10-Q 1 d10q.txt FORM 10-Q 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, 2001 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 5, 2001, there were 8,642,914 shares of the registrant's Common Stock outstanding. Reference is made to the listing beginning on page 18 of all exhibits filed as a part of this report.
NEXTHEALTH, INC. FORM 10-Q TABLE OF CONTENTS Part I - Financial Information Page ------------------------------ ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000 ........................................................................................ 3 Unaudited Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2001 and 2000 ....................................................... 4 Unaudited Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2001 and 2000 ............................................................... 5 Unaudited Consolidated Statements of Changes in Stockholders' Equity for the nine-month period ended September 30, 2001 ...................................................... 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 .................................................................................. 18 Item 4. Submission of Matters to a Vote of Security Holders ................................................ 18 Item 6. Exhibits and Reports on Form 8-K ................................................................... 18 Signatures ................................................................................................... 19
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000s, except share and per share amounts)
September 30 December 31, 2001 2000 ------------ ----------- (Unaudited) ASSETS ------ Current Assets: Cash and equivalents ........................................... $ 5,546 $ 12,737 Accounts receivable, less allowance for doubtful accounts of $367 and $368, respectively .............................. 964 1,467 Prepaid expenses ............................................... 1,152 701 Other current assets ........................................... 645 708 -------- -------- Total current assets ...................................... 8,307 15,613 Property and equipment, net ...................................... 32,193 32,871 Long-term receivables, less allowance for doubtful accounts of $13 and $21, respectively ................................. 40 64 Intangible assets, less amortization of $45 and $527, respectively 69 214 Other assets ..................................................... 22 22 -------- -------- Total assets .............................................. $ 40,631 $ 48,784 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade ........................................ $ 1,059 $ 1,192 Accrued expenses and other liabilities ......................... 3,849 5,808 -------- -------- Total current liabilities ............................. 4,908 7,000 Long-term debt and financing obligation ............................ 194 12,587 -------- -------- Total liabilities ......................................... 5,099 19,587 Minority interest .................................................. 679 547 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, 2001 and December 31, 2000 ........................................ -- -- Common stock, $.01 par value, 16,000,000 shares authorized; 8,638,888 shares outstanding at September 30, 2001 and 8,623,513 shares outstanding at December 31, 2000 ............ 86 86 Additional paid-in capital ..................................... 48,168 48,146 Accumulated deficit ............................................ (13,404) (19,582) -------- -------- Total stockholders' equity ................................ 34,850 28,650 -------- -------- Total liabilities and stockholders' equity ................ $ 40,631 $ 48,784 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
3 NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (000s, except share and per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenue: Net operating revenue ........................................... $ 9,786 $ 9,280 $ 32,303 $ 30,425 Other revenue ................................................... 38 123 439 266 ----------- ----------- ----------- ----------- Total net revenue ......................................... 9,824 9,403 32,742 30,691 Operating expenses: Salaries and related benefits ................................... 4,305 4,212 13,194 12,130 General and administrative ...................................... 3,395 3,240 10,760 9,707 Depreciation and amortization ................................... 484 707 1,597 2,106 Interest expense ................................................ 12 340 599 998 Investment loss ................................................. -- -- 288 -- ----------- ----------- ----------- ----------- Total operating expenses .................................. 8,196 8,499 26,438 24,941 ----------- ----------- ----------- ----------- Income before income taxes ......................................... 1,628 904 6,304 5,750 Income tax provision ............................................... 38 18 126 115 ----------- ----------- ----------- ----------- Net income ......................................................... $ 1,590 $ 886 $ 6,178 $ 5,635 =========== =========== =========== =========== Shares used in basic per share calculation ...................................................... 8,638,888 8,619,488 8,638,888 8,619,488 =========== =========== =========== =========== Shares used in diluted per share calculation ...................................................... 14,549,351 13,986,059 14,535,360 13,839,388 =========== =========== =========== =========== Basic income per common share ............................................................ $ .18 $ .10 $ .72 $ .65 =========== =========== =========== =========== Diluted income per common share ............................................................ $ .11 $ .06 $ .43 $ .41 =========== =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
4 NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000s) (Unaudited)
Nine Months Ended September 30, ---------------------------- 2001 2000 ------------ ------------- Cash flows from operating activities: Net income ........................................... $ 6,178 $ 5,635 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization .................. 1,597 2,106 Provision for bad debts ........................ 185 174 Provision for income tax ....................... -- 25 Minority Interest .............................. 132 125 Charge for non-employee options ................ -- 4 Changes in operating assets and liabilities: Decrease (increase) in assets: Accounts receivable ............................ 342 (317) Other assets ................................... (387) (415) Decrease in liabilities: Accounts payable, accrued expenses and other liabilities ........................ (2,123) 1,239 -------- -------- Net cash provided by operating activities .............. 5,924 8,576 Cash flows from investing activities: Purchase of property and equipment ................ (742) (848) -------- -------- Net cash used in investing activities .................. (742) (848) Cash flows from financing activities: Proceeds from sale of stock ....................... 22 120 Reduction of long-term borrowings and financing obligation ........................... (12,395) (95) -------- -------- Net cash (used in) provided by financing activities .... (12,373) 25 -------- -------- Net (decrease) increase in cash and equivalents .......................................... (7,191) 7,753 Cash and equivalents at beginning of period ............ 12,737 3,803 -------- -------- Cash and equivalents at end of period .................. $ 5,546 $ 11,556 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
5 NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (000s, except share amounts) (Unaudited)
Common Stock Additional Total --------------------- Paid-in Accumulated Stockholders' Cost Shares Capital Deficit Equity --------- --------- --------- --------- ---------- Balance at December 31, 2000 $ 86 8,623,513 $ 48,146 $ (19,582) $ 28,650 Sale of common stock -- 15,375 22 -- 22 Net income for the nine months ended September 30, 2001 -- -- -- 6,178 6,178 --------- --------- --------- --------- --------- Balance at September 30, 2001 $ 86 8,638,888 $ 48,168 $ (13,404) $ 34,850 ========= ========= ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
6 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/A for the year ended December 31, 2000. The accompanying interim consolidated financial statements as of September 30, 2001 and for the three and nine-month periods ended September 30, 2001 and 2000 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, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. NOTE 3 - NEW PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company does not anticipate these statements to have a material impact on the Company's financials. NOTE 4 - NET INCOME PER SHARE Shares used in the diluted per share calculation for the three and nine-month periods ending September 30, 2001 and 2000 are as stated below:
Three-month period Nine-month period ended September 30, ended September 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- ---------- --------- ---------- Common shares 8,638,888 8,619,488 8,638,888 8,619,488 Convertible preferred shares 4,606,500 4,606,500 4,606,500 4,606,500 Dilutive options 585,268 415,029 574,398 319,418 Dilutive warrants 718,695 345,042 715,574 293,982 ---------- ---------- ---------- ---------- Diluted shares 14,549,351 13,986,059 14,535,360 13,839,388 ========== ========== ========== ==========
7 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, 2001 and 2000 is as follows:
Corporate and Health & Other Treatment Leisure Items Consolidated --------- -------- --------- ------------ Three-month period ended September 30, 2001 --------------------------- Total revenue $ 6,254 $ 3,567 $ 3 $ 9,824 Income (loss) before income tax expense 2,591 (660) ( 303) 1,628 Identifiable assets 8,491 28,862 3,278 40,631 Capital expenditures 53 126 0 179 Depreciation & amortization expense 63 417 4 484 Interest expense 9 2 1 12 Nine-month period ended September 30, 2001 --------------------------- Total revenue $18,187 $14,530 $ 25 $32,742 Income (loss) before income tax expense 6,812 1,033 (1,541) 6,304 Identifiable assets 8,491 28,862 3,278 40,631 Capital expenditures 272 467 3 742 Depreciation & amortization expense 277 1,307 13 1,597 Interest expense 384 214 1 599 Three-month period ended September 30, 2000 --------------------------- Total revenue $ 5,547 $ 3,845 $ 11 $ 9,403 Income (loss) before income tax expense 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
8
Corporate and Health & Other Treatment Leisure Items Consolidated --------- -------- --------- ------------- Nine-month period ended September 30, 2000 --------------------------- Total revenue $16,297 $ 14,359 $ 35 $ 30,691 Income (loss) before income tax expense 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
NOTE 6- INCOME TAXES A provision for income taxes was recorded in the three and nine-month periods ended September 30, 2001 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 in the near term. 9 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, 2001. 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 quarter ended September 30, 2001, the Treatment segment accounted for approximately 64% of the Company's operating revenues and approximately 45% of its operating expenses, while the Health and Leisure segment accounted for approximately 36% of the Company's operating revenue and approximately 52% of its operating expenses. Material Changes in Financial Condition Cash and equivalents for the quarter decreased $7.2 million to $5.5 million or 57%. The decrease is a result of the retirement of the outstanding indebtedness to Lehman Brothers Holdings Inc. and partially offset by earnings from operations. See Consolidated Statements of Cash Flows for more information. Material Changes in Results of Operations Three-month period ended September 30, 2001 compared to three-month period ended September 30, 2000 The significant changes in results of operations and net cash provided by operating activities for the three-month period ended September 30, 2001, compared to the same period in 2000 are discussed below.
Three Months Ended September 30, ------------------------------------------------------- 2001 2000 % Change --------------- ---------------- --------------- Financial results: (000s, except per share amounts) Total net revenue $ 9,824 $ 9,403 4.5 % Total operating expenses 8,196 8,499 ( 3.6) Income before income taxes 1,628 904 80.1 Basic income per common share .18 .10 80.0 Diluted income per common share .11 .06 83.3 Net cash provided by operating activities 2,056 2,583 ( 20.4) Operating data: Patient days - Sierra Tucson 6,193 5,826 6.3 Average daily census - Sierra Tucson 67 63 6.3 Guest days - Miraval 8,958 10,133 ( 11.6) Room occupancy - Miraval 62% 68% ( 8.8)
10 For the three-month period ended September 30, 2001, net income before income taxes increased $724,000 to $1.6 million or 80.1% when compared to third quarter of 2000. Net cash provided by operating activities decreased 20.4% resulting in net cash provided by operating activities of $2.1 million compared to the same period in 2000. Total net revenue increased 4.5% to $9.8 million, an increase of $421,000 when compared to the same period in 2000. Results reflect a 12.9% revenue increase at Sierra Tucson and a 7.2% revenue decrease at Miraval, when compared to the corresponding quarter of 2000. Salaries and related benefits decreased 1% as a percentage of revenue during the quarter. Salaries and related benefits increased $93,000 to $4.3 million, a 2.2% increase over the comparable period in 2000. The increase was primarily attributable to staffing changes in the patient care areas at Sierra Tucson. General and administrative expense increased $155,000 to $3.4 million, an increase of 4.8% when compared to the same period in 2000. The increase was primarily related to cost of sales expenses and additional lease expense. Interest expense decreased $328,000 to $12,000 or 96.5% when compared to second quarter 2000. The decrease was a result of the retirement of the outstanding indebtedness to Lehman Brothers Holdings Inc. in July 2001. The Company recognized pre-tax income of $1.6 million for the three-month period ended September 30, 2001. A $38,000 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 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. However, management will continue to evaluate the necessity of maintaining the valuation allowance in light of the Company's profitability results for 2000 and expectations for 2001 and 2002. The continuation of such positive trends in profitability could allow management to appropriately reduce the valuation allowance significantly and result in the recognition of deferred tax assets on the balance sheet. Nine-month period ended September 30, 2001 compared to nine-month period ended September 30, 2000 The significant changes in results of operations and net cash provided by operating activities for the nine-month period ended September 30, 2001, compared to the same period in 2000 are discussed below.
Nine Months Ended September 30, ----------------------------------------------- 2001 2000 % Change ---------- ---------- -------------- Financial results: (000's except per share amounts) Total net revenue $ 32,742 $ 30,691 6.7 % Total operating expenses 26,438 24,941 6.0 Income before income taxes 6,304 5,750 9.6 Basic income per common share 0.72 0.65 10.8 Diluted income per common share 0.43 0.41 4.9 Net cash provided by operating activities 5,924 8,576 (30.9) Operating data: Patient days - Sierra Tucson 18,640 17,405 7.1 Average daily census - Sierra Tucson 68 64 6.3 Guest days - Miraval 27,549 29,427 ( 6.4) Room occupancy - Miraval 63% 68% ( 7.4)
For the nine-month period ended September 30, 2001, net income before income taxes increased 9.6% to $6.3 million compared to $5.8 million for the same period of 2000. Net cash provided by operating activities 11 decreased to $5.9 million compared to $8.6 million for the nine-month period of 2000. Cash flow was affected by the first quarter 2001 payment of a deposit of $1.6 million for preliminary settlement of the 1994 IRS Audit. Total net revenue for the nine-month period ended September 30, 2001 increased $2.1 million or 6.7% to $32.7 million when compared to the same period of 2000. The increase is attributable to an 11.8% revenue increase at Sierra Tucson and a 1.2% revenue increase at Miraval. Salaries and related benefits increased 1% as a percentage of revenue during the nine-month period. Salaries and related benefits increased $1.1 million to $13.2 million or 8.8% when compared to 2000. The increase is due primarily to staffing changes in the patient care areas at Sierra Tucson. General and administrative expense decreased 0.7% as a percentage of revenue during the nine-month period ended September 30, 2001. General and administrative expense increased $436,000 or 4.5% to $10.1 million when compared to the same period of 2000. Included in corporate general and administrative expenses is $617,000 in costs associated with the proposed merger transaction. Additional merger-related expenses incurred following the Company's acceptance of the April 16, 2001 Agreement and Plan of Merger have been deferred. Interest expense decreased $399,000 to $599,000 or 40% when compared to the previous year. The decrease resulted from retirement of the outstanding indebtedness to Lehman Brothers Holdings Inc. in July 2001. The Company recognized pre-tax income of $6.3 million for the nine-month period ended September 30, 2001. A $126,000 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 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. However, management will continue to evaluate the necessity of maintaining the valuation allowance in light of the Company's profitability results for 2000 and expectations for 2001 and 2002. The continuation of such positive trends in profitability could allow management to appropriately reduce the valuation allowance significantly and result in the recognition of deferred tax assets on the balance sheet. 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, 2001. During the three-month period ended September 30, 2001, 46% of patient revenue was derived from retail payments and the remaining 54% 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. Effective May 1, 2001, Sierra Tucson instituted a rate increase in some of its treatment programs. The Company currently leases the Sierra Tucson buildings from a related party, ODE, L.L.C. The Company amended its lease ("Building Lease") with ODE for the buildings to provide for a lease term which, when combined with successive 10-year option renewals ("Renewal Options"), will be of the same duration as the State Land Lease for the property on which the buildings are located. The annual rent for the buildings is subject to an increase for the term of each subsequent Renewal Option (if exercised) based upon or determined by independent appraisal. The first Renewal Option commenced in March 2001, and the annual rent increased to an agreed upon fair market rental of $500,000 plus an annual increase based on the Consumer Price Index, not to exceed 3% per annum. Results in the Health and Leisure segment are primarily affected by room occupancy and average daily rate in addition to expense management. During third quarter 2001, Miraval's room occupancy rate was approximately 62%, as compared to 68% for the same quarter last year. This segment also contributed positive cash flow to the Company's operations during the quarter. Based on third quarter occupancy and future bookings, management believes that Miraval has experienced, and may continue to experience, some negative impact 12 from the general economic downturn and from the tragic events of September 11th. For the three-month period ended September 30, 2001, the Company had capital expenditures of approximately $179. At September 30, 2001, the Company's cash and equivalents were $5.5 million. On July 2, 2001, the Company paid $12.4 million from its cash reserves to fully retire the outstanding indebtedness to Lehman Brothers Holdings Inc. Management believes that funds from operations will provide the cash necessary to meet its short-term capital needs. The Company must continue to focus on revenue growth and expense controls in order to preserve and improve its liquidity position. Insufficient occupancy levels at Miraval or any significant decrease in Sierra Tucson's patient levels would adversely affect the Company's financial position, results of operations and cash flows. Business Outlook In the Treatment segment (Sierra Tucson), particular emphasis will be placed on increasing awareness of Sierra Tucson's innovative treatment programs through a combination of focused advertising, direct mail, field sales, conference sponsorships and outbound telemarketing campaigns. In addition to continuing its traditional marketing efforts to the referent therapist community and alumni, Sierra Tucson will participate in various conferences and professional boards and organizations. Marketing field representatives will continue their efforts to enhance Sierra Tucson's national exposure and to increase the number of prospective patients. Clinically, Sierra Tucson continually strives to refine its programs. In response to census increases, staffing adjustments have been made to ensure high staff to patient ratios and to further enhance the quality of the treatment experience. Sierra Tucson continues to incorporate new credible therapeutic techniques, and based on a trend of higher acuity, assessment tools for higher risk patients have been enhanced, ensuring a better clinical match. 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 administrative offices and space for 16 additional beds, bringing the total number of beds to 79. In 2000, construction was completed on a 4,220 square foot wing named Desert Oasis. The new area houses group rooms and medical records as well as staff offices. In addition, Sierra Tucson also renovated and updated its fitness center in 2000. Effective May 1, 2001, Sierra Tucson instituted a rate increase in some of its treatment programs. The Company currently leases the Sierra Tucson buildings from a related party, ODE, L.L.C. The Company amended its lease ("Building Lease") with ODE for the Buildings to provide for a lease term which, when combined with successive 10-year option renewals ("Renewal Options"), will be of the same duration as the State Land Lease. The annual rent for the Buildings is subject to an increase for the term of each subsequent Renewal Option (if exercised) based upon or determined by independent appraisal. The first Renewal Option commenced in March, 2001 and the annual rent increased to an agreed upon fair market rental of $500,000 plus an annual increase based on the Consumer Price Index, not to exceed 3% per annum. Miraval, the Company's health resort and spa, will continue its focused sales efforts in targeted cities in 2001 and will also continue to build national awareness by capitalizing on the media support received in 2000. In November 2000, Miraval was rated the Top Spa in the Zagat Survey 2001 Top U.S. Hotels, Resorts & Spas. Miraval received a rating of 29 out of a possible 30 in the Zagat Survey rating system and was thus named the top stand-alone spa in the United States. In September 2000, Miraval was named the #2 Best Spa in America in Travel and Leisure's readers' poll. In November 1999, Miraval was voted the #1 Spa in the World in the 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. 13 Miraval's affiliations with American Express Platinum and Virtuoso have proved to be very successful and the relationships will continue in 2001. In addition, Miraval has established itself with top corporate meeting planners and incentive houses. Miraval's advertising campaign has remained solid and benefits have been realized from sending a consistent message to the public. In addition to developing relationships with online travel companies, Miraval has launched its new web site which was developed to maximize and enhance their presence on the world-wide web. In 2001, Miraval will continue to focus on improving visibility in the local market by attending charitable, convention and Chamber of Commerce events. In addition, specialty programs will be evaluated in an effort to improve occupancy during summer and shoulder seasons. Based on third quarter occupancy and future bookings, management believes that Miraval has experienced, and may continue to experience, some negative impact from the general economic downturn and from the tragic events of September 11th. Therefore, Miraval has increased its regional marketing focus in an effort to attract travelers who live within closer proximity. In conjunction with the Convention and Visitors' Bureau, Miraval is participating in special regional radio promotions to entice travelers from neighboring states as well as those who spend the winter months in the Southwest. In addition, special Fall rates have been offered through travel agencies, through direct mail campaigns and on Miraval's web site. Zoning for the property currently occupied by Miraval and the property which is located to the north of Miraval permits a total of 356 resort hotel rooms and up to 226 residential units. As indicated below under the heading "Factors That May Affect Future Results", the Company has entered into a merger agreement with an entity controlled by certain members of management that, if completed, would result in the Company becoming privately held. Factors That May Affect Future Results Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward looking statements regarding plans and expectations for the future. Statements looking forward in time are included pursuant to the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company's current expectations or beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The factors that could cause actual results to differ materially from those described in the forward-looking statements include: the failure of the Company's stockholders to approve the merger, and other reasons that could cause the Merger Agreement (as defined below) to terminate in accordance with its terms (including Anam's (as defined below) inability to complete the financing for the merger); competition from other resort hotel/spas and/or behavioral health facilities; seasonality; a continuing economic downturn that could limit leisure activity spending; or ongoing effects from the events of September 11, 2001. Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. In the context of the forward-looking information provided in this report, please refer to the discussion of Factors That May Affect Future Results detailed in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's annual report on Form 10-K/A for the year ended December 31, 2000, and the current reports on Form 8-K dated April 18, 2001 and June 22, 2001. 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. 14 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. Miraval competes for national and international consumers' discretionary income typically expended upon luxury hotel and resort spas, holistic health and other related upscale vacation experiences. While management believes that Miraval occupies a unique market niche, it nevertheless competes with a broad spectrum of vacation alternatives. It has been categorized as a destination spa, creating competition with a relatively small number of well-known spas, however, it also competes in the resort/hotel spa industry. Some of Miraval's competitors may have greater name recognition as well as longer-standing relationships with travel agents and meeting planners. While the Company believes that there is strong consumer demand for Miraval's products and services, historical data does not exist in this unique market niche to be certain the demand will continue. The Company believes that Miraval has experienced some negative effects from the general economic downturn as well as from the tragic events of September 11, 2001. The Company is committed to increased profitability, however, 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, is negatively impacted by a continuing economic downturn that could limit leisure activity spending, experiences ongoing negative effects from the events of September 11, 2001, or is further impacted by managed care restrictions on payor reimbursement. On April 16, 2001, NextHealth, Inc. (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Anam LLC, a Delaware limited liability company ("Anam"), and NHI Acquisition Corp., a Delaware corporation ("NHI") and a wholly owned subsidiary of Anam. Anam is controlled by William T. O'Donnell, Jr., the Company's Chairman and Chief Executive Officer, and George L. Ruff, a Director of the Company, pursuant to which NHI will be merged with and into the Company (the "Merger"). Upon completion of the Merger (which is subject to certain conditions, including those described below), the Company's stockholders (other than Anam and its subsidiaries) will receive cash in the amount of $5.65 per share of outstanding common stock (including shares of common stock issuable upon conversion of outstanding preferred stock). In addition, all unexercised Company employee and director options and outstanding warrants will be converted into a right to receive cash in the amount of $5.65 (less the applicable exercise price) for each share of common stock issuable upon the exercise of such options and warrants. The Company's Board of Directors unanimously approved the Merger Agreement and the transactions contemplated thereby based upon the unanimous recommendation of a Special Committee of the Board and the receipt of an opinion from Prudential Securities Incorporated that the Merger consideration to be received by the Company's stockholders pursuant to the Merger Agreement is fair to such stockholders (other than Anam and its controlling affiliates) from a financial point of view. The Special Committee of the Board is composed exclusively of directors with no financial interest in the Merger that is different from the interests of the Company's stockholders generally. Consummation of the Merger is subject to certain conditions, including the approval of the Merger, the Merger Agreement and the transactions contemplated thereby by the Company's stockholders, the receipt of required regulatory approvals and the completion of Anam's financing for the Merger. The Merger Agreement also contains customary non-solicitation provisions and termination fee provisions. Consistent with its fiduciary duties and subject to the terms of the Merger Agreement, the Company's Board of Directors has reserved its ability to respond to third parties where appropriate. Assuming Anam obtains the necessary financing and that all required regulatory approvals have been received, the Company expects to hold a meeting of its stockholders to vote on the Merger in the fourth quarter of this year and, if approved by the Company's stockholders, the closing of the Merger is expected to occur shortly thereafter, subject to the satisfaction of the other terms and conditions set forth in the Merger Agreement. 15 Anam has deposited a letter of credit in the amount of $2,500,000 into an escrow account as security for the performance of its obligations under the Merger Agreement. Anam is required to deposit into the escrow account cash or a letter of credit in the additional amount of $500,000 when Anam has been notified by the Company that the Securities and Exchange Commission ("SEC") has no further comment on the Company's proxy material and related Schedule 13E-3 filed in connection with the Merger. As required by the Merger Agreement, on June 15, 2001, Anam furnished the Company with term sheets for debt financing from lending sources that aggregate more than $40,000,000. The term sheets do not represent a firm commitment to provide financing for the Merger contemplated by the Merger Agreement and there can be no assurance that such financings will be completed, or that Anam will be able to obtain the additional debt or equity financing necessary to complete the Merger. In the event the Company accepts a third party offer or the Merger Agreement is terminated following the occurrence of certain other events set forth in the Merger Agreement, Anam will be entitled to receive payments in an aggregate amount of up to $2,400,000 and the return of its deposit. A copy of the Merger Agreement was attached to the Company's Form 8-K dated and filed with the SEC on April 18, 2001. The foregoing description of the Merger Agreement, and the transactions contemplated thereby, do not purport to be complete and is qualified in its entirety by reference to the full text thereof. A preliminary proxy statement, as amended, and a related Schedule 13E-3, as amended, have been filed by the Company with the SEC in connection with a special meeting of the Company's stockholders to be held for the purpose of voting on the Merger, the Merger Agreement and the transactions contemplated thereby. Following the completion of the SEC's review of such documents, a definitive proxy statement will be mailed to each stockholder, together with notice of the special meeting. The Schedule 13E-3 was filed with the SEC because the Merger is subject to the "going private" rules and regulations of the SEC. On September 21, 2001, Anam informed the Special Committee that the events of September 11, 2001 in New York, Washington, D.C. and Pennsylvania, as well as their aftermath and foreseeable effects, constituted a force majeure pursuant to the Merger Agreement. Anam further informed the Special Committee that it was assessing the effect of the force majeure on Anam's obligations under the Merger Agreement and was evaluating its options. Anam reiterated its position with respect to force majeure to the Special Committee on October 1, 2001. On October 8, 2001, the Special Committee informed Anam that it is reviewing Anam's position that a force majeure has occurred under the Merger Agreement. Notwithstanding whether the events of September 11, 2001 constituted a force majeure, Anam and the Special Committee are separately continuing to evaluate whether the events of September 11, 2001, as well as their aftermath and foreseeable effects, had or will have a material and adverse effect on the financial condition, assets, results of operations and business of the Company and it subsidiaries taken as a whole within the meaning of the Merger Agreement. Anam has informed the Special Committee that it has not yet determined how to proceed in light of (i) the events of September 11, 2001, as well as their aftermath and foreseeable effects, and (ii) the effect thereof on the financial condition, assets, results of operations and business of the Company and its subsidiaries taken as a whole. If the events of September 11, 2001, as well as their aftermath and foreseeable effects, constituted a force majeure under the Merger Agreement and had or will have a material and adverse effect on the financial condition, assets, results of operations or business of the Company and its subsidiaries taken as a whole, Anam may have the right to terminate the Merger Agreement. 16 PART II - OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS The Company is involved in various litigation and administrative proceedings arising in the normal course of business. In the opinion of management, any liabilities that may result from these claims will not, individually or in the aggregate, have a material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits NONE (b) Reports on Form 8-K Form 8-K dated April 18, 2001 Form 8-K dated June 22, 2001 17 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, 2001 BY: /s/ William T. O'Donnell, Jr. ----------------------------------- WILLIAM T. O'DONNELL, JR. President and Chief Executive Officer DATE: November 14, 2001 BY: /s/ Loree Thompson -------------------------------------- LOREE THOMPSON Chief Financial Officer 18