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 June 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 August 1, 2001, there were 8,638,888 shares of the registrant's Common Stock outstanding. Reference is made to the listing beginning on page 17 of all exhibits filed as a part of this report. NEXTHEALTH, INC. FORM 10-Q TABLE OF CONTENTS

2 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000s, except share and per share amounts)

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)

The accompanying notes are an integral part of the consolidated financial statements. 4 NEXTHEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000s) (Unaudited)

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)

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 June 30, 2001 and for the three and six-month periods ended June 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 six-month periods ended June 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 six-month periods ending June 30, 2001 and 2000 are as stated below: Three-month period Six-month period ended June 30, ended June 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 589,439 301,042 569,356 277,792 Dilutive warrants 719,892 600,000 714,127 600,000 ---------- ---------- ---------- ---------- Diluted shares 14,554,719 14,127,030 14,528,871 14,103,780 ========== ========== ========== ========== 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 six-month periods ending June 30, 2001 and 2000 is as follows:

NOTE 6- INCOME TAXES A provision for income taxes was recorded in the three and six-month periods ended June 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 six-month periods ended June 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 June 30, 2001, the Treatment segment accounted for approximately 55.3% of the Company's operating revenues and approximately 43.2% of its operating expenses, while the Health and Leisure segment accounted for approximately 44.6% of the Company's operating revenue and approximately 48.6% of its operating expenses. Material Changes in Financial Condition --------------------------------------- Cash and equivalents for the quarter increased $1.3 million to $16.0 million or 9.1%. The increase is a result of cash flow from operating activities during the period. See Consolidated Statements of Cash Flows for more information. Material Changes in Results of Operations ----------------------------------------- Three-month period ended June 30, 2001 compared to three-month period ended June 30, 2000 The significant changes in results of operations and net cash provided by operating activities for the three-month period ended June 30, 2001, compared to the same period in 2000 are discussed below.

10 For the three-month period ended June 30, 2001, net income before income taxes decreased $450,000 to $1.8 million or 20% when compared to second quarter of 2000. Net cash provided by operating activities decreased 21.9% resulting in net cash provided by operating activities of $1.7 million compared to the same period in 2000. Total net revenue increased 3.4% to $10.9 million, an increase of $356,000 when compared to the same period in 2000. Results reflect a less than 1% revenue decrease at Miraval and a 7.0% revenue increase at Sierra Tucson, when compared to the corresponding quarter of 2000. Salaries and related benefits increased 3.7% as a percentage of revenue during the quarter. Salaries and related benefits increased $537,000 to $4.5 million, a 13.6% 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 3.1% as a percentage of revenue during the second quarter of 2001. General and administrative expense increased $448,000 to $3.7 million, an increase of 13.7% when compared to the same period in 2000. Included in corporate general and administrative expenses is $398,000 for ongoing activities related to the proposed merger transaction previously disclosed by the Company. Additional merger-related expenses totaling $252,000, incurred following the Company's acceptance of the April 16, 2001 Agreement and Plan of Merger, have been deferred. Interest expense decreased $57,000 to $276,000 or 17.1% when compared to second quarter 2000. The decrease reflects the more favorable interest rate on the loan outstanding in the second quarter 2001 compared to the rate charged in the corresponding quarter of 2000. The Company recognized pre-tax income of $1.8 million for the three-month period ended June 30, 2001. A $32,000 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 perhaps in the latter part of 2001. Six-month period ended June 30, 2001 compared to six-month period ended June 30, 2000 The significant changes in results of operations and net cash provided by operating activities for the six-month period ended June 30, 2001, compared to the same period in 2000 are discussed below.

11 For the six-month period ended June 30, 2001, net income before income taxes decreased 3.5% to $4.7 million compared to $4.8 million for the same period of 2000. Net cash provided by operating activities decreased to $3.9 million compared to $6.0 million for the six-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 six-month period ended June 30, 2001 increased $1.6 million or 7.7% to $22.9 million when compared to the same period of 2000. The increase is attributable to an 11.3% revenue increase at Sierra Tucson and a 4.3% revenue increase at Miraval. Salaries and related benefits increased 1.6% as a percentage of revenue during the six-month period. Salaries and related benefits increased $971,000 to $8.9 million or 12.3% when compared to 2000. The increase is due primarily to staffing changes in the patient care areas at Sierra Tucson. General and administrative expense increased 1.8% as a percentage of revenue during the six-month period ended June 30, 2001. General and administrative expense increased $898,000 or 13.9% to $7.4 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 totaling $252,000, incurred following the Company's acceptance of the April 16, 2001 Agreement and Plan of Merger, have been deferred. Interest expense decreased $71,000 to $587,000 or 10.8% when compared to the previous year. The increase reflects the more favorable rate on the loan outstanding in 2001 as compared to the rate charged on the loan outstanding in 2000. The Company recognized pre-tax income of $4.7 million for the six-month period ended June 30, 2001. An $88,000 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 perhaps in the latter part of 2001. Liquidity and Capital Resources ------------------------------- Net cash provided by the Treatment segment's operating activities is primarily affected by census levels and net revenue per patient day. This segment contributed positive cash flow to the Company's operations during the three and six-month periods ended June 30, 2001. During the three-month period ended June 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. 12 Results in the Health and Leisure segment are primarily affected by room occupancy and average daily rate in addition to expense management. During second quarter 2001, Miraval's room occupancy rate was approximately 59%, as compared to 66% for the same quarter last year. This segment also contributed positive cash flow to the Company's operations during the quarter. Based on second quarter occupancy, management believes that Miraval may have experienced some negative impact from the general economic downturn. For the three-month period ended June 30, 2001, the Company had capital expenditures of approximately $289. At June 30, 2001, the Company's cash and equivalents were $16.0 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 13 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. 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 second quarter occupancy, management believes that Miraval may have experienced some negative impact from the general economic downturn. 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; or a continuing economic downturn that could limit leisure activity spending. 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. 14 The Company's Treatment segment participates in the highly competitive mental and behavioral health industry, and faces competition for market share resulting from aggressive pricing practices and increasing competition from companies with greater resources. Some of these competitors have tax exempt, non-profit status, are government subsidized or have endowment-related financial support which may provide lower costs of capital. Sierra Tucson's operations are accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). JCAHO accreditation is important to the operations of Sierra Tucson since most insurance companies require such accreditation in order for the treatment of patients to qualify for insurance payment or reimbursement. If Sierra Tucson were unable to maintain its JCAHO accreditation, its business would be adversely affected. In May 1999, Sierra Tucson successfully completed its JCAHO review by receiving accreditation with commendation. The next scheduled review by JCAHO will be in May 2002. 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. While the Company anticipates continued growth in revenues and is committed to increased profitability, operating results could be adversely impacted if the business is unable to accurately anticipate customer demand, is unable to differentiate its products from those of its competitors, is unable to offer services expeditiously in response to customer demand, is negatively impacted by a continuing economic downturn that could limit leisure activity spending, 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 15 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. 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 and a related Schedule 13E-3 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. 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: August 13, 2001 BY:/s/ William T. O'Donnell, Jr. ---------------------------------- WILLIAM T. O'DONNELL, JR. President and Chief Executive Officer DATE: August 13, 2001 BY:/s/ Loree Thompson ---------------------------------- LOREE THOMPSON Chief Financial Officer 18

NEXTHEALTH INC 10-Q