8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 9, 2003

Psychiatric Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other
Jurisdiction of
Incorporation) 0-20488
(Commission File
Number) 23-2491707
(I.R.S. Employer
Identification
Number)

113 Seaboard Lane, Suite C-100, Franklin, Tennessee 37067
(Address of Principal Executive Offices)

(615) 312-5700
(Registrant’s Telephone Number, including Area Code)

Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

TABLE OF CONTENTS

EX-99.1 SECTION OF OM(SUMMARY UNAUDITED)

EX-99.2 SECTION OF OM(SUMMARY HISTORICAL)

EX-99.3 SECTION OF OM(RISK FACTORS)

EX-99.4 SECTION OF OM(UNAUDITED PROFORMA)

EX-99.5 SECTION OF OM(SELECTED CONSOLIDATED)

EX-99.6 SECTION OF OM(MDNA)

EX-99.7 CONSOLIDATED FINANCIAL STATEMENTS

Item 9.     Regulation FD Disclosure.

          On June 9, 2003, we commenced a private offering of $150,000,000 principal amount of our senior subordinated notes due 2013.

          Certain information regarding us and our business that have not been previously publicly reported are disclosed in the preliminary offering memorandum for the senior subordinated notes. These disclosures are attached as exhibits to this current report on Form 8-K and are being furnished to comply with Regulation FD. The information disclosed in this current report is not considered “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 and is not subject to the liabilities of that section.

Item 7.     Financial Statements and Exhibits

(a) Exhibits

99.1	The section of the preliminary offering memorandum entitled “Summary — Summary Unaudited Pro Forma Condensed Combined Financial and Operating Data.”
99.2	The section of the preliminary offering memorandum entitled “Summary — Summary Historical Financial and Operating Data — The Brown Schools.”
99.3	The section of the preliminary offering memorandum entitled “Risk Factors — Risks Related to Us and Our Business” and Risk Factors — Risks Related to the Offering — Our substantial indebtedness could adversely affect our financial health and our ability to fulfill our obligations under the notes.”
99.4	The section of the preliminary offering memorandum entitled “Unaudited Pro Forma Condensed Combined Financial Information.”
99.5	The section of the preliminary offering memorandum entitled “Selected Consolidated Financial and Operating Data — The Brown Schools.”
99.6	The section of the preliminary offering memorandum entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Results of Operations — The Brown Schools.”
99.7	The consolidated financial statements of The Brown Schools and The Brown Schools of Oklahoma, Inc. and Subsidiary contained in the preliminary offering memorandum.

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 hereunto duly authorized.

	PSYCHIATRIC SOLUTIONS, INC.
	By:	/s/ Brent Turner
		Brent Turner Vice President, Treasurer and Investor Relations
Date: June 9, 2003

EX-99.1 3 g83311exv99w1.txt EX-99.1 SECTION OF OM(SUMMARY UNAUDITED) EXHIBIT 99.1 SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA The following table sets forth a summary of unaudited pro forma condensed combined financial and operating data for Psychiatric Solutions, Ramsay and The Brown Schools as a combined company, giving effect to the acquisitions of Ramsay and The Brown Schools and the Financing Transactions as if they had occurred on the dates indicated and after giving effect to certain pro forma adjustments described in the section entitled "Unaudited Pro Forma Condensed Combined Financial Information." The pro forma condensed combined balance sheet data as of March 31, 2003 have been derived from Psychiatric Solutions', Ramsay's, and The Brown Schools' historical balance sheets, adjusted to give effect to these acquisitions and the Financing Transactions, as well as the acquisition of Aeries Healthcare Corporation and Subsidiary (d/b/a Riveredge Hospital) and the merger with PMR Corporation, or PMR, as if they occurred on March 31, 2003. The pro forma condensed combined income statement data for the twelve months ended March 31, 2003, the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002 give effect to these acquisitions and the Financing Transactions, as well as our acquisition of Aeries Healthcare Corporation and Subsidiary (d/b/a Riveredge Hospital) and our merger with PMR as if they occurred at the beginning of these respective periods. The adjustments necessary to fairly present the unaudited pro forma condensed combined financial data have been made based on available information and in the opinion of management are reasonable. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with this unaudited pro forma condensed combined financial data. The pro forma adjustments are preliminary and revisions to the preliminary purchase price allocations and financing of the transactions may have a significant impact on the pro forma adjustments. A final valuation of net assets acquired associated with the Ramsay acquisition cannot be made prior to the completion of this offering memorandum. A final determination of these fair values will be conducted by Psychiatric Solutions' independent valuation specialists. The consideration of this valuation will most likely result in a change in the value assigned to the fixed and intangible assets acquired of Ramsay. The unaudited pro forma condensed combined financial and operating data is for comparative purposes only and does not purport to represent what our financial position or results of operations would actually have been had the events noted above in fact occurred on the assumed dates or to project our financial position or results of operations for any future date or future period. The unaudited pro forma condensed combined financial and operating data are only a summary and should be read in conjunction with the "Unaudited Pro Forma Condensed Combined Financial Information," "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this offering memorandum.

TWELVE MONTHS THREE MONTHS ENDED ENDED MARCH 31, YEAR ENDED MARCH 31, ----------------------- DECEMBER 31, 2003 2003 2002 2002 --------------- ---------- ---------- -------------- (DOLLARS IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA) INCOME STATEMENT DATA: Revenue....................................... $366,464 $ 91,877 $ 89,638 $364,225 Expenses: Salaries, wages and employee benefits....... 202,378 51,071 50,553 201,860 Other operating expenses(1)................. 116,925 29,719 27,705 114,911 Provision for (recovery of) doubtful accounts(2).............................. 7,768 2,132 (52) 5,584 Depreciation and amortization............... 6,701 1,711 1,639 6,629 Interest expense............................ 20,344 5,029 4,881 20,196 Other expenses(3)........................... 2,400 957 107 1,550 -------- -------- -------- -------- Total expenses........................... 356,516 90,619 84,833 350,730

TWELVE MONTHS THREE MONTHS ENDED ENDED MARCH 31, YEAR ENDED MARCH 31, ----------------------- DECEMBER 31, 2003 2003 2002 2002 --------------- ---------- ---------- -------------- (DOLLARS IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA) Earnings from continuing operations before taxes....................................... 9,948 1,258 4,805 13,495 Provision (benefit) for taxes................. (7,890) 843 181 (8,552) -------- -------- -------- -------- Net earnings from continuing operations....... 17,837 415 4,624 22,047 Accrued dividends on series A convertible preferred stock............................. 1,274 312 312 1,274 -------- -------- -------- -------- Net earnings from continuing operations applicable to common stockholders........... $ 16,563 $ 103 $ 4,312 $ 20,773 ======== ======== ======== ======== BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents..................... $ 7,087 Working capital............................... 31,049 Property, plant and equipment, net............ 113,668 Total assets.................................. 274,899 Total debt.................................... 176,986 Total preferred equity........................ 25,000 Stockholders' equity.......................... 23,678 OTHER FINANCIAL DATA: Capital expenditures.......................... $ 5,307 $ 1,685 $ 1,309 $ 4,931 EBITDA(4)..................................... 39,393 8,955 11,432 41,870 SELECTED PRO FORMA RATIOS: EBITDA/Cash interest expense(5)............... 2.2x Net debt/EBITDA(6)............................ 4.3x OPERATING DATA: Number of facilities: Owned....................................... 18 18 18 18 Leased...................................... 4 4 4 4 Number of beds................................ 2,812 2,812 2,759 2,768 Admissions.................................... 31,968 8,334 7,990 31,624 Patient days.................................. 756,459 191,757 185,411 750,113 Average length of stay........................ 24 23 23 24

- --------------- (1) Other operating expenses include operating expenses, professional fees and rent expense. Rent expense was $6,654, $1,747, $1,447 and $6,354 for the twelve months ended March 31, 2003, the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002, respectively. (2) Provision for doubtful accounts of $1,879 for the three months ended March 31, 2002 was offset by the collection of previously reserved accounts receivable relating to closed outpatient programs and a change in the estimate on the collectability of certain other receivables at PMR. (3) Other expenses include (a) for the three months ended March 31, 2003, expense of $960 to revalue put warrants, income of $461 to release reserves on stockholder notes and a loss of $458 related to a sale of land; (b) for the three months ended March 31, 2002, asset impairment charges incurred at Ramsay of $125 and $18 of recoveries from the sale of previously written down assets at PMR; and (c) for the year ended December 31, 2002, asset impairment charges incurred at Ramsay of $125, $18 of recoveries from the sale of previously written down assets at PMR, $1,900 of employee severance and termination costs associated with the winding up of PMR and $457 of other various gains associated with PMR. 2 (4) EBITDA is defined as earnings from continuing operations before income taxes, interest expense (net of interest income), depreciation, amortization, and other items included in the caption above labeled "Other expenses" as more fully described in the accompanying reconciliation of EBITDA to earnings from continuing operations before income taxes. While you should not consider EBITDA in isolation or as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States, management understands that EBITDA is a commonly used analytical indicator of performance within the health care industry and also serves as a measure of leverage capacity and debt service ability. In addition, we use EBITDA as the measure of operating profitability of its segments and their components. EBITDA, as presented, may not be comparable to the same or similarly titled measures of other companies. The following are the components of EBITDA for the twelve months ended March 31, 2003, the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002:

TWELVE MONTHS THREE MONTHS ENDED ENDED MARCH 31, YEAR ENDED MARCH 31, ------------------ DECEMBER 31, 2003 2003 2002 2002 ------------- ------ ------- ------------ (DOLLARS IN THOUSANDS) Earnings from continuing operations before income taxes............................. $ 9,948 $1,258 $ 4,805 $13,495 Interest expense........................... 20,344 5,029 4,881 20,196 Depreciation and amortization.............. 6,701 1,711 1,639 6,629 Other expenses(3): Change in valuation of put warrants...... 960 960 -- -- Change in reserve on stockholder notes... (461) (461) -- -- Loss on sale of land..................... 458 458 -- -- Severance costs associated with PMR...... 1,900 -- -- 1,900 Other various gains associated with PMR not considered operating by management............................ (457) -- -- (457) Impairment charges at Ramsay............. -- -- 125 125 Recoveries from the sale of previously written down assets................... -- -- (18) (18) ------- ------ ------- ------- Total other expenses.................. 2,400 957 107 1,550 ------- ------ ------- ------- EBITDA..................................... $39,393 $8,955 $11,432 $41,870 ======= ====== ======= =======

(5) Cash interest expense excludes the amortization of deferred financing fees and expenses. (6) Net debt represents total debt less cash and cash equivalents. 3 EX-99.2 4 g83311exv99w2.txt EX-99.2 SECTION OF OM(SUMMARY HISTORICAL) EXHIBIT 99.2 THE BROWN SCHOOLS The following table sets forth summary historical financial and operating data of The Brown Schools for, or as of the end of, the twelve months ended March 31, 2003, the three months ended March 31, 2003 and 2002 and each of the years ended December 31, 2002, 2001 and 2000. The summary historical financial data as of and for each of the years ended December 31, 2002, 2001 and 2000 were derived from the audited consolidated financial statements of The Brown Schools contained elsewhere in this offering memorandum. The summary historical financial data as of and for the three months ended March 31, 2003 and 2002 were derived from the unaudited condensed consolidated financial statements of The Brown Schools contained elsewhere in this memorandum. These unaudited condensed consolidated financial statements include all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of the financial position and the results of operations for these periods. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003. The summary historical financial data for the twelve months ended March 31, 2003 were derived from the audited and unaudited financial statements of The Brown Schools. You should read this table in conjunction with The Brown Schools' consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- The Brown Schools" contained elsewhere in this offering memorandum.

TWELVE MONTHS THREE MONTHS ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31, MARCH 31, ------------------- ------------------------------ 2003 2003 2002 2002 2001 2000 ------------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenue............................................ $ 76,969 $ 18,246 $ 19,271 $ 77,994 $ 78,078 $ 67,064 Costs and expenses: Salaries, wages and employee benefits............ 41,937 10,465 10,966 42,438 42,759 36,960 Other operating expenses(1)...................... 26,417 6,430 6,547 26,534 27,645 26,876 Provision for bad debts.......................... 1,797 408 400 1,789 2,079 1,297 Depreciation and amortization.................... 1,775 338 363 1,800 1,672 1,853 Interest expense................................. 7,095 1,671 1,058 6,482 3,814 2,950 Other expenses(2)................................ 458 458 -- -- 68 51 -------- -------- -------- -------- -------- -------- Total costs and expenses....................... 79,479 19,770 19,334 79,043 78,037 69,987 Income (loss) from continuing operations before income taxes..................................... $ (2,510) $ (1,524) $ (63) $ (1,049) $ 41 $ (2,923) ======== ======== ======== ======== ======== ======== Net income (loss).................................. $ (2,510) $ (1,524) $ (63) $ (1,049) $ 41 $ (2,923) ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents.......................... $ 2 $ 2 $ 11 $ 2 $ 4 $ 9 Working capital.................................... 1,314 1,314 5,671 2,130 1,828 2,305 Property, plant and equipment, net................. 15,547 15,547 18,461 16,495 17,305 17,487 Total assets....................................... 30,201 30,201 36,813 32,491 33,526 33,114 Stockholders' equity............................... 19,928 19,928 19,466 21,722 22,655 24,041 OTHER FINANCIAL DATA: Capital expenditures............................... $ 1,386 $ 644 246 $ 988 $ 1,568 $ 561 Net cash provided by operating activities.......... 1,754 352 15 1,417 3,412 585 EBITDA(3).......................................... 6,818 943 1,358 7,233 5,595 1,931 OPERATING DATA: Number of facilities: Owned............................................ 5 5 5 5 5 5 Leased........................................... 1 1 1 1 1 1 Number of licensed beds............................ 879 879 869 885 869 869 Admissions......................................... 5,362 1,430 1,531 5,463 5,564 4,503 Patient days....................................... 216,020 53,668 52,315 214,667 214,223 193,814 Average length of stay............................. 40 38 34 39 39 43

- --------------- (1) Other operating expenses include rent expense which was $1,034, $265, $236, $1,005, $962 and $718 for the twelve months ended March 31, 2003, the three months ended March 31, 2003 and 2002, and each of the years ended December 31, 2002, 2001 and 2000, respectively. (2) Other expenses for each of the periods indicated relate to losses on sales of assets. (3) EBITDA is defined as income (loss) from continuing operations before income taxes, interest expense (net of interest income), depreciation, amortization, and other non-recurring items included in the caption above labeled "Other expenses" as more fully described in the accompanying reconciliation of EBITDA to income from continuing operations before income taxes. While you should not consider EBITDA in isolation or as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States, management understands that EBITDA is a commonly used analytical indicator within the health care industry and also serves as a measure of leverage capacity and debt service ability. In addition, we use EBITDA as the measure of operating profitability of its segments and their components. EBITDA, as presented, may not be comparable to similarly titled measures of other companies. The following are the components of EBITDA for the twelve months ended March 31, 2003, each of the three months ended March 31, 2003 and 2002 and each of the years ended December 31, 2002, 2001 and 2000:

TWELVE MONTHS THREE MONTHS ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31, MARCH 31, ---------------- -------------------------- 2003 2003 2002 2002 2001 2000 ------------- ------- ------ ------- ------ ------- (IN THOUSANDS) Income (loss) from continuing operations before income taxes.......................... $(2,510) $(1,524) $ (63) $(1,049) $ 41 $(2,923) Interest expense................. 7,095 1,671 1,058 6,482 3,814 2,950 Depreciation and amortization.... 1,775 338 363 1,800 1,672 1,853 Other expenses(2)................ 458 458 -- -- 68 51 ------- ------- ------ ------- ------ ------- EBITDA........................... $ 6,818 $ 943 $1,358 $ 7,233 $5,595 $ 1,931 ======= ======= ====== ======= ====== =======

2 EX-99.3 5 g83311exv99w3.txt EX-99.3 SECTION OF OM(RISK FACTORS) EXHIBIT 99.3 RISK FACTORS You should consider carefully each of the following risks and all other information contained and incorporated by reference in this offering memorandum before deciding to invest in the notes. RISKS RELATED TO US AND OUR BUSINESS IF FEDERAL OR STATE HEALTH CARE PROGRAMS OR MANAGED CARE COMPANIES REDUCE REIMBURSEMENT RATES OR METHODS OF REIMBURSEMENT FOR OUR SERVICES, OUR REVENUE MAY DECLINE. A portion of our revenue is derived from the Medicare and Medicaid programs and from various state and local payors. In recent years, federal and state governments have made significant changes in these programs. These changes have, in certain instances, decreased the amount of money we receive for our services. Future federal and state legislation may further reduce the payments received for our services or increase the timing of reimbursement payments to us. Insurance and managed care companies and other third parties from whom we receive payment may attempt to control health care costs by requiring that facilities discount their services in exchange for exclusive or preferred participation in their benefit plans, which may reduce the payments we receive for our services. IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE RECENT ACQUISITIONS INTO OUR BUSINESS, OUR OPERATIONS COULD BE DISRUPTED. Our acquisition of The Brown Schools and expected acquisition of Ramsay will significantly increase the size and geographic scope of our operations. Our ability to integrate the Ramsay facilities with our existing business will be critical to the future success of our business. This integration is subject to numerous conditions beyond our control, including the possibility of negative reactions by existing customers or employees or adverse general and regional economic conditions, general negative industry trends and competition. We also may be unable to achieve the anticipated benefits from the acquisitions of The Brown Schools and Ramsay. If we are unable to realize these anticipated benefits due to our inability to address the challenges of integrating these businesses or for any other reason, it could have a material adverse effect on our business and financial and operating results. The successful integration of Ramsay will require us to, among other things, attract and hire key employees from Ramsay who, at the completion of the acquisition, may decide not to work for us. Our future performance will depend, in part, on our ability to successfully integrate these new employees into our company. Our failure to hire and successfully integrate these new employees could disrupt our ongoing business. ADDITIONAL FINANCING WILL BE NECESSARY TO FUND OUR ACQUISITION PROGRAM, AND ADDITIONAL FINANCING MAY NOT BE AVAILABLE WHEN NEEDED. We expect our capital needs over the next several years, primarily to fund acquisitions, will exceed cash generated from operations. We plan to incur indebtedness and to issue additional debt or equity securities from time to time in order to fund these needs. Our level of indebtedness at any time may restrict our ability to borrow additional funds. In addition, we may not receive additional financing on satisfactory terms if at all. If we are unable to borrow additional funds or to obtain adequate financing on reasonable terms, we may be unable to consummate acquisitions. IF COMPETITION DECREASES THE ABILITY TO ACQUIRE ADDITIONAL FACILITIES ON FAVORABLE TERMS, WE MAY BE UNABLE TO EXECUTE OUR ACQUISITION STRATEGY. Competition among hospitals and other health care providers in the United States has intensified in recent years due to cost containment pressures, changing technology, changes in government regulation and reimbursement, changes in practice patterns (such as shifting from inpatient to outpatient treatments), the impact of managed care organizations and other factors. An important part of our business strategy is the acquisition of facilities in growing urban markets. Some facilities and health care providers that compete with us have greater financial resources and a larger, more experienced development staff focused on identifying and completing acquisitions. Any or all of these factors may impede our business strategy. IF WE FAIL TO COMPLY WITH REGULATIONS REGARDING LICENSES, OWNERSHIP AND OPERATION, WE COULD IMPAIR OUR ABILITY TO OPERATE OR EXPAND OUR OPERATIONS IN ANY STATE. All of the states in which we operate require hospitals and most health care facilities to maintain a license. In addition, some states require prior approval for the purchase, construction and expansion of health care facilities, based upon a state's determination of need for additional or expanded health care facilities or services. Such determinations, embodied in certificates of need issued by governmental agencies with jurisdiction over health care facilities, may be required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and other matters. Nine states in which we currently own or lease inpatient behavioral health care facilities, Alabama, Florida, Georgia, Illinois, Michigan, Missouri, Oklahoma, North Carolina and Virginia, have certificate of need laws. The failure to obtain any required certificate of need or the failure to maintain a required license could impair our ability to operate or expand operations in any state. IF WE FAIL TO COMPLY WITH EXTENSIVE LAWS AND GOVERNMENT REGULATIONS, WE COULD SUFFER PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS. Participants in the health care industry are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things: - billing for services; - relationships with physicians and other referral sources; - adequacy of medical care; - quality of medical equipment and services; - qualifications of medical and support personnel; - confidentiality, maintenance and security issues associated with health-related information and medical records; - licensure; - hospital rate or budget review; - operating policies and procedures; and - addition of facilities and services. Among these laws are the Anti-kickback Statute, the Stark Law and the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These laws impact the relationships that we may have with physicians and other referral sources. The Office of Inspector General of the Department of Health and Human Services, or the OIG, has enacted safe harbor regulations that outline practices that are deemed protected from prosecution under the Anti-kickback Statute. Our current financial relationships with physicians and other referral sources may not qualify for safe harbor protection under the Anti-kickback Statute. Failure to meet a safe harbor does not mean that the arrangement automatically violates the Anti-kickback Statute, but may subject the arrangement to greater scrutiny. Further, we cannot guarantee that practices that are outside of a safe harbor will not be found to violate the Anti-kickback Statute. In order to comply with the Stark Law, our financial relationships with physicians and their immediate family members must meet an exception. We attempt to structure our relationships to meet an exception to 2 the Stark Law, but the regulations implementing the exceptions, some of which are still under review, are detailed and complex, and we cannot guarantee that every relationship fully complies with the Stark Law. HIPAA required the Department of Health and Human Services to issue regulations requiring hospitals and other providers to implement measures to ensure the privacy and security of patients' medical records and use of uniform data standards for the exchange of information between the hospitals and health plans including claims and payment transactions. The privacy standard became effective April 14, 2003. Full compliance with the privacy standard was required by April 14, 2003. We have met the April 14, 2003 privacy standard compliance deadline, but compliance will be an ongoing process. The transaction standard and the security standard became effective on October 16, 2000 and February 20, 2003, respectively. Full compliance with the transaction standard and security standard is required by October 16, 2003 and April 20, 2005, respectively. We are in the process of complying with the transaction standard and security standard. We may incur additional expenses in order to comply with these standards. We cannot predict the full extent of our costs for implementing all of the requirements at this stage. If we fail to comply with the Anti-kickback Statute, the Stark Law, HIPAA or other applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more facilities), and the exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state health care programs. Because many of these laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly. In addition, we are unable to predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation or regulation will take or their impact. OTHER COMPANIES WITHIN THE HEALTH CARE INDUSTRY CONTINUE TO BE THE SUBJECT OF FEDERAL AND STATE INVESTIGATIONS, WHICH INCREASES THE RISK THAT WE MAY BECOME SUBJECT TO INVESTIGATIONS IN THE FUTURE. Both federal and state government agencies as well as private payors have increased and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of health care organizations. These investigations relate to a wide variety of topics, including: - cost reporting and billing practices; - quality of care; - financial relationships with referral sources; - medical necessity of services provided; and - treatment of indigent patients. The Office of the Inspector General, or OIG, and the U.S. Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Moreover, health care providers are subject to civil and criminal false claims laws, including the federal False Claims Act, which allows private parties to bring whistleblower lawsuits against private companies doing business with or receiving reimbursement under federal government programs. Some states have adopted similar state whistleblower and false claims provisions. Publicity associated with the substantial amounts paid by other health care providers to settle these lawsuits may encourage our current and former employees and other health care providers to bring whistleblower lawsuits. Any investigations of us, our executives or our managers could result in significant liabilities or penalties as well as adverse publicity. 3 WE MAY BE SUBJECT TO LIABILITIES BECAUSE OF CLAIMS BROUGHT AGAINST OUR OWNED, LEASED AND MANAGED INPATIENT BEHAVIORAL HEALTH CARE FACILITIES. IN ADDITION, IF WE ACQUIRE FACILITIES WITH UNKNOWN OR CONTINGENT LIABILITIES, WE COULD BECOME LIABLE FOR MATERIAL OBLIGATIONS. In recent years, plaintiffs have brought actions against hospitals and other health care providers, alleging malpractice, product liability or other legal theories. Many of these actions involved large claims and significant defense costs. We maintain professional malpractice liability and general liability insurance coverage of approximately $10.0 million, in excess of our $3.0 million deductible, to cover claims arising out of the operations of our owned and leased inpatient behavioral health care facilities. Some of the claims, however, could exceed the scope of the coverage in effect or coverage of particular claims could be denied. While our professional and other liability insurance has been adequate in the past to provide for liability claims, such insurance may not be available for us to maintain adequate levels of insurance in the future. Moreover, health care providers in our industry are experiencing significant increases in the premiums for malpractice insurance, and it is anticipated that such costs may continue to rise. Malpractice insurance coverage may not continue to be available at a cost allowing us to maintain adequate levels of insurance with acceptable deductible amounts. In addition, inpatient behavioral health care facilities that we acquire may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations. Although we obtain contractual indemnification from sellers covering these matters, such indemnification may be insufficient to cover material claims or liabilities for past activities of acquired hospitals. WE MAY BE SUBJECT TO LIABILITIES BECAUSE OF CLAIMS ARISING FROM OUR UNIT MANAGEMENT ACTIVITIES. We may be subject to liabilities from the acts, omissions and liabilities of the employees of the behavioral health care units we manage or from the actions of our employees in connection with the management of such units. Our unit management contracts generally require the acute care hospitals for which we manage units to indemnify us against certain claims and to maintain specified amounts of insurance. The hospitals, however, may not maintain such insurance and indemnification may not be available to us. Recently, other unit management companies have been subject to complaints alleging that these companies violated laws on behalf of units they managed. In some cases, plaintiffs brought actions against the managing company instead of, or in addition to, their individually managed hospital clients for these violations. Our managed units or other third parties may not hold us harmless for any losses we incur arising out of the acts, omissions and liabilities of the employees of the units we manage. If the courts determine that we are liable for amounts exceeding the limits of any insurance coverage or for claims outside the scope of that coverage or any indemnity, or if any indemnity agreement is determined to be unenforceable, then the resulting liability could affect adversely our business, results of operations and financial condition. WE FACE PERIODIC REVIEWS, AUDITS AND INVESTIGATIONS UNDER OUR CONTRACTS WITH FEDERAL AND STATE GOVERNMENT AGENCIES, AND THESE AUDITS COULD HAVE ADVERSE FINDINGS THAT MAY NEGATIVELY IMPACT OUR BUSINESS. As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Private pay sources also reserve the right to conduct audits. An adverse review, audit or investigation could result in: - refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from private payors; - state or federal agencies imposing fines, penalties and other sanctions on us; 4 - loss of our right to participate in the Medicare or Medicaid programs or one or more private payor networks; or - damages to our reputation in various markets. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of health care companies. The investigations include: - cost reporting and billing practices; - quality of care; - financial relationships with referral sources; and - medical necessity of services provided. We also are subject to potential lawsuits under a federal whistleblower statute designed to combat fraud and abuse in the health care industry. These lawsuits can involve significant monetary and award bounties to private plaintiffs who successfully bring these suits. IF WE FAIL TO CULTIVATE NEW, OR MAINTAIN EXISTING, RELATIONSHIPS WITH THE PHYSICIANS IN THE COMMUNITIES IN WHICH WE OPERATE, OUR PATIENT BASE MAY DECLINE. Our business depends upon the efforts and success of the physicians who provide health care services at our facilities and the strength of the relationships with these physicians. Our business could be adversely affected if a significant number of physicians or a group of physicians: - terminate their relationship with, or reduce their use of, the facilities; - fail to maintain acceptable quality of care or to otherwise adhere to professional standards; - suffer damage to their reputation; or - exit the market entirely. WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL, AND THE LOSS OF SERVICES OF ONE OR MORE KEY EXECUTIVES OR A SIGNIFICANT PORTION OF OUR LOCAL MANAGEMENT PERSONNEL COULD WEAKEN OUR MANAGEMENT TEAM AND OUR ABILITY TO DELIVER BEHAVIORAL HEALTH CARE SERVICES EFFICIENTLY. We are highly dependent on our senior management team, which has many years of experience addressing the broad range of concerns and issues relevant to our business. We have entered into employment agreements with Joey A. Jacobs, our Chairman, President and Chief Executive Officer, and Jack Salberg, our Chief Operating Officer, each of which include non-competition and non-solicitation provisions. Key man life insurance policies are not maintained on any member of senior management other than Mr. Jacobs. The loss of key management or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on our business and financial and operating results. THE SHORTAGE OF QUALIFIED REGISTERED NURSING STAFF AND OTHER HEALTH CARE WORKERS COULD ADVERSELY AFFECT OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED PERSONNEL AND COULD INCREASE OPERATING COSTS. The health care industry is very labor intensive and salaries and benefits are subject to inflationary pressures. Some of our inpatient behavioral health care facilities are experiencing the effects of the tight labor market, including a shortage of nurses, which has caused and may continue to cause an increase in our salaries, wages and benefits expenses in excess of the inflation rate. In order to supplement staffing levels, we periodically use temporary help from staffing agencies. 5 RISKS RELATED TO THE OFFERING OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES. As of March 31, 2003, our total consolidated indebtedness, after giving effect to the Financing Transactions and the acquisitions of The Brown Schools and Ramsay, was approximately $177.0 million. We will use a portion of the net proceeds from the Financing Transactions to repay our outstanding indebtedness, except for $17.0 million of our senior secured term notes, our $4.9 million mortgage loan insured by HUD, $5.0 million of our subordinated seller notes and approximately $0.1 million of our existing capital lease obligations. Our indebtedness could have important consequences to you including: - making it more difficult for us to satisfy our obligations with respect to the notes; - increasing our vulnerability to general adverse economic and industry conditions; - requiring that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate requirements; - limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and general corporate requirements; - limiting our flexibility in planning for, or reacting to, changes in our business and the health care industry; and - placing us at a competitive disadvantage to our competitors that have less indebtedness. We and our subsidiaries may be able to incur additional indebtedness in the future, including secured indebtedness. The terms of the indenture do not fully prohibit us or our subsidiaries from doing so. If new indebtedness is added to our and our subsidiaries' current indebtedness levels, the related risks that we and they now face could intensify. 6 EX-99.4 6 g83311exv99w4.txt EX-99.4 SECTION OF OM(UNAUDITED PROFORMA) EXHIBIT 99.4 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following table sets forth the unaudited pro forma condensed combined financial data for Psychiatric Solutions, Ramsay and The Brown Schools as a combined company, giving effect to the acquisitions of Ramsay and The Brown Schools and the Financing Transactions as if they had occurred on the dates indicated and after giving effect to the pro forma adjustments discussed herein. The unaudited pro forma condensed combined balance sheet as of March 31, 2003 has been derived from Psychiatric Solutions', Ramsay's, and The Brown Schools' historical balance sheets, adjusted to give effect to these acquisitions and the Financing Transactions, as well as our acquisition of Aeries Healthcare Corporation and Subsidiary (d/b/a Riveredge Hospital) and our merger with PMR as if they occurred on March 31, 2003. The pro forma condensed combined income statement for the twelve months ended March 31, 2003, the three months ended March 31, 2003 and 2002 and the year ended December 31, 2002 give effect to the acquisitions of Ramsay and The Brown Schools and the Financing Transactions, as well as our acquisition of Aeries Healthcare Corporation and Subsidiary (d/b/a Riveredge Hospital) and our merger with PMR as if they occurred at the beginning of the periods presented. The adjustments necessary to fairly present the unaudited pro forma condensed combined financial data have been made based on available information and in the opinion of management are reasonable. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with this unaudited pro forma condensed combined financial data. The pro forma adjustments are preliminary and revisions to the preliminary purchase price allocations and financing of the transactions may have a significant impact on the pro forma adjustments. A final valuation of net assets acquired associated with the Ramsay acquisition cannot be made prior to the completion of this offering memorandum. A final determination of these fair values will be conducted by Psychiatric Solutions' independent valuation specialists. The consideration of this valuation will most likely result in a change in the value assigned to the fixed and intangible assets acquired of Ramsay. The unaudited pro forma condensed combined financial data is for comparative purposes only and does not purport to represent what our financial position or results of operations would actually have been had the events noted above in fact occurred on the assumed dates or to project our financial position or results of operations for any future date or future period. The unaudited pro forma condensed combined financial data should be read in conjunction with the "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this offering memorandum. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2003 (DOLLARS IN THOUSANDS)

THE BROWN SCHOOLS ADJUSTMENTS ----------------------------------------------------- THE THE BROWN PRO FORMA PSYCHIATRIC BROWN SCHOOLS OF PURCHASE PRO FORMA SOLUTIONS SCHOOLS(1) OKLAHOMA, INC. ADJUSTMENTS COMBINED ----------- ---------- -------------- ----------- --------- ASSETS Current assets: Cash and cash equivalents........ $ 4,045 $ -- $ 2 $ (2)(2) $ 4,045 Accounts receivable, net......... 22,137 8,913 2,213 -- 33,263 Other current assets............. 2,832 345 114 -- 3,291 ------- -------- ------- -------- -------- Total current assets........... 29,014 9,258 2,329 (2) 40,599 Property, plant and equipment, net.............................. 33,764 13,321 2,226 30,625(3) 79,936 Costs in excess of net assets acquired, net.................... 26,846 -- 3,004 11,268(4) 41,118 Amortizable intangible asset, net.............................. 3,558 -- -- -- 3,558 Other assets....................... 3,438 39 24 682(5) 4,183 ------- -------- ------- -------- -------- Total assets....................... $96,620 $ 22,618 $ 7,583 $ 42,573 $169,394 ======= ======== ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings............ $ 9,529 $ -- $ -- $ 15,171(6) 24,700 Accounts payable................. 3,486 6,172 1,054 (597)(2) 10,115 Accrued liabilities.............. 12,610 2,385 661 (572)(2) 15,084 ------- -------- ------- -------- -------- Total current liabilities...... 25,625 8,557 1,715 14,002 49,899 Long-term debt, less current portion.......................... 36,657 -- -- 36,000(6) 72,657 Other liabilities.................. 3,447 -- -- -- 3,447 ------- -------- ------- -------- -------- Total liabilities.................. 65,729 8,557 1,715 50,002 126,003 Series A convertible preferred stock............................ -- -- -- 12,500(6) 12,500 Common stock....................... 77 -- 1 (1)(7) 77 Additional paid-in capital......... 35,013 14,061 10,749 (24,810)(7) 35,013 Notes receivable from stockholders..................... (711) -- -- -- (711) Accumulated (deficit) earnings..... (3,488) -- (4,882) 4,882(7) (3,488) Treasury stock..................... -- -- -- -- -- ------- -------- ------- -------- -------- Total stockholders' equity......... 30,891 14,061 5,868 (19,929) 30,891 ------- -------- ------- -------- -------- Total liabilities and stockholders' equity........................... $96,620 $ 22,618 $ 7,583 $ 42,573 $169,394 ======= ======== ======= ======== ========

RAMSAY AND FINANCING TRANSACTIONS ADJUSTMENTS ----------------------------------- OFFERING AND PURCHASE PRO FORMA PRO FORMA RAMSAY ADJUSTMENTS COMBINED -------- ----------- --------- ASSETS Current assets: Cash and cash equivalents........ $ 328 $ 2,714 $ 7,087 Accounts receivable, net......... 21,089 -- 54,352 Other current assets............. 7,007 -- 10,298 -------- --------- -------- Total current assets........... 28,424 2,714 71,737 Property, plant and equipment, net.............................. 33,732 -- 113,668 Costs in excess of net assets acquired, net.................... 2,286 28,755(8) 72,159 Amortizable intangible asset, net.............................. -- -- 3,558 Other assets....................... 7,698 1,896(9) 14,470 -------- --------- -------- Total assets....................... $ 72,140 $ 33,365 $274,899 ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings............ $ 3,856 $ (27,002)(10) $ 1,554 Accounts payable................. 4,504 -- 14,619 Accrued liabilities.............. 9,431 -- 24,515 -------- --------- -------- Total current liabilities...... 17,791 (27,002) 40,688 Long-term debt, less current portion.......................... 13,061 89,714(10) 175,432 Other liabilities.................. 3,675 2,979(11) 10,101 -------- --------- -------- Total liabilities.................. 34,527 65,691 226,221 Series A convertible preferred stock............................ -- 12,500(10) 25,000 Common stock....................... 95 (95)(12) 77 Additional paid-in capital......... 127,169 (127,169)(12) 35,013 Notes receivable from stockholders..................... -- -- (711) Accumulated (deficit) earnings..... (85,752) 78,539(12) (10,701) Treasury stock..................... (3,899) 3,899(12) -- -------- --------- -------- Total stockholders' equity......... 37,613 (44,826) 23,678 -------- --------- -------- Total liabilities and stockholders' equity........................... $ 72,140 $ 33,365 $274,899 ======== ========= ========

2 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2003 (DOLLARS IN THOUSANDS) (1) This column presents condensed combined balance sheet data for five of the six facilities acquired from The Brown Schools in April 2003, including The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc. and The Oaks Psychiatric Hospital, Inc. This group of five facilities was audited separately from The Brown Schools of Oklahoma, Inc. (2) Represents the elimination of cash and cash equivalents ($2), Medicare liabilities ($572) and bank overdrafts ($597) not acquired in connection with the acquisition of The Brown Schools. (3) Represents the adjustment of the property, plant and equipment of The Brown Schools to reflect their appraised value. (4) Represents adjustment to goodwill, calculated as follows: Total required financing.................................... $ 63,671 Less: Estimated capitalized financing costs................. (682) Less: Net assets acquired................................... (51,721) -------- Adjustment to goodwill...................................... $ 11,268 ======== (5) Represents estimated capitalized financing costs incurred in connection with the acquisition of The Brown Schools. (6) Represents the incurrence of $15,171 of short-term borrowings and $36,000 of long-term debt and the issuance of $12,500 of our series A convertible preferred stock to finance the acquisition of The Brown Schools. (7) Reflects the elimination of The Brown Schools' equity accounts and existing accumulated (deficit) earnings. (8) Represents adjustment to goodwill, calculated as follows: Total purchase price........................................ $ 58,075 Plus: Estimated transaction costs........................... 7,600 Less: Net assets acquired................................... (36,920) -------- Adjustment to goodwill...................................... $ 28,755 ======== (9) Represents estimated capitalized financing costs of $4,650 incurred in connection with the acquisition of Ramsay, less write-off of existing capitalized financing costs due to extinguishment of debt ($1,481) for Psychiatric Solutions and ($693) for Ramsay, less write-off of estimated capitalized financing costs incurred in connection with the acquisition of The Brown Schools ($580). (10) Represents (a) the incurrence of $150,000 of long-term debt, less the repayment of Ramsay's short-term debt ($3,856) and long-term debt ($13,061) and the repayment a portion of Psychiatric Solutions' short-term debt ($23,146) and a portion of its long-term debt ($47,225) and (b) the issuance of $12,500 of our series A convertible preferred stock, to finance the acquisition of Ramsay. (11) Represents a reclassification of put warrants from debt to other liabilities due to the pay off of $10,000 of related debt to the 1818 Fund. These warrants were exercised and classified as temporary equity in April 2003. (12) Reflects the elimination of Ramsay's equity accounts and existing accumulated (deficit) earnings of $85,752, debt prepayment penalties of ($3,350), a write-off of capitalized finance cost of ($2,061), and a write-off of the original issue discount on debt of ($1,802) related to the pay-off of $10,000 of debt to the 1818 Fund. 3 UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED MARCH 31, 2003 (DOLLARS IN THOUSANDS)

THE BROWN SCHOOLS ADJUSTMENTS ------------------------------------------------------- THE THE BROWN PSYCHIATRIC BROWN SCHOOLS OF PRO FORMA PRO FORMA SOLUTIONS(1) SCHOOLS(2) OKLAHOMA, INC. ADJUSTMENTS COMBINED ------------ ---------- -------------- ----------- ---------- Revenue.................................. $143,643 $59,165 $17,804 $ -- $220,612 -------- ------- ------- ------- -------- Expenses: Salaries, wages and employee benefits............................. 71,123 33,330 8,607 -- 113,060 Professional fees...................... 18,521 4,238 688 -- 23,447 Rentals and leases..................... 1,186 723 311 -- 2,220 Other operating expenses(18)........... 32,916 14,268 6,189 (3,342)(3) 50,031 Provision for doubtful accounts........ 4,422 1,716 81 -- 6,219 Depreciation and amortization.......... 2,415 1,536 239 (82)(4) 4,108 Other expenses(5)...................... 1,942 458 -- -- 2,400 -------- ------- ------- ------- -------- Total expenses................... 132,525 56,269 16,115 (3,424) 201,485 Interest expense......................... (6,598) (6,200) (895) 1,793(6) (11,900) -------- ------- ------- ------- -------- Earnings from continuing operations before taxes........................... 4,520 (3,304) 794 5,217 7,227 Provision (benefit) for taxes............ (2,966) -- -- 1,237(7) (1,729) -------- ------- ------- ------- -------- Net earnings from continuing operations............................. 7,486 (3,304) 794 3,980 8,956 Accrued dividends on series A convertible preferred stock........................ -- -- -- 637(8) 637 -------- ------- ------- ------- -------- Net earnings from continuing operations applicable to common stockholders...... $ 7,486 $(3,304) $ 794 $ 3,343 $ 8,319 ======== ======= ======= ======= ======== Other Financial Data: Capital expenditures................... $ 1,911 $ 1,095 $ 291 $ -- $ 3,297

RAMSAY AND FINANCING TRANSACTIONS ADJUSTMENTS ---------------------- PRO FORMA PRO FORMA RAMSAY ADJUSTMENTS COMBINED -------- ----------- --------- Revenue.................................. $145,852 $ -- $366,464 -------- ------- -------- Expenses: Salaries, wages and employee benefits............................. 92,318 (3,000)(9) 202,378 Professional fees...................... 3,991 -- 27,438 Rentals and leases..................... 4,434 -- 6,654 Other operating expenses(18)........... 32,802 -- 82,833 Provision for doubtful accounts........ 1,549 -- 7,768 Depreciation and amortization.......... 2,593 -- 6,701 Other expenses(5)...................... -- -- 2,400 -------- ------- -------- Total expenses................... 137,687 (3,000) 336,172 Interest expense......................... (2,342) (6,102)(10) (20,344) -------- ------- -------- Earnings from continuing operations before taxes........................... 5,823 (3,102) 9,948 Provision (benefit) for taxes............ (5,773) (388) (7,890) -------- ------- -------- Net earnings from continuing operations............................. 11,596 (2,715) 17,837 Accrued dividends on series A convertible preferred stock........................ -- 637(12) 1,274 -------- ------- -------- Net earnings from continuing operations applicable to common stockholders...... $ 11,596 $(3,352) $ 16,563 ======== ======= ======== Other Financial Data: Capital expenditures................... $ 2,010 $ -- $ 5,307

4 UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2003 (DOLLARS IN THOUSANDS)

THE BROWN SCHOOLS ADJUSTMENTS ------------------------------------------------------ THE THE BROWN PSYCHIATRIC BROWN SCHOOLS OF PRO FORMA PRO FORMA SOLUTIONS SCHOOLS(2) OKLAHOMA, INC. ADJUSTMENTS COMBINED ----------- ---------- -------------- ----------- ---------- Revenue................................. $37,104 $13,851 $4,395 $ -- $55,350 ------- ------- ------ ------ ------- Expenses: Salaries, wages and employee benefits............................ 17,785 8,319 2,146 -- 28,250 Professional fees..................... 4,451 995 185 -- 5,631 Rentals and leases.................... 248 188 77 -- 513 Other operating expenses(18).......... 8,850 3,434 1,551 (814)(3) 13,021 Provision for doubtful accounts....... 1,322 388 20 -- 1,730 Depreciation and amortization......... 667 279 59 65 (4) 1,070 Other expenses........................ 499 458 -- -- 957 ------- ------- ------ ------ ------- Total expenses.................. 33,822 14,061 4,038 (749) 51,172 Interest expense........................ (1,420) (1,414) (257) 389 (6) (2,702) ------- ------- ------ ------ ------- Earnings from continuing operations before taxes.......................... 1,862 (1,624) 100 1,138 1,476 Provision (benefit) for taxes........... 1,073 -- -- (147)(7) 926 ------- ------- ------ ------ ------- Net earnings from continuing operations............................ 789 (1,624) 100 1,285 550 Accrued dividends on series A convertible preferred stock........... -- -- -- 156 (8) 156 ------- ------- ------ ------ ------- Net earnings from continuing operations applicable to common stockholders..... $ 789 $(1,624) $ 100 $1,129 $ 394 ======= ======= ====== ====== ======= Other Financial Data: Capital expenditures.................. $ 628 $ 569 $ 75 $ -- $ 1,272

RAMSAY AND FINANCING TRANSACTIONS ADJUSTMENTS --------------------- PRO FORMA PRO FORMA RAMSAY ADJUSTMENTS COMBINED ------- ----------- --------- Revenue................................. $36,527 $ -- $91,877 ------- ------- ------- Expenses: Salaries, wages and employee benefits............................ 23,571 (750)(9) 51,071 Professional fees..................... 783 -- 6,414 Rentals and leases.................... 1,234 -- 1,747 Other operating expenses(18).......... 8,537 -- 21,558 Provision for doubtful accounts....... 402 -- 2,132 Depreciation and amortization......... 641 -- 1,711 Other expenses........................ -- -- 957 ------- ------- ------- Total expenses.................. 35,168 (750) 85,590 Interest expense........................ (557) (1,770)(10) (5,029) ------- ------- ------- Earnings from continuing operations before taxes.......................... 802 (1,020) 1,258 Provision (benefit) for taxes........... 305 (388)(11) 843 ------- ------- ------- Net earnings from continuing operations............................ 497 (633) 415 Accrued dividends on series A convertible preferred stock........... -- 156 (12) 312 ------- ------- ------- Net earnings from continuing operations applicable to common stockholders..... $ 497 $ (789) $ 103 ======= ======= ======= Other Financial Data: Capital expenditures.................. $ 413 $ -- $ 1,685

5 UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN THOUSANDS)

RIVEREDGE AND PMR ADJUSTMENTS ----------------------------------------------- PRO FORMA PSYCHIATRIC PSYCHIATRIC RIVEREDGE PURCHASE SOLUTIONS SOLUTIONS HOSPITAL PMR ADJUSTMENTS PRO FORMA ----------- --------- ------- ----------- ----------- Revenue........................ $23,188 $6,544 $ 4,804 $ -- $34,536 ------- ------ ------- ----- ------- Expenses: Salaries, wages and employee benefits.................... 13,970 3,616 555 -- 18,141 Professional fees............. 3,108 212 68 -- 3,388 Rentals and leases............ 190 25 33 -- 248 Other operating expenses(18)................ 2,671 1,861 4,161 -- 8,693 Provision for (recovery of) doubtful accounts........... 715 44 (1,931) -- (1,172) Depreciation and amortization................ 386 80 116 109(13) 691 Other expenses(5)............. -- -- (18) -- (18) ------- ------ ------- ----- ------- Total expenses.......... 21,040 5,838 2,984 109 29,971 Interest expense.............. (1,372) (139) (2) (427)(14) (1,940) Other income-interest......... -- -- 109 (109)(15) -- ------- ------ ------- ----- ------- Earnings from continuing operations before taxes..... 776 567 1,927 (645) 2,625 Provision (benefit) for taxes....................... 21 221 (88) (187)(16) (33) ------- ------ ------- ----- ------- Net earnings from continuing operations.................. 755 346 2,015 (458) 2,658 Accrued dividends on series A convertible preferred stock....................... -- -- -- -- -- ------- ------ ------- ----- ------- Net earnings from continuing operations applicable to common stockholders......... $ 755 $ 346 $ 2,015 $(458) $ 2,658 ======= ====== ======= ===== ======= Other Financial Data: Capital expenditures.......... $ 187 $ -- $ -- $ -- $ 187

RAMSAY AND FINANCING TRANSACTIONS THE BROWN SCHOOLS ADJUSTMENTS ADJUSTMENTS ----------------------------------------------------- --------------------- THE THE BROWN BROWN SCHOOLS OF PRO FORMA PRO FORMA PRO FORMA PRO FORMA SCHOOLS(2) OKLAHOMA, INC. ADJUSTMENTS COMBINED RAMSAY ADJUSTMENTS COMBINED ---------- -------------- ----------- --------- ------- ----------- ---------- Revenue........................ $14,860 $4,411 $ -- $53,807 $35,831 $ -- $89,638 ------- ------ ----- ------- ------- ------ ------- Expenses: Salaries, wages and employee benefits.................... 8,920 2,046 -- 29,107 22,196 (750)(9) 50,553 Professional fees............. 1,066 164 -- 4,618 822 -- 5,440 Rentals and leases............ 173 63 -- 484 963 -- 1,447 Other operating expenses(18)................ 3,567 1,514 (863)(3) 12,911 7,907 -- 20,818 Provision for (recovery of) doubtful accounts........... 400 -- -- (772) 720 -- (52) Depreciation and amortization................ 300 63 (40)(4) 1,014 625 -- 1,639 Other expenses(5)............. -- -- -- (18) 125 -- 107 ------- ------ ----- ------- ------- ------ ------- Total expenses.......... 14,426 3,850 (903) 47,344 33,358 (750) 79,952 Interest expense.............. (843) (215) (290)(6) (3,288) (690) (903)(10) (4,881) Other income-interest......... -- -- -- -- -- -- -- ------- ------ ----- ------- ------- ------ ------- Earnings from continuing operations before taxes..... (409) 346 613 3,175 1,783 (153) 4,805 Provision (benefit) for taxes....................... -- -- -- (33) 214 -- 181 ------- ------ ----- ------- ------- ------ ------- Net earnings from continuing operations.................. (409) 346 613 3,208 1,569 (153) 4,624 Accrued dividends on series A convertible preferred stock....................... -- -- 156(8) 156 -- 156(12) 312 ------- ------ ----- ------- ------- ------ ------- Net earnings from continuing operations applicable to common stockholders......... $ (409) $ 346 $ 457 $ 3,052 $ 1,569 $ (309) $ 4,312 ======= ====== ===== ======= ======= ====== ======= Other Financial Data: Capital expenditures.......... $ 119 $ 127 $ -- $ 433 $ 876 $ -- $ 1,309

6 UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2002 (DOLLARS IN THOUSANDS)

RIVEREDGE AND PMR ADJUSTMENTS THE BROWN SCHOOLS ADJUSTMENTS ----------------------------------------------- ----------------------------- PRO FORMA PSYCHIATRIC THE THE BROWN PSYCHIATRIC RIVEREDGE PURCHASE SOLUTIONS BROWN SCHOOLS OF SOLUTIONS HOSPITAL PMR ADJUSTMENTS PRO FORMA SCHOOLS(2) OKLAHOMA, INC. ----------- --------- ------- ----------- ----------- ---------- -------------- Revenue..................... $113,912 $14,152 $13,011 $ -- $141,075 $60,174 $17,820 -------- ------- ------- -------- -------- ------- ------- Expenses: Salaries, wages and employee benefits........ 62,326 8,907 1,513 (1,267)(17) 71,479 33,931 8,507 Professional fees.......... 14,373 1,271 1,814 -- 17,458 4,309 667 Rentals and leases......... 870 52 264 -- 1,186 708 297 Other operating expenses(18)............. 20,651 2,576 9,532 -- 32,759 14,401 6,152 Provision for (recovery of) doubtful accounts........ 3,681 211 (1,964) -- 1,928 1,728 61 Depreciation and amortization............. 1,770 140 181 348(13) 2,439 1,557 243 Other expenses(5).......... -- -- 1,425 -- 1,425 -- -- -------- ------- ------- -------- -------- ------- ------- Total expenses........... 103,671 13,157 12,765 (919) 128,674 56,634 15,927 Interest expense............ (5,564) (628) (4) (922)(14) (7,118) (5,629) (853) Other income -- interest.... -- -- 209 (209)(15) -- -- -- -------- ------- ------- -------- -------- ------- ------- Earnings from continuing operations before taxes.... 4,677 367 451 (212) 5,283 (2,089) 1,040 Provision (benefit) for taxes...................... (1,007) 190 (3,255) -- (4,072) -- -- -------- ------- ------- -------- -------- ------- ------- Net earnings from continuing operations................. 5,684 177 3,706 (212) 9,355 (2,089) 1,040 Accrued dividends on series A convertible preferred stock...................... -- -- -- -- -- -- -- -------- ------- ------- -------- -------- ------- ------- Net earnings from continuing operations applicable to common stockholders........ $ 5,684 $ 177 $ 3,706 $ (212) $ 9,355 $(2,089) $ 1,040 ======== ======= ======= ======== ======== ======= ======= Other Financial Data: Capital expenditures....... $ 1,470 $ -- $ -- $ -- $ 1,470 $ 645 $ 343

RAMSAY AND FINANCING TRANSACTIONS BROWN SCHOOLS ADJUSTMENTS --------------------------- ---------------------- PRO FORMA PRO FORMA PRO FORMA PRO FORMA ADJUSTMENTS COMBINED RAMSAY ADJUSTMENTS COMBINED ----------- ---------- -------- ----------- --------- Revenue..................... $ -- $219,069 $145,156 $ -- $364,225 -------- -------- -------- -------- -------- Expenses: Salaries, wages and employee benefits........ -- 113,917 90,943 (3,000)(9) 201,860 Professional fees.......... -- 22,434 4,030 -- 26,464 Rentals and leases......... -- 2,191 4,163 -- 6,354 Other operating expenses(18)............. (3,391)(3) 49,921 32,172 -- 82,093 Provision for (recovery of) doubtful accounts........ -- 3,717 1,867 -- 5,584 Depreciation and amortization............. (187)(4) 4,052 2,577 -- 6,629 Other expenses(5).......... -- 1,425 125 -- 1,550 -------- -------- -------- -------- -------- Total expenses........... (3,578) 197,657 135,877 (3,000) 330,534 Interest expense............ 1,114(6) (12,486) (2,475) (5,235)(10) (20,196) Other income -- interest.... -- -- -- -- -- -------- -------- -------- -------- -------- Earnings from continuing operations before taxes.... 4,692 8,926 6,804 (2,235) 13,495 Provision (benefit) for taxes...................... 1,384(7) (2,688) (5,864) -- (8,552) -------- -------- -------- -------- -------- Net earnings from continuing operations................. 3,308 11,614 12,668 (2,235) 22,047 Accrued dividends on series A convertible preferred stock...................... 637(8) 637 -- 637(12) 1,274 -------- -------- -------- -------- -------- Net earnings from continuing operations applicable to common stockholders........ $ 2,671 $ 10,977 $ 12,668 $(2,872) $ 20,773 ======== ======== ======== ======== ======== Other Financial Data: Capital expenditures....... $ -- $ 2,458 $ 2,473 $ -- $ 4,931

7 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS (DOLLARS IN THOUSANDS) (1) Includes the historical results of Aeries Healthcare Corporation and Subsidiary (d/b/a Riveredge Hospital) and PMR from the beginning of the period presented, except for capital expenditures, which are for Psychiatric Solutions only. (2) This column presents five of the six facilities acquired from The Brown Schools in April 2003, including The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc. and The Oaks Psychiatric Hospital, Inc. This group of five facilities was audited separately from The Brown Schools of Oklahoma, Inc. (3) Represents the elimination of overhead costs (salaries and expenses) historically allocated to the operation of The Brown Schools, plus Psychiatric Solutions' expected incremental costs to manage the business. (4) Reflects adjustment to depreciation and amortization resulting from changes in the valuation of The Brown Schools' fixed assets to reflect their appraised value. (5) Other expenses include (a) for the three months ended March 31, 2003, expense of $960 to revalue put warrants, income of $461 to release reserves on stockholder notes and a loss of $458 related to a sale of land; (b) for the three months ended March 31, 2002, asset impairment charges incurred at Ramsay of $125 and $18 of recoveries from the sale of previously written down assets at PMR; and (c) for the year ended December 31, 2002, asset impairment charges incurred at Ramsay of $125, $18 of recoveries from the sale of previously written down assets at PMR, $1,900 of employee severance and termination costs associated with the winding up of PMR and $457 of other various gains associated with PMR. (6) Represents the elimination of historical interest expense and the recording of interest expense relating to the financing of the acquisition of The Brown Schools. (7) Reflects the expected provision for income taxes resulting from the acquisition of The Brown Schools. (8) Reflects pay-in-kind dividends related to the issuance of $12,500 of Psychiatric Solutions' series A convertible preferred stock concurrently with the acquisition of The Brown Schools. (9) Reflects the elimination of duplicative costs related to executive compensation, the former board of directors of Ramsay and other administrative fees and expenses which are directly related to the acquisition of Ramsay. (10) Represents the elimination of historical interest expense and the recording of interest expense relating to the financing of the acquisition of Ramsay and the Financing Transactions based on an assumed interest rate for the notes. (11) Reflects the expected provision for income taxes resulting from the acquisition of Ramsay. For Ramsay's twelve months ended March 31, 2003, no income taxes were recorded for the period from April 1, 2002 to December 31, 2002 due to Ramsay's net deferred tax valuation allowance. (12) Reflects pay-in-kind dividends related to the issuance of $12,500 of Psychiatric Solutions' series A convertible preferred stock concurrently with the acquisition of Ramsay. (13) Reflects adjustment to depreciation and amortization resulting from changes in the valuation of Riveredge Hospital's and PMR's fixed assets to reflect their appraised value. (14) Represents the elimination of historical interest expense and the recording of interest expense relating to the financing of the acquisitions of Riveredge Hospital and PMR. (15) Reflects lost interest income due to the reduction in cash, cash equivalents and short-term investments balances. (16) Represents the elimination of a federal income tax provision as a result of the net deferred tax valuation allowance. (17) Reflects the reversal of accrued payouts to Riveredge Hospital option holders. (18) Other operating expenses are comprised of (a) for Psychiatric Solutions, other operating expenses plus supplies expense, (b) for Riveredge Hospital, other operating expenses plus supplies, contract services, insurance, utilities, real estate taxes less rentals and leases, (c) for PMR, other operating expenses plus research and development expenses, (d) for The Brown Schools, other operating expenses plus supplies and management fees, (e) for The Brown Schools of Oklahoma, other operating expenses plus supplies, purchased services and management fees and (f) for Ramsay, other operating expenses less professional fees and rentals and leases. 8 EX-99.5 7 g83311exv99w5.txt EX-99.5 SECTION OF OM(SELECTED CONSOLIDATED) EXHIBIT 99.5 THE BROWN SCHOOLS The following table sets forth selected historical financial and operating data of The Brown Schools for, or as of the end of, the three months ended March 31, 2003 and 2002 and each of the years ended December 31, 2002, 2001 and 2000. The selected historical financial data as of and for each of the years ended December 31, 2002, 2001 and 2000 were derived from the audited consolidated financial statements of The Brown Schools. The selected historical financial data as of and for the three months ended March 31, 2003 and 2002 were derived from the unaudited condensed consolidated financial statements of The Brown Schools. These unaudited condensed consolidated financial statements include all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of the financial position and the results of operations for these periods. Operating results for the three months ended March 31, 2003, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003. You should read this table in conjunction with The Brown Schools' consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- The Brown Schools" contained elsewhere in this offering memorandum.

THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ------------------------------ 2003 2002 2002 2001 2000 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA) STATEMENT OF OPERATIONS DATA: Revenue................................... $ 18,246 $ 19,271 $ 77,994 $ 78,078 $ 67,064 Costs and expenses: Salaries, wages and employee benefits... 10,465 10,966 42,438 42,759 36,960 Other operating expenses(1)............. 6,430 6,547 26,534 27,645 26,876 Provision for bad debts................. 408 400 1,789 2,079 1,297 Depreciation and amortization........... 338 363 1,800 1,672 1,853 Interest expense........................ 1,671 1,058 6,482 3,814 2,950 Other expenses(2)....................... 458 -- -- 68 51 -------- -------- -------- -------- -------- Total costs and expenses............. 19,770 19,334 79,043 78,037 69,987 Income (loss) from continuing operations before income taxes..................... $ (1,524) $ (63) $ (1,049) $ 41 $ (2,923) ======== ======== ======== ======== ======== Net income (loss)......................... $ (1,524) $ (63) $ (1,049) $ 41 $ (2,923) ======== ======== ======== ======== ======== BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents................. $ 2 $ 11 $ 2 $ 4 $ 9 Working capital........................... 1,314 5,671 2,130 1,828 2,305 Property, plant and equipment, net........ 15,547 18,461 16,495 17,305 17,487 Total assets.............................. 30,201 36,813 32,491 33,526 33,114 Stockholders' equity...................... 19,928 19,466 21,722 22,655 24,041 OTHER FINANCIAL DATA: Capital expenditures...................... $ 644 246 $ 988 $ 1,568 $ 561 Net cash provided by operating activities.............................. 352 15 1,417 3,412 585 EBITDA(3)................................. 943 1,358 7,233 5,595 1,931

THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ------------------------------ 2003 2002 2002 2001 2000 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA) OPERATING DATA: Number of facilities: Owned................................... 5 5 5 5 5 Leased.................................. 1 1 1 1 1 Number of licensed beds................... 879 869 885 869 869 Admissions................................ 1,430 1,531 5,463 5,564 4,503 Patient days.............................. 53,668 52,315 214,667 214,223 193,814 Average length of stay.................... 38 34 39 39 43

- --------------- (1) Other operating expenses include rent expense which was $265, $236, $1,005, $962 and $718 for the three months ended March 31, 2003 and 2002, and each of the years ended December 31, 2002, 2001 and 2000, respectively. (2) Other expenses relate to losses on sales of assets. (3) EBITDA is defined as income from continuing operations before income taxes, interest expense (net of interest income), depreciation, amortization, and other items included in the caption above labeled "Other expenses" as more fully described in the accompanying reconciliation of EBITDA to income from continuing operations before income taxes. While you should not consider EBITDA in isolation or as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States, management understands that EBITDA is a commonly used analytical indicator within the health care industry and also serves as a measure of leverage capacity and debt service ability. In addition, we use EBITDA as the measure of operating profitability of its segments and their components. EBITDA, as presented, may not be comparable to similarly titled measures of other companies. The following are the components of EBITDA for the three months ended March 31, 2003 and 2002 and each of the years ended December 31, 2002, 2001 and 2000:

THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- -------------------------- 2003 2002 2002 2001 2000 ------- ------ ------- ------ ------- (IN THOUSANDS) Income (loss) from continuing operations before income taxes.................................. $(1,524) $ (63) $(1,049) $ 41 $(2,923) Interest expense................................ 1,671 1,058 6,482 3,814 2,950 Depreciation and amortization................... 338 363 1,800 1,672 1,853 Other expenses(2)............................... 458 -- -- 68 51 ------- ------ ------- ------ ------- EBITDA.......................................... $ 943 $1,358 $ 7,233 $5,595 $ 1,931 ======= ====== ======= ====== =======

2 EX-99.6 8 g83311exv99w6.txt EX-99.6 SECTION OF OM(MDNA) EXHIBIT 99.6 THE BROWN SCHOOLS THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002 Revenue. Revenue was $18.2 million for the quarter ended March 31, 2003, compared to $19.2 million for the quarter ended March 31, 2002, a decrease of $1.0 million or 5.2%. This decrease is primarily attributable to decreased revenues at our San Antonio facility due to a drop in admissions and patient days. Salaries, wages and employee benefits. Salaries, wages and employee benefits expense was $10.5 million, or 57.4% of revenue for the quarter ended March 31, 2003, compared to $11.0 million, or 56.9% of revenue for the quarter ended March 31, 2002. In total, salaries, wages and employee benefits decreased $0.5 million in the quarter ended March 31, 2003 as compared to the quarter ended March 31, 2002, due largely to efforts to reduce non-essential administrative staff, beginning in March 2002. Other operating expenses. Other operating expenses were approximately $6.4 million, or 35.2% of revenue for the quarter ended March 31, 2003, compared to $6.5 million, or 34.0% of revenue for the quarter ended March 31, 2002. Other operating expenses include supplies, medical, professional and other expenses necessary to serve patients and operate facilities. Other operating expenses also include a management fee from parent of $0.9 million and $1.0 million for the quarters ended March 31, 2003 and 2002, respectively. The Brown Schools facilities are charged a management fee from parent equal to approximately 5% of net revenues to cover accounting, data processing and management and administrative services provided to the facilities by the parent. Provision for bad debts. The provision for bad debts was relatively unchanged at $0.4 million for the quarters ended March 31, 2003 and 2002. It is the policy of The Brown Schools facilities to reserve 100% of accounts over 180 days. Depreciation and amortization. Depreciation and amortization expense was $338,000 for the quarter ended March 31, 2003 compared to $363,000 for the quarter ended March 31, 2002, a decrease of $25,000. This decrease in depreciation and amortization expense is the result of sales of assets during the quarter ended March 31, 2003. Interest expense. Interest costs were allocated by the parent to the facilities based on the relation of total assets of each facility to the consolidated assets of the parent. This allocation is not necessarily indicative of interest expense had the facilities been separate from the parent. Other expenses. Other expenses totaled $458,000 for the quarter ended March 31, 2003. Other expenses for 2003 relate to losses on sale of assets during the quarter. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Revenue. Revenue was $78.0 million for the year ended December 31, 2002, compared to $78.1 million for the year ended December 31, 2001, a decrease of $0.1 million or less than 1%. Salaries, wages and employee benefits. Salaries, wages and employee benefits expense was $42.4 million, or 54.4% of revenue for the year ended December 31, 2002, compared to $42.8 million, or 54.8% of revenue for the year ended December 31, 2001. In total, salaries, wages and employee benefits decreased $0.4 million in the year ended December 31, 2002 as compared to the year ended December 31, 2001, due largely to efforts to reduce non-essential administrative staff, beginning in March 2002. Other operating expenses. Other operating expenses were approximately $26.5 million, or 34.0% of revenue for the year ended December 31, 2002, compared to $27.6 million, or 35.4% of revenue for the quarter ended December 31, 2001. Other operating expenses include supplies, medical professional and other expenses necessary to serve patients and operate facilities. Other operating expenses also include a management fee from parent of $3.8 million and $4.3 million for the years ended December 31, 2002 and 2001, respectively. The Brown Schools facilities are charged a management fee from parent equal to approximately 5% of net revenues to cover accounting, data processing and other management and administrative services provided to the facilities by the parent. Provision for bad debts. The provision for bad debts was approximately $1.8 million, or 2.3% of revenue for the year ended December 31, 2002, compared to $2.1 million, or 2.7% of revenue for the year ended December 31, 2001. It was the policy of The Brown Schools facilities to reserve 100% of accounts over 180 days. Depreciation and amortization. Depreciation and amortization expense was $1.8 million for the year ended December 31, 2002 compared to $1.7 million for the year ended December 31, 2001, an increase of $0.1 million. This increase in depreciation and amortization expense is the result of fixed asset additions at our San Marcos and The Oaks Treatment Centers in late 2001. Interest expense. Interest costs were allocated by the parent to the facilities based on the relation of total assets of each facility to the consolidated assets of the parent. This allocation is not necessarily indicative of interest expense had the facilities been separate from the parent. Other expenses. Other expenses totaled $68,000 for the year ended December 31, 2001. Other expenses for 2003 were losses on sale of assets during the year. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Revenue. Revenue was $78.1 million for the year ended December 31, 2001, compared to $67.1 million for the year ended December 31, 2000, an increase of $11.0 million or 16.4%. This increase was due in part to the opening of our facility in Virginia in 2001, which generated $3.2 million in revenues during the year. Excluding the opening of our Virginia facility, revenues increased $7.8 million or 11.6% attributable to an increase in patient days of approximately 10.5%. Salaries, wages and employee benefits. Salaries, wages and employee benefits expense was $42.8 million, or 54.8% of revenue for the year ended December 31, 2001, compared to $37.0 million, or 55.1% of revenue for the year ended December 31, 2000. This decrease in salaries, wages and employee benefits as a percentage of revenues was the result of realizing efficiencies due to increased patient volume. Other operating expenses. Other operating expenses were approximately $27.6 million, or 34.4% of revenue for the year ended December 31, 2001, compared to $26.9 million, or 40.1% of revenue for the quarter ended December 31, 2000. Other operating expenses include supplies, medical professional and other expenses necessary to serve patients and run facilities. The decrease in other operating expenses as a percentage of revenues was the result of realizing efficiencies due to increased patient volume. Other operating expenses also include a management fee from parent of $4.3 million and $3.4 million for the years ended December 31, 2001 and 2000, respectively. The Brown Schools facilities are charged a management fee from parent equal to approximately 5% of net revenues to cover accounting, data processing and other management and administrative services provided to the facilities by the parent. Provision for bad debts. The provision for bad debts was approximately $2.1 million, or 2.7% of revenue for the year ended December 31, 2001, compared to $1.3 million, or 1.9% of revenue for the year ended December 31, 2000. It was the policy of The Brown Schools facilities to reserve 100% of accounts over 180 days. Depreciation and amortization. Depreciation and amortization expense was $1.7 million for the year ended December 31, 2001 compared to $1.9 million for the year ended December 31, 2000, a decrease of $0.2 million. This decrease in depreciation and amortization expense is the result of sales of assets during 2000 and 2001. Interest expense. Interest costs were allocated by the parent to the facilities based on the relation of total assets of each facility to the consolidated assets of the parent. This allocation is not necessarily indicative of interest expense had the facilities been separate from the parent. 2 Other expenses. Other expenses totaled $68,000 for the year ended December 31, 2001, compared to $51,000 for the year ended December 31, 2000. Other expenses for 2001 and 2000 were losses on sale of assets. 3 EX-99.7 9 g83311exv99w7.txt EX-99.7 CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 99.7 REPORT OF INDEPENDENT AUDITORS The Board of Directors The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and The Oaks Psychiatric Hospital, Inc. We have audited the accompanying combined balance sheets of The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and The Oaks Psychiatric Hospital, Inc. (collectively the "Company") as of December 31, 2002 and 2001 and the related combined statements of operations, changes in equity of parent, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the combined financial position of The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and The Oaks Psychiatric Hospital, Inc. at December 31, 2002 and the combined results of their operations and their cash flows for each of the three years in the period ending December 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Nashville, Tennessee May 2, 2003 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. COMBINED BALANCE SHEETS

DECEMBER 31, ----------------- MARCH 31, 2001 2002 2003 ------- ------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Accounts receivable, less allowance for doubtful accounts of $4,505, $3,602, and $3,194 at December 31, 2001, 2002 and March 31, 2003, respectively.................. $10,336 $10,169 $ 8,913 Prepaid expenses and other................................ 336 360 345 ------- ------- ------- Total current assets.............................. 10,672 10,529 9,258 Property, plant and equipment, net.......................... 15,187 14,277 13,321 Other....................................................... 68 39 39 ------- ------- ------- Total assets...................................... $25,927 $24,845 $22,618 ======= ======= ======= LIABILITIES AND EQUITY OF PARENT Current liabilities: Bank overdraft............................................ $ 739 $ 834 $ 450 Accounts payable.......................................... 5,186 5,145 5,722 Accrued salaries and benefits............................. 2,147 2,007 1,661 Due to third party payors................................. 718 584 514 Other current liabilities................................. 330 302 210 ------- ------- ------- Total current liabilities......................... 9,120 8,872 8,557 Equity of parent............................................ 16,807 15,973 14,061 ------- ------- ------- Total liabilities and equity of parent............ $25,927 $24,845 $22,618 ======= ======= =======

See accompanying notes. 2 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. COMBINED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------- ------------------- 2000 2001 2002 2002 2003 ------- ------- ------- -------- -------- (UNAUDITED) (IN THOUSANDS) Revenue...................................... $50,955 $60,074 $60,174 $14,860 $13,851 Expenses: Salaries, wages and employee benefits...... 28,623 34,568 33,931 8,920 8,319 Supplies................................... 3,801 4,393 4,390 1,080 1,124 Rentals and leases......................... 442 709 708 173 188 Professional fees.......................... 3,353 3,801 4,309 1,066 995 Provision for doubtful accounts............ 1,047 1,694 1,728 400 388 Other operating expenses................... 9,320 8,107 7,108 1,744 1,616 Depreciation............................... 1,485 1,317 1,557 300 279 Management fee............................. 2,556 3,034 2,903 743 694 Interest................................... 2,572 3,375 5,629 843 1,414 Loss on sale of land....................... -- -- -- -- 458 ------- ------- ------- ------- ------- Loss before income taxes................... (2,244) (924) (2,089) (409) (1,624) ------- ------- ------- ------- ------- Provision for income taxes................. -- -- -- -- -- Net loss................................... $(2,244) $ (924) $(2,089) $ (409) $(1,624) ======= ======= ======= ======= =======

See accompanying notes. 3 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. COMBINED STATEMENTS OF CHANGES IN EQUITY OF PARENT

TOTAL -------------- (IN THOUSANDS) Equity of Parent at January 1, 2000......................... $17,625 Net loss.................................................. (2,244) Contribution from Parent.................................. 1,502 ------- Equity of Parent at December 31, 2000....................... 16,883 Net loss.................................................. (924) Contribution from Parent.................................. 848 ------- Equity of Parent at December 31, 2001....................... 16,807 Net loss.................................................. (2,089) Contribution from Parent.................................. 1,255 ------- Equity of Parent at December 31, 2002....................... 15,973 Net loss.................................................. (1,624) Distribution to Parent.................................... (288) ------- Equity of Parent at March 31, 2003 (unaudited).............. $14,061 =======

See accompanying notes. 4 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. COMBINED STATEMENTS OF CASH FLOWS

THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, --------------------------- --------------- 2000 2001 2002 2002 2003 ------- ------- ------- ----- ------- (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................ $(2,244) $ (924) $(2,089) $(409) $(1,624) Adjustments to reconcile net loss to net cash provided by in operating activities: Depreciation.................................. 1,485 1,317 1,557 300 279 Provision for doubtful accounts............... 1,047 1,694 1,728 400 388 Provision for professional liability risk..... 3,146 750 970 287 264 Loss on land.................................. -- -- -- -- 458 Changes in operating assets and liabilities: Accounts receivable........................ (3,874) (3,939) (1,561) 157 868 Prepaid and other current assets........... (12) 37 (24) 7 15 Accounts payable........................... 1,220 760 (41) (328) 577 Bank overdraft............................. 500 98 95 133 (384) Accrued salaries and benefits.............. 481 268 (140) (248) (346) Due to third party payors.................. 175 976 (134) (212) (70) Other Liabilities.......................... 111 41 (28) (176) (93) ------- ------- ------- ----- ------- Net cash provided by (used in) operating activities............................ 2,035 1,078 333 (89) 332 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment............. (385) (1,196) (645) (119) (569) Proceeds from sale of land...................... -- -- -- -- 789 Other assets.................................... (5) 19 29 25 -- ------- ------- ------- ----- ------- Net cash (used in) provided by investing activities............................ (390) (1,177) (616) (94) 220 CASH FLOWS FROM FINANCING ACTIVITIES Transfers to and advances from Parent, net...... (1,645) 99 283 183 (552) ------- ------- ------- ----- ------- Net cash (used in) provided by financing activities............................ (1,645) 99 283 183 (552) Increase (decrease) in cash..................... -- -- -- -- -- Cash at beginning of year....................... -- -- -- -- -- ------- ------- ------- ----- ------- Cash at end of year............................. $ -- $ -- $ -- $ -- $ -- ======= ======= ======= ===== ======= SUPPLEMENTAL INFORMATION: Interest payments............................... $ 2,572 $ 3,375 $ 5,629 $ 843 $ 1,414 ======= ======= ======= ===== =======

See accompanying notes. 5 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) 1. ORGANIZATION The accompanying combined financial statements include the accounts of the following entities (collectively, the Company) which are each subsidiaries of The Brown Schools, Inc. (the Parent) which provides behavioral and psychiatric services to children, adolescents, and adults. - The Brown Schools of Virginia, Inc. owns and operates a 64-bed hospital located in Charlottesville, Virginia. - Cedar Springs Behavioral Health System, Inc. owns and operates a 110-bed hospital located in Colorado Springs, Colorado. - Healthcare San Antonio, Inc. owns and operates a 196-bed hospital located in San Antonio, Texas. - The Oaks Psychiatric Hospital, Inc. owns and operates a 118-bed hospital in Austin, Texas. - The Brown Schools of San Marcos, Inc. owns and operates a 186-bed hospital in San Marcos, Texas. Substantially all of the net assets of the Company were purchased by Psychiatric Solutions, Inc. for approximately $48 million during April 2003. The accompanying unaudited consolidated condensed financial statements as of March 31, 2003 and for the three months ended March 31, 2002 and 2003, were prepared in accordance with accounting principles generally accepted in the United States of America and all applicable financial statement rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. The interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements have been included. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Net Patient Service Revenue The Company receives payment for patient services from federal and various state governments primarily under the Medicare and Medicaid programs, health maintenance organizations, preferred provider organizations and other private insurers and directly from patients. Patient service revenue is reported on the accrual basis in the period in which services are provided, at established rates, regardless of whether collection in full is expected. Net patient service revenue is based on established billing rates less allowances and discounts for patients covered by Medicare, Medicaid and various other discount arrangements. Payments received under these programs and arrangements, which are based on either predetermined rates or the cost of services, are generally less than the Company's customary charges, and the differences are recorded as contractual adjustments or policy discounts at the time service is rendered. Settlements under cost reimbursement agreements with third party payors are estimated and recorded in the period in which the related services are rendered and are adjusted in future periods as final settlements are determined. Final determination of amounts earned under the Medicare and Medicaid programs often 6 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) occur in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. Intercompany Allocations Related Party Transactions The Company is allocated interest expense based upon a percentage of the Company's fixed assets and working capital as compared to the Parent. Interest expense totaled approximately $2,572, $3,375 and $5,629 for the years ended December 31, 2000, 2001 and 2002, respectively. The Company is charged a management fee equal to 5% of its unaudited revenues. Management fees were $2,556, $3,034 and $2,903 for the years ended December 31, 2000, 2001 and 2002, respectively. The Parent carries employee health and dental insurance from an unrelated commercial carrier. Premiums are allocated based on the number of enrolled employees and dependents at the individual facilities. Health and dental expenses were approximately $740, $829 and $1,270 for the years ended December 31, 2000, 2001 and 2002, respectively. Although management considers its allocation methods to be reasonable, due to the relationship between the Company and its Parent, the terms of the allocation may not necessarily be indicative of that which would have resulted had the Company been a separate entity. Inventories Inventories, consisting principally of supplies, are stated at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over the useful lives of the assets, which are assigned by the Company as follows:

ASSET CATEGORY DEPRECIABLE LIFE - -------------- ---------------- Land improvements 15 years Buildings 30 years Building improvements 10 years Leasehold improvements Remaining life of lease Furniture, fixtures and equipment 7 years Computers, vehicles, and office equipment 5 years Software 3 years

Depreciation expense was approximately $1,485, $1,317 and $1,557 for the years ended December 31, 2000, 2001 and 2002, respectively. When events, circumstances and operating results indicate the carrying values of certain long-lived assets might be impaired, the Company prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts 7 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) are not expected to be recoverable, such amounts are reduced to estimated fair value. Fair value is estimated based upon projections of discounted cash flows. Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based upon differences between the financial statement carrying amounts and tax bases of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse. General and Professional Liability Risks The Parent, on behalf of the Company, carries general and professional liability insurance from an unrelated commercial insurance carrier, on a claims-made basis, for per occurrence losses up to $1 million in 2001 and 2002 with policy limits of $3 million in the aggregate in 2001 and 2002. The Parent also carries workers' compensation insurance from an unrelated commercial insurance carrier. The cost of general and professional liability and workers' compensation coverage is allocated by the Parent based upon the percentage of the number of the Company's full time employees as compared to the consolidated total of the Parent. The cost for the years ended December 31, 2000, 2001 and 2002 was approximately $3,734, $1,384 and $1,680, respectively. Capital Transactions with Parent The Company maintains certain intercompany accounts with its Parent whereby the Parent funds certain operating expenses and costs, such as insurance, payroll, and employee benefits. Such costs are offset in the intercompany accounts by transfers of cash collected by the Company to the Parent. Such amounts were reflected as amounts due to Parent in the Company's internal financial statements. As a result of the sale of the Company to an unrelated party subsequent to December 31, 2002, these amounts due to the Parent at December 31, 2001 and 2002 were not paid by the Company. Accordingly, the amounts due to Parent are reflected in the accompanying financial statements within equity of Parent. All changes in the amounts due to Parent have been reflected as contributions from or distributions to Parent. Use of Estimates The preparation of 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. Advertising Costs Advertising costs are expensed as incurred. Advertising costs were $225, $273 and $188 for the years ended December 31, 2000, 2001 and 2002, respectively. Fair Values of Financial Instruments Bank Overdraft -- The carrying amounts reported in the balance sheet for bank overdraft approximate fair value. 8 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Accounts Receivable and Accounts Payable -- The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate fair value. Recently Issued Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, ("SFAS No. 121"), and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 removes goodwill from its scope and clarifies other implementation issues related to SFAS No. 121. SFAS No. 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of this statement were adopted effective January 1, 2002 and had no material effect on the Company's results of operations or financial position. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 prohibits the classification of gains or losses from debt extinguishments as extraordinary items unless the criteria outlined in APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, are met. SFAS 145 also eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. The Company intends to adopt the provisions of SFAS 145 effective January 1, 2003 and does not expect this pronouncement to have a material effect on its financial position or results of operations. 3. CONCENTRATIONS OF CREDIT RISK The Company's primary concentration of credit risk is patient accounts receivable, which consists of amounts owed by governmental agencies, insurance companies, and private patients. The Company manages the receivables by regularly reviewing its accounts and contracts and by providing appropriate allowances for uncollectible accounts. Various state Medicaid programs comprised approximately 70% and 59% of patient receivables at December 31, 2002 and 2001, respectively. Remaining receivables relate primarily to various commercial insurance carriers and HMO/PPO programs. Concentration of credit risk from other payers is limited by the number of patients and payors. Three of the five facilities are located in the state of Texas, making the Company somewhat reliant on various laws and economic conditions in Texas. 4. RETIREMENT PLAN The Company participates in the Parent's defined contribution retirement plan, The Brown Schools, Inc. 401(k) Plan (the "Plan"). The Plan covers substantially all employees. Retirement expense was approximately $76, $98 and $32 for the years ended December 31, 2000, 2001 and 2002, respectively. The Company makes discretionary contributions to the Plan through the Parent each year. 9 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. COMMITMENTS AND CONTINGENCIES Current Operations Final determination of amounts earned under prospective payment and cost-reimbursement activities is subject to review by appropriate governmental authorities or their agents. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. OIG Investigation Healthcare San Antonio, Inc. is currently under investigation by the Office of Inspector General of the Department of Health and Human Services (OIG). The Company received a subpoena from the OIG requesting certain medical records related to Champus-Tricare reimbursement issues. The Company has complied with the subpoena and provided the requested documents. The Company is now awaiting further instruction from the government. While management believes that it has complied with all laws and regulations, it is unable to predict the outcome of the investigation. If the Company were to be subject to an unfavorable outcome to this investigation, the ultimate resolution of the investigation could have a material adverse effect on the Company's financial position and results of operations. Other Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing, except for the Champus-Tricare issue referred to above. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. The Company is subject to claims and suits arising in the ordinary course of business. Even though management is unable to predict such claims and their potential outcomes, it is management's opinion, that the ultimate resolution of such other pending legal proceedings will not have a material effect on the Company's financial position or results of operations. Leases The Company leases the facility comprising The Brown Schools of Virginia, Inc. as well as office space and certain equipment under operating agreements. Total rent expense under operating leases was approximately $442, $709 and $708 for the years ended December 31, 2000, 2001 and 2002, respectively. 10 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Future minimum rental commitments under noncancelable operating leases (with an initial or remaining term in excess of one year) at December 31, 2002, are as follows (in thousands):

OPERATING LEASES ---------------- 2003........................................................ $ 631 2004........................................................ 603 2005........................................................ 330 2006........................................................ 3 2007........................................................ 1 Thereafter.................................................. -- ------ Total minimum rental commitments............................ $1,568 ======

6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (in thousands):

DECEMBER 31, ------------------- 2001 2002 -------- -------- Land and improvements....................................... $ 6,246 $ 6,285 Buildings and improvements.................................. 16,209 17,533 Equipment................................................... 8,404 7,848 Leasehold improvements...................................... 185 58 Construction in progress.................................... 64 -- -------- -------- 31,108 31,724 Less accumulated depreciation............................... (15,921) (17,447) -------- -------- Net property, plant and equipment........................... $ 15,187 $ 14,277 ======== ========

11 THE BROWN SCHOOLS OF VIRGINIA, INC., CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC., HEALTHCARE SAN ANTONIO, INC., THE BROWN SCHOOLS OF SAN MARCOS, INC., AND THE OAKS PSYCHIATRIC HOSPITAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) are as follows (in thousands):

DECEMBER 31, ---------------- 2001 2002 ------ ------- Deferred tax assets: Net operating loss carryforwards............................ $1,167 $ 2,630 Allowance for bad debts..................................... 1,341 679 ------ ------- Total gross deferred tax assets............................. 2,508 3,309 Less: Valuation allowance................................... (2,276) (3,069) ------ ------- Net deferred tax assets..................................... 232 240 Deferred tax liabilities: Depreciation................................................ (232) (240) ------ ------- Total gross deferred tax liabilities........................ (232) (240) ------ ------- Net deferred tax asset (liability).......................... $ -- $ -- ====== =======

SFAS 109 requires the Company to record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." It further states that "forming a conclusion that a valuation allowance is not needed is difficult when there is a negative evidence such as cumulative losses in recent years." A 100% valuation allowance has been recorded equal to the deferred tax assets after considering deferred tax assets that can be realized through offset to existing taxable temporary differences. Assuming the Company achieves sufficient profitability in future years to realize the deferred income tax assets, the valuation allowance will be reduced in future years through a credit to income tax expense. As of December 31, 2002, the valuation allowance is approximately $3,069 which represents an increase of approximately $794 from December 31, 2001. At December 31, 2002, the Company has federal and state net operating loss carryforwards of approximately $6,820, which expire at various dates through 2022. A reconciliation of the federal statutory tax rate to the effective tax rate is as follows (in thousands):

YEAR ENDED DECEMBER 31, ------------------------ 2000 2001 2002 ------ ------ ------ Tax at U.S. statutory rate.................................. $(762) $(314) $(710) State income tax, net of federal benefit.................... (90) (37) (84) Change in valuation allowance............................... 852 351 794 ----- ----- ----- Total income tax expense.................................... $ -- $ -- $ -- ===== ===== =====

8. SUBSEQUENT EVENTS (UNAUDITED) On April 1, 2003, Psychiatric Solutions, Inc., which manages behavioral health units and owns psychiatric facilities, purchased substantially all of the assets of the Company for $48 million. 12 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY INDEPENDENT AUDITORS' REPORT To the Board of Directors The Brown Schools of Oklahoma, Inc. and Subsidiary We have audited the accompanying consolidated balance sheets of The Brown Schools of Oklahoma, Inc. and subsidiary (the Company) as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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. As discussed in Note 5 to the consolidated financial statements, the Company is economically dependent upon certain government programs under which it derived approximately 93%, 95% and 94% of its total revenues in 2002, 2001 and 2000, respectively. Additionally, the Company was dependent on its Parent for operating and financial support during the three years ended December 31, 2002. Effective April 9, 2003, the Parent sold the Company to an unrelated entity that manages behavioral health units and owns psychiatric facilities. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill upon adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." BDO SEIDMAN, LLP Houston, Texas May 22, 2003 13 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS

DECEMBER 31, ------------------------- MARCH 31, 2001 2002 2003 ----------- ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents............................ $ 3,630 $ 1,950 $ 1,950 Patient accounts receivable, net of allowance for doubtful accounts of $485,442, $493,020 and $249,563 (unaudited), respectively................ 1,929,475 2,243,487 2,212,995 Prepaid expenses and other current assets............ 94,715 124,707 114,408 ----------- ----------- ----------- Total current assets................................... 2,027,820 2,370,144 2,329,353 ----------- ----------- ----------- PROPERTY AND EQUIPMENT, at cost Land................................................. 969,828 969,828 969,828 Building and improvements............................ 1,468,703 1,775,176 1,841,675 Equipment............................................ 1,226,088 1,203,514 1,203,514 ----------- ----------- ----------- 3,664,619 3,948,518 4,015,017 Less accumulated depreciation........................ (1,546,488) (1,730,067) (1,789,389) ----------- ----------- ----------- Property and equipment, net............................ 2,118,131 2,218,451 2,225,628 GOODWILL, net of accumulated amortization of $421,325............................................. 3,004,339 3,004,339 3,004,339 DEFERRED INCOME TAXES, net............................. 432,788 38,129 -- OTHER ASSETS........................................... 16,135 14,912 23,500 ----------- ----------- ----------- TOTAL ASSETS........................................... $ 7,599,213 $ 7,645,975 $ 7,582,820 =========== =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses................ $ 1,002,143 $ 1,234,346 $ 1,054,490 Accrued salaries and benefits........................ 495,504 563,439 603,867 Due to third-party payers............................ 253,982 99,215 57,748 ----------- ----------- ----------- Total current liabilities.............................. 1,751,629 1,897,000 1,716,105 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 4) STOCKHOLDER'S EQUITY Common stock, par value $.01; 1,000 shares authorized; 100 shares issued and outstanding..... 1 1 1 Additional paid-in capital........................... 11,870,186 10,731,907 10,749,202 Accumulated deficit.................................. (6,022,603) (4,982,933) (4,882,488) ----------- ----------- ----------- Total Stockholder's Equity............................. 5,847,584 5,748,975 5,866,715 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY............. $ 7,599,213 $ 7,645,975 $ 7,582,820 =========== =========== ===========

The accompanying notes are an integral part of these consolidated financial statements. 14 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31, --------------------------------------- ------------------------- 2000 2001 2002 2002 2003 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) REVENUES: Net patient revenue......... $15,434,506 $17,092,904 $17,180,341 $4,194,657 $4,268,061 Other revenue............... 674,734 911,673 639,991 215,935 126,969 ----------- ----------- ----------- ---------- ---------- Total revenues................ 16,109,240 18,004,577 17,820,332 4,410,592 4,395,030 ----------- ----------- ----------- ---------- ---------- OPERATING EXPENSES: Salaries and benefits....... 8,336,902 8,191,457 8,507,256 2,045,959 2,146,513 Purchased services.......... 3,823,935 3,593,229 3,027,749 790,340 717,285 Supplies.................... 677,662 920,937 974,574 206,943 233,907 Rent expense................ 275,798 253,428 296,557 62,853 77,213 Medical professional fees... 416,778 528,599 666,831 164,156 184,696 Other operating expenses.... 1,394,879 1,392,589 1,262,560 296,388 378,317 Management fees and interest allocated by Parent...... 1,193,474 1,351,392 1,740,880 435,194 477,092 Provision for bad debts..... 249,563 384,929 60,828 180 20,240 Loss on sale of assets...... 50,558 67,544 -- -- -- Depreciation and amortization............. 368,236 355,079 243,427 62,597 59,322 ----------- ----------- ----------- ---------- ---------- Total operating expenses...... 16,787,785 17,039,183 16,780,662 4,064,610 4,294,585 ----------- ----------- ----------- ---------- ---------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES....................... (678,545) 965,394 1,039,670 345,982 100,445 Provision (benefit) for income taxes (Note 3).............. -- -- -- -- -- ----------- ----------- ----------- ---------- ---------- NET INCOME (LOSS)............. $ (678,545) $ 965,394 $ 1,039,670 $ 345,982 $ 100,445 =========== =========== =========== ========== ==========

The accompanying notes are an integral part of these consolidated financial statements. 15 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

COMMON STOCK ADDITIONAL TOTAL --------------- PAID-IN ACCUMULATED STOCKHOLDER'S SHARES AMOUNT CAPITAL DEFICIT EQUITY ------ ------ ----------- ----------- ------------------- BALANCE, December 31, 1999......... 100 $ 1 $12,406,950 $(6,309,452) $ 6,097,499 Net loss........................... -- -- -- (678,545) (678,545) --- ----- ----------- ----------- ----------- BALANCE, December 31, 2000......... 100 1 12,406,950 (6,987,997) 5,418,954 Conversion of amounts due from Parent as reduction of paid-in capital.......................... -- -- (536,764) -- (536,764) Net income......................... -- -- -- 965,394 965,394 --- ----- ----------- ----------- ----------- BALANCE, December 31, 2001......... 100 1 11,870,186 (6,022,603) 5,847,584 Conversion of amounts due from Parent as reduction of paid-in capital.......................... -- -- (1,138,279) -- (1,138,279) Net income......................... -- -- -- 1,039,670 1,039,670 --- ----- ----------- ----------- ----------- BALANCE, December 31, 2002......... 100 $ 1 $10,731,907 $(4,982,933) $ 5,748,975 === ===== =========== =========== ===========

The accompanying notes are an integral part of these consolidated financial statements. 16 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31, -------------------------------------- ----------------------- 2000 2001 2002 2002 2003 ----------- ----------- ---------- ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............. $ (678,545) $ 965,394 $1,039,670 $ 345,982 $ 100,445 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.............. 368,236 355,079 243,427 62,597 59,322 Provision for bad debts..... 249,563 384,929 60,828 180 20,240 Loss on disposal of asset... 50,558 67,544 -- -- -- Effect of changes in operating assets and liabilities: Patient accounts receivable............. (824,196) 503,979 (374,840) (383,925) 10,252 Prepaid expenses and other assets................. (39,873) 4,834 (29,992) (1,277) 10,299 Accounts payable and accrued expenses....... (426,404) 138,584 232,203 (22,542) (179,856) Accrued salaries and benefits............... (166,662) (5,273) 67,935 82,843 40,428 Due to third party payees................. 16,852 (81,360) (154,767) 19,903 (41,467) ----------- ----------- ---------- --------- --------- Net cash provided by (used in) operating activities........... (1,450,471) 2,333,710 1,084,464 103,761 19,663 ----------- ----------- ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment................... (175,697) (371,616) (342,524) (126,847) (75,087) ----------- ----------- ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Transfers to and advances from parent, net................. 1,521,205 (1,967,469) (743,620) 22,086 55,424 ----------- ----------- ---------- --------- --------- Net decrease in cash and cash equivalents.................... (104,963) (5,375) (1,680) (1,000) -- CASH AND CASH EQUIVALENTS, beginning of period............ 113,968 9,005 3,630 3,630 1,950 ----------- ----------- ---------- --------- --------- CASH AND CASH EQUIVALENTS, end of period......................... $ 9,005 $ 3,630 $ 1,950 $ 2,630 $ 1,950 ----------- ----------- ---------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid to Parent for interest.................... $ 377,743 $ 439,451 $ 853,375 $ 215,556 $ 257,341 ----------- ----------- ---------- --------- --------- NON-CASH TRANSACTIONS: Conversion of amounts due from Parent as reduction to paid-in capital........................ $ -- $ 536,764 $1,138,279 $ -- $ 17,295 =========== =========== ========== ========= =========

The accompanying notes are an integral part of these consolidated financial statements. 17 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Organization and Basis of Presentation -- The Brown Schools of Oklahoma, Inc. a Delaware corporation ("BSO" or "the Company"), was organized in 1993 as Shadow Mountain Hospital, Inc. In 1998, through amendment to its Articles of Incorporation, the Company was renamed to The Brown Schools of Oklahoma, Inc. The Company was a wholly-owned subsidiary of The Brown Schools, Inc. (the Parent) until April 9, 2003 at which date BSO, along with other healthcare facilities owned by the Parent, was sold to an unrelated entity (see Note 2). The Company provides psychiatric and other behavioral health services principally to at-risk and troubled youth in Oklahoma. Services are provided from multiple locations in Oklahoma, including the Company's main campus in Tulsa, Oklahoma. The Parent conducts similar operations through other subsidiaries throughout the United States and Puerto Rico. Basis of Consolidation -- The accompanying consolidated financial statements include the accounts of Brown Schools of Oklahoma, Inc. and its subsidiary, Therapeutic School Services, LLC. Significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates. Cash and Cash Equivalents -- The Company considers cash and highly liquid investments with original maturities of less than three months to be cash and cash equivalents. Net Patient Service Receivables and Revenues -- The Company receives payment for services rendered to patients from (1) federal and state governments under Medicaid and other similar programs; (2) privately sponsored managed care and commercial insurance plans for which payment is made based on terms defined under contracts; and (3) other payers. Net patient service revenue consists of net charges for services, which are based on the Company's established billing rates less allowances and discounts for patients covered by third-party programs, including estimated retroactive adjustments where applicable. Payments under third-party programs are based on either costs of services or predetermined rates and formulas that are generally less than the Company's established billing rates. Patient service revenues, net of allowances and discounts, are recorded in the period in which the related services are rendered and are adjusted, as necessary, in future periods as final settlements are determined. Final determination of amounts earned under third party programs often occur in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. Receivables from, or payables to, third-party payers reflect estimated settlements resulting from intermediary reviews. In the opinion of management, the allowances, discounts and liabilities to third-party payers recognized in the accompanying consolidated financial statements are adequate. Regulations regarding reimbursements from government agencies are subject to periodic change based upon administrative, legislative and judicial actions, some of which may be retroactive. The Company currently does not anticipate any material adverse effect from such matters. Management believes its estimates of discounts, allowances and other adjustments are reasonable based on currently available information. However, due to uncertainties inherent in the estimation process and actions of government agencies regarding reimbursement, it is reasonably possible that net patient service revenues, the allowance for doubtful accounts, or estimated amounts due to third-party payers could be adjusted by a material amount in the near term. Other Revenue -- Other revenue consists primarily of school counseling and administrative fee revenue. Such other revenues are recognized in the period the services are provided. 18 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment -- Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:

YEARS ----- Buildings and improvements.................................. 5-30 Equipment................................................... 3-10

The Company records impairments to property and equipment when it becomes probable that the carrying values of the assets will not be fully recovered over their estimated lives. Impairments are recorded to reduce the carrying value of the assets to their estimated fair values determined by the Company based on facts and circumstances in existence at the time of the determination, estimates of probable future economic conditions and other information. No impairment adjustments were required for the three years ended December 31, 2002. Goodwill -- Goodwill is the result of acquisition costs for a business purchased in 1998 that exceeded the fair value of acquired net tangible assets by $3,247,544. Prior to 2002, goodwill was amortized on a straight-line basis over 30 years. A similar intangible asset of $128,120 was, prior to 2002, amortized by the Company's subsidiary over 15 years. The recoverability of goodwill was, prior to 2002, reviewed based primarily upon an analysis of undiscounted cash flows from the acquired businesses. Other than amortization, there were no changes in goodwill during 2000, 2001 and 2002. Effective January 1, 2002, BSO was required to adopt SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 required that the Company's recorded goodwill no longer be amortized, but instead be periodically reviewed for impairment. SFAS No. 142 required the Company to complete a transitional goodwill impairment test within six months from the date of adoption, and any resulting impairment loss recognized as a cumulative effect of a change in accounting principle. Management's assessment, which was based primarily on the proceeds from sale of the Company (see Note 2), did not indicate any material impairment losses associated with the adoption of SFAS No. 142 at January 1, 2002. SFAS No. 142 requires a pro forma presentation of net income after the add-back of goodwill amortization. Such pro forma analysis for 2000, 2001 and 2002 is as follows:

2000 2001 2002 --------- ---------- ---------- Net income (loss), as reported.................... $(678,545) $ 965,394 $1,039,670 Add back goodwill amortization.................... 116,793 116,793 -- --------- ---------- ---------- Pro forma adjusted net income (loss).............. $(561,752) $1,082,187 $1,039,670 ========= ========== ==========

The Company had no acquisitions or dispositions of businesses during 2000, 2001 and 2002. Income Taxes -- The Company is included in the consolidated tax return of its Parent and through an informal agreement with the Parent accounts for its share of consolidated tax obligations (benefits) using an "as if separate return" methodology. Deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to temporary differences between the tax bases and financial carrying values of the Company's assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets for amounts that management determines are more likely than not to be realized. Fair Value of Financial Instruments -- The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and accounts payable approximate their fair value given the short-term maturity of these instruments. Recent Accounting Pronouncements -- In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the 19 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Impairment of Long-Lived Assets." This statement superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", ("APB No. 30") for the disposal of a segment of a business. The Statement was required to be adopted by the Company during 2002. The adoption of SFAS No. 144 did not have a material effect on the Company's financial statements. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 prohibits the classification of gains or losses from debt extinguishments as extraordinary items unless the criteria outlined in APB No. 30, are met. SFAS 145 also eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. The Company intends to adopt the provisions of SFAS 145 effective January 1, 2003 and does not expect this pronouncement to have a material effect on its financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". This standard requires recognition of costs associated with exit or disposal activities as they are incurred, rather than at the date of commitment to an exit or disposal plan. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. As described in Note 7, the Company was sold subsequent to year-end. This transaction may result in a material effect on the Company's financial statements. In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". The interpretation requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN No. 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, during the first quarter of fiscal 2003. The adoption of FIN No. 45 did not have a material effect on the accompanying financial statements. The following is a summary of the Company's agreements that have been determined to be within the scope of FIN No. 45. The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these agreements is minimal. Accordingly, there are no liabilities recorded for these agreements as of December 31, 2002 and March 31, 2003. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51". This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The adoption of this Interpretation did not have a material effect on the Company's financial statements. 20 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interim Financial Statements -- The accompanying unaudited consolidated condensed financial statements as of March 31, 2003 and for the three months ended March 31, 2002 and 2003, were prepared in accordance with accounting principles generally accepted in the United States of America and all applicable financial statement rules and regulations of the Securities and Exchange Commission pertaining to interim financial information. The interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements have been included. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year. 2. RELATED PARTY TRANSACTIONS Financing Arrangements with Parent Through April 9, 2003, the Company was dependent upon its Parent for financing and operating support. The Company had access to funds through credit arrangements obtained by its Parent. The Parent has a credit facility with multiple banks (the Bank Facility). The Bank facility bears interest at LIBOR plus 3.5% and expires on June 30, 2003. At December 31, 2002, the Parent had $46.2 million outstanding under the Bank Facility. From December 2000 through December 2002, the Parent was not in compliance with the financial covenants under the Bank Facility. The Parent negotiated limited waivers for these violations and agreed to complete certain asset sales, the proceeds from which were used to reduce its outstanding debt. In April 2003, the Parent sold six of its healthcare facilities, including the Company, for aggregate proceeds of approximately $63 million (see Note 7). Proceeds from the sale were used by the Parent to retire all amounts outstanding under the Bank Facility. In addition, as of December 31, 2002, the Parent had $16.1 million senior subordinated notes outstanding with a non-bank creditor (the Subordinated Notes) and $16.7 million of paid-in-kind notes (the PIK Notes) with its primary investor. The Subordinated Notes and the PIK Notes bear interest at 18% and 12% per annum, respectively. Effectively all of the assets of the Parent and its subsidiaries are pledged as collateral under these debt agreements. Capital Transactions with Parent As of December 31, 1999, the Company's additional paid-in capital of $12,406,950 represented amounts contributed by the Parent through the forgiveness and permanent investment of certain intercompany balances due from the Company. As a result of the sale of the Company to an unrelated party subsequent to December 31, 2002, certain amounts due from the Parent at December 31, 2001 and 2002 were not collected by the Company. The reduction of amounts due from Parent are reported in the accompanying financial statements as a return of capital to the Parent in the amount of $536,764 and $1,138,279 for the years ended December 31, 2001 and 2002, respectively. Intercompany Allocations During the three years ended December 31, 2002, the Parent maintained financing arrangements to provide working capital and other advances to its subsidiaries, including the Company. Interest costs were allocated to the subsidiaries based upon the relation of total assets of each subsidiary to the Parent's consolidated total assets, rather than on the specific borrowings attributed to each subsidiary. Interest charges allocated to the Company for fiscal years 2000, 2001 and 2002 were $377,743, $439,451, and $853,375, 21 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively. The terms of the allocation may not necessarily be indicative of that which would have resulted had the Company been a separate entity. The Parent provides accounting, data processing, and other management and administrative services to its subsidiaries, including the Company. A management fee of approximately 5% of net revenues is charged to each subsidiary to cover the costs of such services. Management fees allocated to the Company for fiscal years 2000, 2001 and 2002 were $815,731, $911,941, and $887,505, respectively. Although management considers the allocation method to be reasonable, due to the relationship between the Company and its Parent, the terms of the allocation may not necessarily be indicative of that which would have resulted had the Company been a separate entity. The Parent purchases professional and general liability insurance coverage and charged the Company $107,959, $118,210, and $185,486 for its share of such insurance cost during the years ended December 31, 2000, 2001 and 2002, respectively. 3. INCOME TAXES The Company is included in the consolidated tax return of its Parent and through an informal agreement with the Parent, accounts for its share of consolidated tax obligations (benefits) using an "as if separate return" methodology. A reconciliation of income taxes computed by applying the U.S. federal statutory rate to the actual income tax expense attributable to income before provisions (benefit) for income taxes is as follows:

YEAR ENDED DECEMBER 31, --------------------------------- 2000 2001 2002 --------- --------- --------- Income tax provision (benefit) at U.S. federal statutory rate.................................... $(230,705) $ 328,234 $ 353,488 State income taxes, net of federal tax benefit...... (26,870) 38,230 41,171 Utilization of net operating loss carryforwards..... -- (366,464) (394,659) Change in valuation allowance....................... 257,575 -- -- --------- --------- --------- Provision (benefit) for income taxes................ $ -- $ -- $ -- ========= ========= =========

Deferred tax assets of the Company are primarily attributable to: (1) built-in losses that resulted from declines in depreciable property values in years prior to recapitalization and ownership change for the Parent in 1997; (2) amortization of intangible assets; and (3) available net operating loss carryforwards. The Internal Revenue code significantly limits the amount of pre-acquisition net operating losses that are available to offset future taxable income when a change of ownership occurs (see Note 7). As a result of limitations on deductibility of the built-in losses and the uncertainty surrounding the tax benefit to be realized from the operating loss carryforwards, management has established a valuation allowance against the related deferred tax assets. As of December 31, 2001 and 2002, the Company had recorded net deferred tax assets of $432,788 and $38,129, respectively. The recognition of these deferred taxes was based on management's assessment that the realization of these deferred tax assets is more likely than not on an "as if separate return" basis. 4. COMMITMENTS AND CONTINGENCIES As is typical in the at-risk youth treatment industry, the Company, the Parent and other affiliated subsidiaries are subject to claims and lawsuits arising in the ordinary course of business, including malpractice claims. In the opinion of management, the ultimate resolution of the claims will not have a material adverse effect on the business, results of operations or financial condition of the Company, the Parent or other subsidiaries as sufficient insurance coverage to mitigate risks of loss is maintained. 22 THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Final determination of amounts earned under certain government programs and privately sponsored plans is subject to review by the appropriate payor or its agents. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. BSO has incentive arrangements with certain of its employees. These provide for incentive bonuses of 5% to 25% of annual salary amounts if specified goals are attained. The incentive bonuses for 2000, 2001 and 2002 were approximately $25,000, $30,000 and $101,000, respectively. As a result of the sale of the Company subsequent to December 31, 2002, bonuses payable to certain executives totaling approximately $50,000 were accrued at March 31, 2003. The Company has various operating leases for office equipment and clinic space. At December 31, 2002, future minimum payments under noncancellable operating leases are approximately: 2003 -- $199,256; 2004 -- $117,224; 2005 -- $52,081; 2006 -- $5,566; and 2007 -- $-0-. 5. CONCENTRATION OF CREDIT RISK The Company is particularly sensitive to regulatory and economic changes in the state of Oklahoma. During the three years ended December 31, 2002, substantially all of the Company's revenues were derived from services provided and facilities operated in Oklahoma. Approximately 94%, 95% and 93% of the Company's net revenues for the years ended December 31, 2000, 2001 and 2002, respectively, were derived from Medicaid and other government programs. As of December 31, 2002 and 2001, substantially all of the Company's patient accounts receivable related to services provided under these programs. 6. RETIREMENT PLAN The Company participates in the Parent's defined contribution retirement plan, The Brown Schools, Inc. 401(k) Plan (the "Plan"). The Company made discretionary contributions to the Plan of $31,941, $42,843, and $19,594 for the years ended December 31, 2000, 2001 and 2002, respectively. 7. SUBSEQUENT EVENTS (UNAUDITED) On April 9, 2003, Psychiatric Solutions, Inc., a company that manages behavioral health units and owns psychiatric facilities, purchased substantially all of the assets of the Company for approximately $15,000,000. 23 -----END PRIVACY-ENHANCED MESSAGE-----

EX-99.1

                                                                    EXHIBIT 99.1


  SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA

     The following table sets forth a summary of unaudited pro forma condensed
combined financial and operating data for Psychiatric Solutions, Ramsay and The
Brown Schools as a combined company, giving effect to the acquisitions of Ramsay
and The Brown Schools and the Financing Transactions as if they had occurred on
the dates indicated and after giving effect to certain pro forma adjustments
described in the section entitled "Unaudited Pro Forma Condensed Combined
Financial Information." The pro forma condensed combined balance sheet data as
of March 31, 2003 have been derived from Psychiatric Solutions', Ramsay's, and
The Brown Schools' historical balance sheets, adjusted to give effect to these
acquisitions and the Financing Transactions, as well as the acquisition of
Aeries Healthcare Corporation and Subsidiary (d/b/a Riveredge Hospital) and the
merger with PMR Corporation, or PMR, as if they occurred on March 31, 2003. The
pro forma condensed combined income statement data for the twelve months ended
March 31, 2003, the three months ended March 31, 2003 and 2002 and the year
ended December 31, 2002 give effect to these acquisitions and the Financing
Transactions, as well as our acquisition of Aeries Healthcare Corporation and
Subsidiary (d/b/a Riveredge Hospital) and our merger with PMR as if they
occurred at the beginning of these respective periods.

     The adjustments necessary to fairly present the unaudited pro forma
condensed combined financial data have been made based on available information
and in the opinion of management are reasonable. Assumptions underlying the pro
forma adjustments are described in the accompanying notes, which should be read
in conjunction with this unaudited pro forma condensed combined financial data.
The pro forma adjustments are preliminary and revisions to the preliminary
purchase price allocations and financing of the transactions may have a
significant impact on the pro forma adjustments. A final valuation of net assets
acquired associated with the Ramsay acquisition cannot be made prior to the
completion of this offering memorandum. A final determination of these fair
values will be conducted by Psychiatric Solutions' independent valuation
specialists. The consideration of this valuation will most likely result in a
change in the value assigned to the fixed and intangible assets acquired of
Ramsay.

     The unaudited pro forma condensed combined financial and operating data is
for comparative purposes only and does not purport to represent what our
financial position or results of operations would actually have been had the
events noted above in fact occurred on the assumed dates or to project our
financial position or results of operations for any future date or future
period. The unaudited pro forma condensed combined financial and operating data
are only a summary and should be read in conjunction with the "Unaudited Pro
Forma Condensed Combined Financial Information," "Selected Consolidated
Financial and Operating Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included elsewhere in this offering memorandum.



                                                 TWELVE MONTHS      THREE MONTHS ENDED
                                                     ENDED               MARCH 31,            YEAR ENDED
                                                   MARCH 31,      -----------------------    DECEMBER 31,
                                                     2003            2003         2002           2002
                                                ---------------   ----------   ----------   --------------
                                                 (DOLLARS IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA)
                                                                                
INCOME STATEMENT DATA:
Revenue.......................................      $366,464       $ 91,877     $ 89,638       $364,225
Expenses:
  Salaries, wages and employee benefits.......       202,378         51,071       50,553        201,860
  Other operating expenses(1).................       116,925         29,719       27,705        114,911
  Provision for (recovery of) doubtful
     accounts(2)..............................         7,768          2,132          (52)         5,584
  Depreciation and amortization...............         6,701          1,711        1,639          6,629
  Interest expense............................        20,344          5,029        4,881         20,196
  Other expenses(3)...........................         2,400            957          107          1,550
                                                    --------       --------     --------       --------
     Total expenses...........................       356,516         90,619       84,833        350,730






                                                 TWELVE MONTHS      THREE MONTHS ENDED
                                                     ENDED               MARCH 31,            YEAR ENDED
                                                   MARCH 31,      -----------------------    DECEMBER 31,
                                                     2003            2003         2002           2002
                                                ---------------   ----------   ----------   --------------
                                                 (DOLLARS IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA)
                                                                                
Earnings from continuing operations before
  taxes.......................................         9,948          1,258        4,805         13,495
Provision (benefit) for taxes.................        (7,890)           843          181         (8,552)
                                                    --------       --------     --------       --------
Net earnings from continuing operations.......        17,837            415        4,624         22,047
Accrued dividends on series A convertible
  preferred stock.............................         1,274            312          312          1,274
                                                    --------       --------     --------       --------
Net earnings from continuing operations
  applicable to common stockholders...........      $ 16,563       $    103     $  4,312       $ 20,773
                                                    ========       ========     ========       ========
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents.....................      $  7,087
Working capital...............................        31,049
Property, plant and equipment, net............       113,668
Total assets..................................       274,899
Total debt....................................       176,986
Total preferred equity........................        25,000
Stockholders' equity..........................        23,678
OTHER FINANCIAL DATA:
Capital expenditures..........................      $  5,307       $  1,685     $  1,309       $  4,931
EBITDA(4).....................................        39,393          8,955       11,432         41,870
SELECTED PRO FORMA RATIOS:
EBITDA/Cash interest expense(5)...............           2.2x
Net debt/EBITDA(6)............................           4.3x
OPERATING DATA:
Number of facilities:
  Owned.......................................            18             18           18             18
  Leased......................................             4              4            4              4
Number of beds................................         2,812          2,812        2,759          2,768
Admissions....................................        31,968          8,334        7,990         31,624
Patient days..................................       756,459        191,757      185,411        750,113
Average length of stay........................            24             23           23             24


- ---------------

(1) Other operating expenses include operating expenses, professional fees and
    rent expense. Rent expense was $6,654, $1,747, $1,447 and $6,354 for the
    twelve months ended March 31, 2003, the three months ended March 31, 2003
    and 2002 and the year ended December 31, 2002, respectively.

(2) Provision for doubtful accounts of $1,879 for the three months ended March
    31, 2002 was offset by the collection of previously reserved accounts
    receivable relating to closed outpatient programs and a change in the
    estimate on the collectability of certain other receivables at PMR.

(3) Other expenses include (a) for the three months ended March 31, 2003,
    expense of $960 to revalue put warrants, income of $461 to release reserves
    on stockholder notes and a loss of $458 related to a sale of land; (b) for
    the three months ended March 31, 2002, asset impairment charges incurred at
    Ramsay of $125 and $18 of recoveries from the sale of previously written
    down assets at PMR; and (c) for the year ended December 31, 2002, asset
    impairment charges incurred at Ramsay of $125, $18 of recoveries from the
    sale of previously written down assets at PMR, $1,900 of employee severance
    and termination costs associated with the winding up of PMR and $457 of
    other various gains associated with PMR.

                                       2


(4) EBITDA is defined as earnings from continuing operations before income
    taxes, interest expense (net of interest income), depreciation,
    amortization, and other items included in the caption above labeled "Other
    expenses" as more fully described in the accompanying reconciliation of
    EBITDA to earnings from continuing operations before income taxes. While you
    should not consider EBITDA in isolation or as a substitute for net income,
    operating cash flows or other cash flow statement data determined in
    accordance with accounting principles generally accepted in the United
    States, management understands that EBITDA is a commonly used analytical
    indicator of performance within the health care industry and also serves as
    a measure of leverage capacity and debt service ability. In addition, we use
    EBITDA as the measure of operating profitability of its segments and their
    components. EBITDA, as presented, may not be comparable to the same or
    similarly titled measures of other companies. The following are the
    components of EBITDA for the twelve months ended March 31, 2003, the three
    months ended March 31, 2003 and 2002 and the year ended December 31, 2002:



                                                 TWELVE MONTHS   THREE MONTHS ENDED
                                                     ENDED           MARCH 31,         YEAR ENDED
                                                   MARCH 31,     ------------------   DECEMBER 31,
                                                     2003         2003       2002         2002
                                                 -------------   ------     -------   ------------
                                                              (DOLLARS IN THOUSANDS)
                                                                          
    Earnings from continuing operations before
      income taxes.............................     $ 9,948      $1,258     $ 4,805     $13,495
    Interest expense...........................      20,344       5,029       4,881      20,196
    Depreciation and amortization..............       6,701       1,711       1,639       6,629
    Other expenses(3):
      Change in valuation of put warrants......         960         960          --          --
      Change in reserve on stockholder notes...        (461)       (461)         --          --
      Loss on sale of land.....................         458         458          --          --
      Severance costs associated with PMR......       1,900          --          --       1,900
      Other various gains associated with PMR
         not considered operating by
         management............................        (457)         --          --        (457)
      Impairment charges at Ramsay.............          --          --         125         125
      Recoveries from the sale of previously
         written down assets...................          --          --         (18)        (18)
                                                    -------      ------     -------     -------
         Total other expenses..................       2,400         957         107       1,550
                                                    -------      ------     -------     -------
    EBITDA.....................................     $39,393      $8,955     $11,432     $41,870
                                                    =======      ======     =======     =======


(5) Cash interest expense excludes the amortization of deferred financing fees
    and expenses.

(6) Net debt represents total debt less cash and cash equivalents.

                                       3

EX-99.2

                                                                    EXHIBIT 99.2

THE BROWN SCHOOLS

     The following table sets forth summary historical financial and operating
data of The Brown Schools for, or as of the end of, the twelve months ended
March 31, 2003, the three months ended March 31, 2003 and 2002 and each of the
years ended December 31, 2002, 2001 and 2000. The summary historical financial
data as of and for each of the years ended December 31, 2002, 2001 and 2000 were
derived from the audited consolidated financial statements of The Brown Schools
contained elsewhere in this offering memorandum. The summary historical
financial data as of and for the three months ended March 31, 2003 and 2002 were
derived from the unaudited condensed consolidated financial statements of The
Brown Schools contained elsewhere in this memorandum. These unaudited condensed
consolidated financial statements include all adjustments necessary (consisting
of normal recurring accruals) for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the three
months ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2003. The summary
historical financial data for the twelve months ended March 31, 2003 were
derived from the audited and unaudited financial statements of The Brown
Schools. You should read this table in conjunction with The Brown Schools'
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- The Brown Schools" contained elsewhere in this offering
memorandum.



                                                     TWELVE MONTHS      THREE MONTHS
                                                         ENDED         ENDED MARCH 31,        YEAR ENDED DECEMBER 31,
                                                       MARCH 31,     -------------------   ------------------------------
                                                         2003          2003       2002       2002       2001       2000
                                                     -------------   --------   --------   --------   --------   --------
                                                                (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
                                                                                               
STATEMENT OF OPERATIONS DATA:
Revenue............................................    $ 76,969      $ 18,246   $ 19,271   $ 77,994   $ 78,078   $ 67,064
Costs and expenses:
  Salaries, wages and employee benefits............      41,937        10,465     10,966     42,438     42,759     36,960
  Other operating expenses(1)......................      26,417         6,430      6,547     26,534     27,645     26,876
  Provision for bad debts..........................       1,797           408        400      1,789      2,079      1,297
  Depreciation and amortization....................       1,775           338        363      1,800      1,672      1,853
  Interest expense.................................       7,095         1,671      1,058      6,482      3,814      2,950
  Other expenses(2)................................         458           458         --         --         68         51
                                                       --------      --------   --------   --------   --------   --------
    Total costs and expenses.......................      79,479        19,770     19,334     79,043     78,037     69,987
Income (loss) from continuing operations before
  income taxes.....................................    $ (2,510)     $ (1,524)  $    (63)  $ (1,049)  $     41   $ (2,923)
                                                       ========      ========   ========   ========   ========   ========
Net income (loss)..................................    $ (2,510)     $ (1,524)  $    (63)  $ (1,049)  $     41   $ (2,923)
                                                       ========      ========   ========   ========   ========   ========
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents..........................    $      2      $      2   $     11   $      2   $      4   $      9
Working capital....................................       1,314         1,314      5,671      2,130      1,828      2,305
Property, plant and equipment, net.................      15,547        15,547     18,461     16,495     17,305     17,487
Total assets.......................................      30,201        30,201     36,813     32,491     33,526     33,114
Stockholders' equity...............................      19,928        19,928     19,466     21,722     22,655     24,041
OTHER FINANCIAL DATA:
Capital expenditures...............................    $  1,386      $    644        246   $    988   $  1,568   $    561
Net cash provided by operating activities..........       1,754           352         15      1,417      3,412        585
EBITDA(3)..........................................       6,818           943      1,358      7,233      5,595      1,931
OPERATING DATA:
Number of facilities:
  Owned............................................           5             5          5          5          5          5
  Leased...........................................           1             1          1          1          1          1
Number of licensed beds............................         879           879        869        885        869        869
Admissions.........................................       5,362         1,430      1,531      5,463      5,564      4,503
Patient days.......................................     216,020        53,668     52,315    214,667    214,223    193,814
Average length of stay.............................          40            38         34         39         39         43


- ---------------




(1) Other operating expenses include rent expense which was $1,034, $265, $236,
    $1,005, $962 and $718 for the twelve months ended March 31, 2003, the three
    months ended March 31, 2003 and 2002, and each of the years ended December
    31, 2002, 2001 and 2000, respectively.

(2) Other expenses for each of the periods indicated relate to losses on sales
    of assets.

(3) EBITDA is defined as income (loss) from continuing operations before income
    taxes, interest expense (net of interest income), depreciation,
    amortization, and other non-recurring items included in the caption above
    labeled "Other expenses" as more fully described in the accompanying
    reconciliation of EBITDA to income from continuing operations before income
    taxes. While you should not consider EBITDA in isolation or as a substitute
    for net income, operating cash flows or other cash flow statement data
    determined in accordance with accounting principles generally accepted in
    the United States, management understands that EBITDA is a commonly used
    analytical indicator within the health care industry and also serves as a
    measure of leverage capacity and debt service ability. In addition, we use
    EBITDA as the measure of operating profitability of its segments and their
    components. EBITDA, as presented, may not be comparable to similarly titled
    measures of other companies. The following are the components of EBITDA for
    the twelve months ended March 31, 2003, each of the three months ended March
    31, 2003 and 2002 and each of the years ended December 31, 2002, 2001 and
    2000:



                                       TWELVE MONTHS     THREE MONTHS
                                           ENDED       ENDED MARCH 31,     YEAR ENDED DECEMBER 31,
                                         MARCH 31,     ----------------   --------------------------
                                           2003         2003      2002     2002      2001     2000
                                       -------------   -------   ------   -------   ------   -------
                                                              (IN THOUSANDS)
                                                                           
    Income (loss) from continuing
      operations before income
      taxes..........................     $(2,510)     $(1,524)  $  (63)  $(1,049)  $   41   $(2,923)
    Interest expense.................       7,095        1,671    1,058     6,482    3,814     2,950
    Depreciation and amortization....       1,775          338      363     1,800    1,672     1,853
    Other expenses(2)................         458          458       --        --       68        51
                                          -------      -------   ------   -------   ------   -------
    EBITDA...........................     $ 6,818      $   943   $1,358   $ 7,233   $5,595   $ 1,931
                                          =======      =======   ======   =======   ======   =======


                                       2

EX-99.3

                                                                    EXHIBIT 99.3

                                  RISK FACTORS

     You should consider carefully each of the following risks and all other
information contained and incorporated by reference in this offering memorandum
before deciding to invest in the notes.

RISKS RELATED TO US AND OUR BUSINESS

  IF FEDERAL OR STATE HEALTH CARE PROGRAMS OR MANAGED CARE COMPANIES REDUCE
  REIMBURSEMENT RATES OR METHODS OF REIMBURSEMENT FOR OUR SERVICES, OUR REVENUE
  MAY DECLINE.

     A portion of our revenue is derived from the Medicare and Medicaid programs
and from various state and local payors. In recent years, federal and state
governments have made significant changes in these programs. These changes have,
in certain instances, decreased the amount of money we receive for our services.
Future federal and state legislation may further reduce the payments received
for our services or increase the timing of reimbursement payments to us.

     Insurance and managed care companies and other third parties from whom we
receive payment may attempt to control health care costs by requiring that
facilities discount their services in exchange for exclusive or preferred
participation in their benefit plans, which may reduce the payments we receive
for our services.

  IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE RECENT ACQUISITIONS INTO OUR
  BUSINESS, OUR OPERATIONS COULD BE DISRUPTED.

     Our acquisition of The Brown Schools and expected acquisition of Ramsay
will significantly increase the size and geographic scope of our operations. Our
ability to integrate the Ramsay facilities with our existing business will be
critical to the future success of our business. This integration is subject to
numerous conditions beyond our control, including the possibility of negative
reactions by existing customers or employees or adverse general and regional
economic conditions, general negative industry trends and competition.

     We also may be unable to achieve the anticipated benefits from the
acquisitions of The Brown Schools and Ramsay. If we are unable to realize these
anticipated benefits due to our inability to address the challenges of
integrating these businesses or for any other reason, it could have a material
adverse effect on our business and financial and operating results.

     The successful integration of Ramsay will require us to, among other
things, attract and hire key employees from Ramsay who, at the completion of the
acquisition, may decide not to work for us. Our future performance will depend,
in part, on our ability to successfully integrate these new employees into our
company. Our failure to hire and successfully integrate these new employees
could disrupt our ongoing business.

  ADDITIONAL FINANCING WILL BE NECESSARY TO FUND OUR ACQUISITION PROGRAM, AND
  ADDITIONAL FINANCING MAY NOT BE AVAILABLE WHEN NEEDED.

     We expect our capital needs over the next several years, primarily to fund
acquisitions, will exceed cash generated from operations. We plan to incur
indebtedness and to issue additional debt or equity securities from time to time
in order to fund these needs. Our level of indebtedness at any time may restrict
our ability to borrow additional funds. In addition, we may not receive
additional financing on satisfactory terms if at all. If we are unable to borrow
additional funds or to obtain adequate financing on reasonable terms, we may be
unable to consummate acquisitions.

  IF COMPETITION DECREASES THE ABILITY TO ACQUIRE ADDITIONAL FACILITIES ON
  FAVORABLE TERMS, WE MAY BE UNABLE TO EXECUTE OUR ACQUISITION STRATEGY.

     Competition among hospitals and other health care providers in the United
States has intensified in recent years due to cost containment pressures,
changing technology, changes in government regulation and



reimbursement, changes in practice patterns (such as shifting from inpatient to
outpatient treatments), the impact of managed care organizations and other
factors. An important part of our business strategy is the acquisition of
facilities in growing urban markets. Some facilities and health care providers
that compete with us have greater financial resources and a larger, more
experienced development staff focused on identifying and completing
acquisitions. Any or all of these factors may impede our business strategy.

  IF WE FAIL TO COMPLY WITH REGULATIONS REGARDING LICENSES, OWNERSHIP AND
  OPERATION, WE COULD IMPAIR OUR ABILITY TO OPERATE OR EXPAND OUR OPERATIONS IN
  ANY STATE.

     All of the states in which we operate require hospitals and most health
care facilities to maintain a license. In addition, some states require prior
approval for the purchase, construction and expansion of health care facilities,
based upon a state's determination of need for additional or expanded health
care facilities or services. Such determinations, embodied in certificates of
need issued by governmental agencies with jurisdiction over health care
facilities, may be required for capital expenditures exceeding a prescribed
amount, changes in bed capacity or services and other matters. Nine states in
which we currently own or lease inpatient behavioral health care facilities,
Alabama, Florida, Georgia, Illinois, Michigan, Missouri, Oklahoma, North
Carolina and Virginia, have certificate of need laws. The failure to obtain any
required certificate of need or the failure to maintain a required license could
impair our ability to operate or expand operations in any state.

  IF WE FAIL TO COMPLY WITH EXTENSIVE LAWS AND GOVERNMENT REGULATIONS, WE COULD
  SUFFER PENALTIES OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS.

     Participants in the health care industry are required to comply with
extensive and complex laws and regulations at the federal, state and local
government levels relating to, among other things:

     - billing for services;

     - relationships with physicians and other referral sources;

     - adequacy of medical care;

     - quality of medical equipment and services;

     - qualifications of medical and support personnel;

     - confidentiality, maintenance and security issues associated with
       health-related information and medical records;

     - licensure;

     - hospital rate or budget review;

     - operating policies and procedures; and

     - addition of facilities and services.

     Among these laws are the Anti-kickback Statute, the Stark Law and the
Health Insurance Portability and Accountability Act of 1996, or HIPAA. These
laws impact the relationships that we may have with physicians and other
referral sources. The Office of Inspector General of the Department of Health
and Human Services, or the OIG, has enacted safe harbor regulations that outline
practices that are deemed protected from prosecution under the Anti-kickback
Statute. Our current financial relationships with physicians and other referral
sources may not qualify for safe harbor protection under the Anti-kickback
Statute. Failure to meet a safe harbor does not mean that the arrangement
automatically violates the Anti-kickback Statute, but may subject the
arrangement to greater scrutiny. Further, we cannot guarantee that practices
that are outside of a safe harbor will not be found to violate the Anti-kickback
Statute.

     In order to comply with the Stark Law, our financial relationships with
physicians and their immediate family members must meet an exception. We attempt
to structure our relationships to meet an exception to

                                       2


the Stark Law, but the regulations implementing the exceptions, some of which
are still under review, are detailed and complex, and we cannot guarantee that
every relationship fully complies with the Stark Law.

     HIPAA required the Department of Health and Human Services to issue
regulations requiring hospitals and other providers to implement measures to
ensure the privacy and security of patients' medical records and use of uniform
data standards for the exchange of information between the hospitals and health
plans including claims and payment transactions. The privacy standard became
effective April 14, 2003. Full compliance with the privacy standard was required
by April 14, 2003. We have met the April 14, 2003 privacy standard compliance
deadline, but compliance will be an ongoing process. The transaction standard
and the security standard became effective on October 16, 2000 and February 20,
2003, respectively. Full compliance with the transaction standard and security
standard is required by October 16, 2003 and April 20, 2005, respectively. We
are in the process of complying with the transaction standard and security
standard. We may incur additional expenses in order to comply with these
standards. We cannot predict the full extent of our costs for implementing all
of the requirements at this stage.

     If we fail to comply with the Anti-kickback Statute, the Stark Law, HIPAA
or other applicable laws and regulations, we could be subjected to liabilities,
including criminal penalties, civil penalties (including the loss of our
licenses to operate one or more facilities), and the exclusion of one or more of
our facilities from participation in the Medicare, Medicaid and other federal
and state health care programs.

     Because many of these laws and regulations are relatively new, we do not
always have the benefit of significant regulatory or judicial interpretation of
these laws and regulations. In the future, different interpretations or
enforcement of these laws and regulations could subject our current or past
practices to allegations of impropriety or illegality or could require us to
make changes in our facilities, equipment, personnel, services, capital
expenditure programs and operating expenses. A determination that we have
violated these laws, or the public announcement that we are being investigated
for possible violations of these laws, could have a material adverse effect on
our business, financial condition, results of operations or prospects and our
business reputation could suffer significantly. In addition, we are unable to
predict whether other legislation or regulations at the federal or state level
will be adopted, what form such legislation or regulation will take or their
impact.

  OTHER COMPANIES WITHIN THE HEALTH CARE INDUSTRY CONTINUE TO BE THE SUBJECT OF
  FEDERAL AND STATE INVESTIGATIONS, WHICH INCREASES THE RISK THAT WE MAY BECOME
  SUBJECT TO INVESTIGATIONS IN THE FUTURE.

     Both federal and state government agencies as well as private payors have
increased and coordinated civil and criminal enforcement efforts as part of
numerous ongoing investigations of health care organizations. These
investigations relate to a wide variety of topics, including:

     - cost reporting and billing practices;

     - quality of care;

     - financial relationships with referral sources;

     - medical necessity of services provided; and

     - treatment of indigent patients.

     The Office of the Inspector General, or OIG, and the U.S. Department of
Justice have, from time to time, undertaken national enforcement initiatives
that focus on specific billing practices or other suspected areas of abuse.
Moreover, health care providers are subject to civil and criminal false claims
laws, including the federal False Claims Act, which allows private parties to
bring whistleblower lawsuits against private companies doing business with or
receiving reimbursement under federal government programs. Some states have
adopted similar state whistleblower and false claims provisions. Publicity
associated with the substantial amounts paid by other health care providers to
settle these lawsuits may encourage our current and former employees and other
health care providers to bring whistleblower lawsuits. Any investigations of us,
our executives or our managers could result in significant liabilities or
penalties as well as adverse publicity.

                                       3


  WE MAY BE SUBJECT TO LIABILITIES BECAUSE OF CLAIMS BROUGHT AGAINST OUR OWNED,
  LEASED AND MANAGED INPATIENT BEHAVIORAL HEALTH CARE FACILITIES. IN ADDITION,
  IF WE ACQUIRE FACILITIES WITH UNKNOWN OR CONTINGENT LIABILITIES, WE COULD
  BECOME LIABLE FOR MATERIAL OBLIGATIONS.

     In recent years, plaintiffs have brought actions against hospitals and
other health care providers, alleging malpractice, product liability or other
legal theories. Many of these actions involved large claims and significant
defense costs. We maintain professional malpractice liability and general
liability insurance coverage of approximately $10.0 million, in excess of our
$3.0 million deductible, to cover claims arising out of the operations of our
owned and leased inpatient behavioral health care facilities. Some of the
claims, however, could exceed the scope of the coverage in effect or coverage of
particular claims could be denied. While our professional and other liability
insurance has been adequate in the past to provide for liability claims, such
insurance may not be available for us to maintain adequate levels of insurance
in the future. Moreover, health care providers in our industry are experiencing
significant increases in the premiums for malpractice insurance, and it is
anticipated that such costs may continue to rise. Malpractice insurance coverage
may not continue to be available at a cost allowing us to maintain adequate
levels of insurance with acceptable deductible amounts.

     In addition, inpatient behavioral health care facilities that we acquire
may have unknown or contingent liabilities, including liabilities for failure to
comply with health care laws and regulations. Although we obtain contractual
indemnification from sellers covering these matters, such indemnification may be
insufficient to cover material claims or liabilities for past activities of
acquired hospitals.

  WE MAY BE SUBJECT TO LIABILITIES BECAUSE OF CLAIMS ARISING FROM OUR UNIT
  MANAGEMENT ACTIVITIES.

     We may be subject to liabilities from the acts, omissions and liabilities
of the employees of the behavioral health care units we manage or from the
actions of our employees in connection with the management of such units. Our
unit management contracts generally require the acute care hospitals for which
we manage units to indemnify us against certain claims and to maintain specified
amounts of insurance. The hospitals, however, may not maintain such insurance
and indemnification may not be available to us.

     Recently, other unit management companies have been subject to complaints
alleging that these companies violated laws on behalf of units they managed. In
some cases, plaintiffs brought actions against the managing company instead of,
or in addition to, their individually managed hospital clients for these
violations. Our managed units or other third parties may not hold us harmless
for any losses we incur arising out of the acts, omissions and liabilities of
the employees of the units we manage. If the courts determine that we are liable
for amounts exceeding the limits of any insurance coverage or for claims outside
the scope of that coverage or any indemnity, or if any indemnity agreement is
determined to be unenforceable, then the resulting liability could affect
adversely our business, results of operations and financial condition.

  WE FACE PERIODIC REVIEWS, AUDITS AND INVESTIGATIONS UNDER OUR CONTRACTS WITH
  FEDERAL AND STATE GOVERNMENT AGENCIES, AND THESE AUDITS COULD HAVE ADVERSE
  FINDINGS THAT MAY NEGATIVELY IMPACT OUR BUSINESS.

     As a result of our participation in the Medicare and Medicaid programs, we
are subject to various governmental reviews, audits and investigations to verify
our compliance with these programs and applicable laws and regulations. Private
pay sources also reserve the right to conduct audits. An adverse review, audit
or investigation could result in:

     - refunding amounts we have been paid pursuant to the Medicare or Medicaid
       programs or from private payors;

     - state or federal agencies imposing fines, penalties and other sanctions
       on us;

                                       4


     - loss of our right to participate in the Medicare or Medicaid programs or
       one or more private payor networks; or

     - damages to our reputation in various markets.

     Both federal and state government agencies have heightened and coordinated
civil and criminal enforcement efforts as part of numerous ongoing
investigations of health care companies. The investigations include:

     - cost reporting and billing practices;

     - quality of care;

     - financial relationships with referral sources; and

     - medical necessity of services provided.

     We also are subject to potential lawsuits under a federal whistleblower
statute designed to combat fraud and abuse in the health care industry. These
lawsuits can involve significant monetary and award bounties to private
plaintiffs who successfully bring these suits.

  IF WE FAIL TO CULTIVATE NEW, OR MAINTAIN EXISTING, RELATIONSHIPS WITH THE
  PHYSICIANS IN THE COMMUNITIES IN WHICH WE OPERATE, OUR PATIENT BASE MAY
  DECLINE.

     Our business depends upon the efforts and success of the physicians who
provide health care services at our facilities and the strength of the
relationships with these physicians.

     Our business could be adversely affected if a significant number of
physicians or a group of physicians:

     - terminate their relationship with, or reduce their use of, the
       facilities;

     - fail to maintain acceptable quality of care or to otherwise adhere to
       professional standards;

     - suffer damage to their reputation; or

     - exit the market entirely.

  WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL, AND THE LOSS OF SERVICES OF ONE OR
  MORE KEY EXECUTIVES OR A SIGNIFICANT PORTION OF OUR LOCAL MANAGEMENT PERSONNEL
  COULD WEAKEN OUR MANAGEMENT TEAM AND OUR ABILITY TO DELIVER BEHAVIORAL HEALTH
  CARE SERVICES EFFICIENTLY.

     We are highly dependent on our senior management team, which has many years
of experience addressing the broad range of concerns and issues relevant to our
business. We have entered into employment agreements with Joey A. Jacobs, our
Chairman, President and Chief Executive Officer, and Jack Salberg, our Chief
Operating Officer, each of which include non-competition and non-solicitation
provisions. Key man life insurance policies are not maintained on any member of
senior management other than Mr. Jacobs. The loss of key management or the
inability to attract, retain and motivate sufficient numbers of qualified
management personnel could have a material adverse effect on our business and
financial and operating results.

  THE SHORTAGE OF QUALIFIED REGISTERED NURSING STAFF AND OTHER HEALTH CARE
  WORKERS COULD ADVERSELY AFFECT OUR ABILITY TO ATTRACT, TRAIN AND RETAIN
  QUALIFIED PERSONNEL AND COULD INCREASE OPERATING COSTS.

     The health care industry is very labor intensive and salaries and benefits
are subject to inflationary pressures. Some of our inpatient behavioral health
care facilities are experiencing the effects of the tight labor market,
including a shortage of nurses, which has caused and may continue to cause an
increase in our salaries, wages and benefits expenses in excess of the inflation
rate. In order to supplement staffing levels, we periodically use temporary help
from staffing agencies.

                                       5


RISKS RELATED TO THE OFFERING

  OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
  OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES.

     As of March 31, 2003, our total consolidated indebtedness, after giving
effect to the Financing Transactions and the acquisitions of The Brown Schools
and Ramsay, was approximately $177.0 million. We will use a portion of the net
proceeds from the Financing Transactions to repay our outstanding indebtedness,
except for $17.0 million of our senior secured term notes, our $4.9 million
mortgage loan insured by HUD, $5.0 million of our subordinated seller notes and
approximately $0.1 million of our existing capital lease obligations.

     Our indebtedness could have important consequences to you including:

     - making it more difficult for us to satisfy our obligations with respect
       to the notes;

     - increasing our vulnerability to general adverse economic and industry
       conditions;

     - requiring that a portion of our cash flow from operations be used for the
       payment of interest on our debt, thereby reducing our ability to use our
       cash flow to fund working capital, capital expenditures, acquisitions and
       general corporate requirements;

     - limiting our ability to obtain additional financing to fund future
       working capital, capital expenditures, acquisitions and general corporate
       requirements;

     - limiting our flexibility in planning for, or reacting to, changes in our
       business and the health care industry; and

     - placing us at a competitive disadvantage to our competitors that have
       less indebtedness.

     We and our subsidiaries may be able to incur additional indebtedness in the
future, including secured indebtedness. The terms of the indenture do not fully
prohibit us or our subsidiaries from doing so. If new indebtedness is added to
our and our subsidiaries' current indebtedness levels, the related risks that we
and they now face could intensify.



                                       6

EX-99.4

                                                                    EXHIBIT 99.4


          UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     The following table sets forth the unaudited pro forma condensed combined
financial data for Psychiatric Solutions, Ramsay and The Brown Schools as a
combined company, giving effect to the acquisitions of Ramsay and The Brown
Schools and the Financing Transactions as if they had occurred on the dates
indicated and after giving effect to the pro forma adjustments discussed herein.
The unaudited pro forma condensed combined balance sheet as of March 31, 2003
has been derived from Psychiatric Solutions', Ramsay's, and The Brown Schools'
historical balance sheets, adjusted to give effect to these acquisitions and the
Financing Transactions, as well as our acquisition of Aeries Healthcare
Corporation and Subsidiary (d/b/a Riveredge Hospital) and our merger with PMR as
if they occurred on March 31, 2003. The pro forma condensed combined income
statement for the twelve months ended March 31, 2003, the three months ended
March 31, 2003 and 2002 and the year ended December 31, 2002 give effect to the
acquisitions of Ramsay and The Brown Schools and the Financing Transactions, as
well as our acquisition of Aeries Healthcare Corporation and Subsidiary (d/b/a
Riveredge Hospital) and our merger with PMR as if they occurred at the beginning
of the periods presented.

     The adjustments necessary to fairly present the unaudited pro forma
condensed combined financial data have been made based on available information
and in the opinion of management are reasonable. Assumptions underlying the pro
forma adjustments are described in the accompanying notes, which should be read
in conjunction with this unaudited pro forma condensed combined financial data.
The pro forma adjustments are preliminary and revisions to the preliminary
purchase price allocations and financing of the transactions may have a
significant impact on the pro forma adjustments. A final valuation of net assets
acquired associated with the Ramsay acquisition cannot be made prior to the
completion of this offering memorandum. A final determination of these fair
values will be conducted by Psychiatric Solutions' independent valuation
specialists. The consideration of this valuation will most likely result in a
change in the value assigned to the fixed and intangible assets acquired of
Ramsay.

     The unaudited pro forma condensed combined financial data is for
comparative purposes only and does not purport to represent what our financial
position or results of operations would actually have been had the events noted
above in fact occurred on the assumed dates or to project our financial position
or results of operations for any future date or future period. The unaudited pro
forma condensed combined financial data should be read in conjunction with the
"Selected Consolidated Financial and Operating Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and the notes thereto included elsewhere in
this offering memorandum.


              UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
                              AS OF MARCH 31, 2003
                             (DOLLARS IN THOUSANDS)



                                                                 THE BROWN SCHOOLS ADJUSTMENTS
                                                     -----------------------------------------------------

                                                        THE         THE BROWN       PRO FORMA
                                       PSYCHIATRIC     BROWN        SCHOOLS OF      PURCHASE     PRO FORMA
                                        SOLUTIONS    SCHOOLS(1)   OKLAHOMA, INC.   ADJUSTMENTS   COMBINED
                                       -----------   ----------   --------------   -----------   ---------
                                                                                  
ASSETS
  Current assets:
    Cash and cash equivalents........    $ 4,045      $     --       $     2        $     (2)(2) $  4,045
    Accounts receivable, net.........     22,137         8,913         2,213              --       33,263
    Other current assets.............      2,832           345           114              --        3,291
                                         -------      --------       -------        --------     --------
      Total current assets...........     29,014         9,258         2,329              (2)      40,599
  Property, plant and equipment,
    net..............................     33,764        13,321         2,226          30,625(3)    79,936
  Costs in excess of net assets
    acquired, net....................     26,846            --         3,004          11,268(4)    41,118
  Amortizable intangible asset,
    net..............................      3,558            --            --              --        3,558
  Other assets.......................      3,438            39            24             682(5)     4,183
                                         -------      --------       -------        --------     --------
  Total assets.......................    $96,620      $ 22,618       $ 7,583        $ 42,573     $169,394
                                         =======      ========       =======        ========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
    Short-term borrowings............    $ 9,529      $     --       $    --        $ 15,171(6)    24,700
    Accounts payable.................      3,486         6,172         1,054            (597)(2)   10,115
    Accrued liabilities..............     12,610         2,385           661            (572)(2)   15,084
                                         -------      --------       -------        --------     --------
      Total current liabilities......     25,625         8,557         1,715          14,002       49,899
  Long-term debt, less current
    portion..........................     36,657            --            --          36,000(6)    72,657
  Other liabilities..................      3,447            --            --              --        3,447
                                         -------      --------       -------        --------     --------
  Total liabilities..................     65,729         8,557         1,715          50,002      126,003
  Series A convertible preferred
    stock............................         --            --            --          12,500(6)    12,500
  Common stock.......................         77            --             1              (1)(7)       77
  Additional paid-in capital.........     35,013        14,061        10,749         (24,810)(7)   35,013
  Notes receivable from
    stockholders.....................       (711)           --            --              --         (711)
  Accumulated (deficit) earnings.....     (3,488)           --        (4,882)          4,882(7)    (3,488)
  Treasury stock.....................         --            --            --              --           --
                                         -------      --------       -------        --------     --------
  Total stockholders' equity.........     30,891        14,061         5,868         (19,929)      30,891
                                         -------      --------       -------        --------     --------
  Total liabilities and stockholders'
    equity...........................    $96,620      $ 22,618       $ 7,583        $ 42,573     $169,394
                                         =======      ========       =======        ========     ========


                                        RAMSAY AND FINANCING TRANSACTIONS
                                                   ADJUSTMENTS
                                       -----------------------------------
                                                   OFFERING
                                                      AND
                                                   PURCHASE
                                                   PRO FORMA     PRO FORMA
                                        RAMSAY    ADJUSTMENTS    COMBINED
                                       --------   -----------    ---------
                                                        
ASSETS
  Current assets:
    Cash and cash equivalents........  $    328    $   2,714     $  7,087
    Accounts receivable, net.........    21,089           --       54,352
    Other current assets.............     7,007           --       10,298
                                       --------    ---------     --------
      Total current assets...........    28,424        2,714       71,737
  Property, plant and equipment,
    net..............................    33,732           --      113,668
  Costs in excess of net assets
    acquired, net....................     2,286       28,755(8)    72,159
  Amortizable intangible asset,
    net..............................        --           --        3,558
  Other assets.......................     7,698        1,896(9)    14,470
                                       --------    ---------     --------
  Total assets.......................  $ 72,140    $  33,365     $274,899
                                       ========    =========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
    Short-term borrowings............  $  3,856    $ (27,002)(10) $  1,554
    Accounts payable.................     4,504           --       14,619
    Accrued liabilities..............     9,431           --       24,515
                                       --------    ---------     --------
      Total current liabilities......    17,791      (27,002)      40,688
  Long-term debt, less current
    portion..........................    13,061       89,714(10)  175,432
  Other liabilities..................     3,675        2,979(11)   10,101
                                       --------    ---------     --------
  Total liabilities..................    34,527       65,691      226,221
  Series A convertible preferred
    stock............................        --       12,500(10)   25,000
  Common stock.......................        95          (95)(12)       77
  Additional paid-in capital.........   127,169     (127,169)(12)   35,013
  Notes receivable from
    stockholders.....................        --           --         (711)
  Accumulated (deficit) earnings.....   (85,752)      78,539(12)  (10,701)
  Treasury stock.....................    (3,899)       3,899(12)       --
                                       --------    ---------     --------
  Total stockholders' equity.........    37,613      (44,826)      23,678
                                       --------    ---------     --------
  Total liabilities and stockholders'
    equity...........................  $ 72,140    $  33,365     $274,899
                                       ========    =========     ========


                                       2


         NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
                              AS OF MARCH 31, 2003
                             (DOLLARS IN THOUSANDS)

 (1) This column presents condensed combined balance sheet data for five of the
     six facilities acquired from The Brown Schools in April 2003, including The
     Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System,
     Inc., Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc.
     and The Oaks Psychiatric Hospital, Inc. This group of five facilities was
     audited separately from The Brown Schools of Oklahoma, Inc.

 (2) Represents the elimination of cash and cash equivalents ($2), Medicare
     liabilities ($572) and bank overdrafts ($597) not acquired in connection
     with the acquisition of The Brown Schools.

 (3) Represents the adjustment of the property, plant and equipment of The Brown
     Schools to reflect their appraised value.

 (4) Represents adjustment to goodwill, calculated as follows:

                                                           
Total required financing....................................  $ 63,671
Less: Estimated capitalized financing costs.................      (682)
Less: Net assets acquired...................................   (51,721)
                                                              --------
Adjustment to goodwill......................................  $ 11,268
                                                              ========



 (5) Represents estimated capitalized financing costs incurred in connection
     with the acquisition of The Brown Schools.

 (6) Represents the incurrence of $15,171 of short-term borrowings and $36,000
     of long-term debt and the issuance of $12,500 of our series A convertible
     preferred stock to finance the acquisition of The Brown Schools.

 (7) Reflects the elimination of The Brown Schools' equity accounts and existing
     accumulated (deficit) earnings.

 (8) Represents adjustment to goodwill, calculated as follows:

                                                           
      Total purchase price........................................  $ 58,075
      Plus: Estimated transaction costs...........................     7,600
      Less: Net assets acquired...................................   (36,920)
                                                                    --------
      Adjustment to goodwill......................................  $ 28,755
                                                                    ========

      

 (9) Represents estimated capitalized financing costs of $4,650 incurred in
     connection with the acquisition of Ramsay, less write-off of existing
     capitalized financing costs due to extinguishment of debt ($1,481) for
     Psychiatric Solutions and ($693) for Ramsay, less write-off of estimated
     capitalized financing costs incurred in connection with the acquisition of
     The Brown Schools ($580).

(10) Represents (a) the incurrence of $150,000 of long-term debt, less the
     repayment of Ramsay's short-term debt ($3,856) and long-term debt ($13,061)
     and the repayment a portion of Psychiatric Solutions' short-term debt
     ($23,146) and a portion of its long-term debt ($47,225) and (b) the
     issuance of $12,500 of our series A convertible preferred stock, to finance
     the acquisition of Ramsay.

(11) Represents a reclassification of put warrants from debt to other
     liabilities due to the pay off of $10,000 of related debt to the 1818 Fund.
     These warrants were exercised and classified as temporary equity in April
     2003.

(12) Reflects the elimination of Ramsay's equity accounts and existing
     accumulated (deficit) earnings of $85,752, debt prepayment penalties of
     ($3,350), a write-off of capitalized finance cost of ($2,061), and a
     write-off of the original issue discount on debt of ($1,802) related to the
     pay-off of $10,000 of debt to the 1818 Fund.

                                       3


            UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
                   FOR THE TWELVE MONTHS ENDED MARCH 31, 2003
                             (DOLLARS IN THOUSANDS)



                                                                       THE BROWN SCHOOLS ADJUSTMENTS
                                                          -------------------------------------------------------
                                                             THE         THE BROWN
                                           PSYCHIATRIC      BROWN        SCHOOLS OF      PRO FORMA     PRO FORMA
                                           SOLUTIONS(1)   SCHOOLS(2)   OKLAHOMA, INC.   ADJUSTMENTS     COMBINED
                                           ------------   ----------   --------------   -----------    ----------
                                                                                        
Revenue..................................    $143,643      $59,165        $17,804         $    --       $220,612
                                             --------      -------        -------         -------       --------
Expenses:
  Salaries, wages and employee
    benefits.............................      71,123       33,330          8,607              --        113,060
  Professional fees......................      18,521        4,238            688              --         23,447
  Rentals and leases.....................       1,186          723            311              --          2,220
  Other operating expenses(18)...........      32,916       14,268          6,189          (3,342)(3)     50,031
  Provision for doubtful accounts........       4,422        1,716             81              --          6,219
  Depreciation and amortization..........       2,415        1,536            239             (82)(4)      4,108
  Other expenses(5)......................       1,942          458             --              --          2,400
                                             --------      -------        -------         -------       --------
        Total expenses...................     132,525       56,269         16,115          (3,424)       201,485
Interest expense.........................      (6,598)      (6,200)          (895)          1,793(6)     (11,900)
                                             --------      -------        -------         -------       --------
Earnings from continuing operations
  before taxes...........................       4,520       (3,304)           794           5,217          7,227
Provision (benefit) for taxes............      (2,966)          --             --           1,237(7)      (1,729)
                                             --------      -------        -------         -------       --------
Net earnings from continuing
  operations.............................       7,486       (3,304)           794           3,980          8,956
Accrued dividends on series A convertible
  preferred stock........................          --           --             --             637(8)         637
                                             --------      -------        -------         -------       --------
Net earnings from continuing operations
  applicable to common stockholders......    $  7,486      $(3,304)       $   794         $ 3,343       $  8,319
                                             ========      =======        =======         =======       ========
Other Financial Data:
  Capital expenditures...................    $  1,911      $ 1,095        $   291         $    --       $  3,297


                                            RAMSAY AND FINANCING
                                                TRANSACTIONS
                                                ADJUSTMENTS
                                           ----------------------

                                                       PRO FORMA     PRO FORMA
                                            RAMSAY    ADJUSTMENTS    COMBINED
                                           --------   -----------    ---------
                                                            
Revenue..................................  $145,852     $    --      $366,464
                                           --------     -------      --------
Expenses:
  Salaries, wages and employee
    benefits.............................    92,318      (3,000)(9)   202,378
  Professional fees......................     3,991          --        27,438
  Rentals and leases.....................     4,434          --         6,654
  Other operating expenses(18)...........    32,802          --        82,833
  Provision for doubtful accounts........     1,549          --         7,768
  Depreciation and amortization..........     2,593          --         6,701
  Other expenses(5)......................        --          --         2,400
                                           --------     -------      --------
        Total expenses...................   137,687      (3,000)      336,172
Interest expense.........................    (2,342)     (6,102)(10)  (20,344)
                                           --------     -------      --------
Earnings from continuing operations
  before taxes...........................     5,823      (3,102)        9,948
Provision (benefit) for taxes............    (5,773)       (388)       (7,890)
                                           --------     -------      --------
Net earnings from continuing
  operations.............................    11,596      (2,715)       17,837
Accrued dividends on series A convertible
  preferred stock........................        --         637(12)     1,274
                                           --------     -------      --------
Net earnings from continuing operations
  applicable to common stockholders......  $ 11,596     $(3,352)     $ 16,563
                                           ========     =======      ========
Other Financial Data:
  Capital expenditures...................  $  2,010     $    --      $  5,307


                                       4


            UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
                   FOR THE THREE MONTHS ENDED MARCH 31, 2003
                             (DOLLARS IN THOUSANDS)



                                                                    THE BROWN SCHOOLS ADJUSTMENTS
                                                        ------------------------------------------------------
                                                           THE         THE BROWN
                                          PSYCHIATRIC     BROWN        SCHOOLS OF      PRO FORMA    PRO FORMA
                                           SOLUTIONS    SCHOOLS(2)   OKLAHOMA, INC.   ADJUSTMENTS    COMBINED
                                          -----------   ----------   --------------   -----------   ----------
                                                                                     
Revenue.................................    $37,104      $13,851         $4,395         $   --       $55,350
                                            -------      -------         ------         ------       -------
Expenses:
  Salaries, wages and employee
    benefits............................     17,785        8,319          2,146             --        28,250
  Professional fees.....................      4,451          995            185             --         5,631
  Rentals and leases....................        248          188             77             --           513
  Other operating expenses(18)..........      8,850        3,434          1,551           (814)(3)    13,021
  Provision for doubtful accounts.......      1,322          388             20             --         1,730
  Depreciation and amortization.........        667          279             59             65 (4)     1,070
  Other expenses........................        499          458             --             --           957
                                            -------      -------         ------         ------       -------
        Total expenses..................     33,822       14,061          4,038           (749)       51,172
Interest expense........................     (1,420)      (1,414)          (257)           389 (6)    (2,702)
                                            -------      -------         ------         ------       -------
Earnings from continuing operations
  before taxes..........................      1,862       (1,624)           100          1,138         1,476
Provision (benefit) for taxes...........      1,073           --             --           (147)(7)       926
                                            -------      -------         ------         ------       -------
Net earnings from continuing
  operations............................        789       (1,624)           100          1,285           550
Accrued dividends on series A
  convertible preferred stock...........         --           --             --            156 (8)       156
                                            -------      -------         ------         ------       -------
Net earnings from continuing operations
  applicable to common stockholders.....    $   789      $(1,624)        $  100         $1,129       $   394
                                            =======      =======         ======         ======       =======
Other Financial Data:
  Capital expenditures..................    $   628      $   569         $   75         $   --       $ 1,272


                                          RAMSAY AND FINANCING
                                              TRANSACTIONS
                                               ADJUSTMENTS
                                          ---------------------

                                                     PRO FORMA    PRO FORMA
                                          RAMSAY    ADJUSTMENTS   COMBINED
                                          -------   -----------   ---------
                                                         
Revenue.................................  $36,527     $    --      $91,877
                                          -------     -------      -------
Expenses:
  Salaries, wages and employee
    benefits............................   23,571        (750)(9)   51,071
  Professional fees.....................      783          --        6,414
  Rentals and leases....................    1,234          --        1,747
  Other operating expenses(18)..........    8,537          --       21,558
  Provision for doubtful accounts.......      402          --        2,132
  Depreciation and amortization.........      641          --        1,711
  Other expenses........................       --          --          957
                                          -------     -------      -------
        Total expenses..................   35,168        (750)      85,590
Interest expense........................     (557)     (1,770)(10)  (5,029)
                                          -------     -------      -------
Earnings from continuing operations
  before taxes..........................      802      (1,020)       1,258
Provision (benefit) for taxes...........      305        (388)(11)      843
                                          -------     -------      -------
Net earnings from continuing
  operations............................      497        (633)         415
Accrued dividends on series A
  convertible preferred stock...........       --         156 (12)      312
                                          -------     -------      -------
Net earnings from continuing operations
  applicable to common stockholders.....  $   497     $  (789)     $   103
                                          =======     =======      =======
Other Financial Data:
  Capital expenditures..................  $   413     $    --      $ 1,685


                                       5


            UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
                   FOR THE THREE MONTHS ENDED MARCH 31, 2002
                             (DOLLARS IN THOUSANDS)



                                                        RIVEREDGE AND PMR ADJUSTMENTS
                                               -----------------------------------------------
                                                                      PRO FORMA    PSYCHIATRIC
                                 PSYCHIATRIC   RIVEREDGE              PURCHASE      SOLUTIONS
                                  SOLUTIONS    HOSPITAL      PMR     ADJUSTMENTS    PRO FORMA
                                 -----------   ---------   -------   -----------   -----------
                                                                    
Revenue........................    $23,188      $6,544     $ 4,804      $  --        $34,536
                                   -------      ------     -------      -----        -------
Expenses:
 Salaries, wages and employee
   benefits....................     13,970       3,616         555         --         18,141
 Professional fees.............      3,108         212          68         --          3,388
 Rentals and leases............        190          25          33         --            248
 Other operating
   expenses(18)................      2,671       1,861       4,161         --          8,693
 Provision for (recovery of)
   doubtful accounts...........        715          44      (1,931)        --         (1,172)
 Depreciation and
   amortization................        386          80         116        109(13)        691
 Other expenses(5).............         --          --         (18)        --            (18)
                                   -------      ------     -------      -----        -------
       Total expenses..........     21,040       5,838       2,984        109         29,971
 Interest expense..............     (1,372)       (139)         (2)      (427)(14)    (1,940)
 Other income-interest.........         --          --         109       (109)(15)        --
                                   -------      ------     -------      -----        -------
 Earnings from continuing
   operations before taxes.....        776         567       1,927       (645)         2,625
 Provision (benefit) for
   taxes.......................         21         221         (88)      (187)(16)       (33)
                                   -------      ------     -------      -----        -------
 Net earnings from continuing
   operations..................        755         346       2,015       (458)         2,658
 Accrued dividends on series A
   convertible preferred
   stock.......................         --          --          --         --             --
                                   -------      ------     -------      -----        -------
 Net earnings from continuing
   operations applicable to
   common stockholders.........    $   755      $  346     $ 2,015      $(458)       $ 2,658
                                   =======      ======     =======      =====        =======
Other Financial Data:
 Capital expenditures..........    $   187      $   --     $    --      $  --        $   187


                                                                                         RAMSAY AND FINANCING
                                                                                             TRANSACTIONS
                                             THE BROWN SCHOOLS ADJUSTMENTS                    ADJUSTMENTS
                                 -----------------------------------------------------   ---------------------
                                    THE         THE BROWN
                                   BROWN        SCHOOLS OF      PRO FORMA    PRO FORMA              PRO FORMA    PRO FORMA
                                 SCHOOLS(2)   OKLAHOMA, INC.   ADJUSTMENTS   COMBINED    RAMSAY    ADJUSTMENTS    COMBINED
                                 ----------   --------------   -----------   ---------   -------   -----------   ----------
                                                                                            
Revenue........................   $14,860         $4,411          $  --       $53,807    $35,831     $   --       $89,638
                                  -------         ------          -----       -------    -------     ------       -------
Expenses:
 Salaries, wages and employee
   benefits....................     8,920          2,046             --        29,107     22,196       (750)(9)    50,553
 Professional fees.............     1,066            164             --         4,618        822         --         5,440
 Rentals and leases............       173             63             --           484        963         --         1,447
 Other operating
   expenses(18)................     3,567          1,514           (863)(3)    12,911      7,907         --        20,818
 Provision for (recovery of)
   doubtful accounts...........       400             --             --          (772)       720         --           (52)
 Depreciation and
   amortization................       300             63            (40)(4)     1,014        625         --         1,639
 Other expenses(5).............        --             --             --           (18)       125         --           107
                                  -------         ------          -----       -------    -------     ------       -------
       Total expenses..........    14,426          3,850           (903)       47,344     33,358       (750)       79,952
 Interest expense..............      (843)          (215)          (290)(6)    (3,288)      (690)      (903)(10)   (4,881)
 Other income-interest.........        --             --             --            --         --         --            --
                                  -------         ------          -----       -------    -------     ------       -------
 Earnings from continuing
   operations before taxes.....      (409)           346            613         3,175      1,783       (153)        4,805
 Provision (benefit) for
   taxes.......................        --             --             --           (33)       214         --           181
                                  -------         ------          -----       -------    -------     ------       -------
 Net earnings from continuing
   operations..................      (409)           346            613         3,208      1,569       (153)        4,624
 Accrued dividends on series A
   convertible preferred
   stock.......................        --             --            156(8)        156         --        156(12)       312
                                  -------         ------          -----       -------    -------     ------       -------
 Net earnings from continuing
   operations applicable to
   common stockholders.........   $  (409)        $  346          $ 457       $ 3,052    $ 1,569     $ (309)      $ 4,312
                                  =======         ======          =====       =======    =======     ======       =======
Other Financial Data:
 Capital expenditures..........   $   119         $  127          $  --       $   433    $   876     $   --       $ 1,309


                                       6


            UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
                      FOR THE YEAR ENDED DECEMBER 31, 2002
                             (DOLLARS IN THOUSANDS)



                                                     RIVEREDGE AND PMR ADJUSTMENTS            THE BROWN SCHOOLS ADJUSTMENTS
                                            -----------------------------------------------   -----------------------------
                                                                   PRO FORMA    PSYCHIATRIC      THE         THE BROWN
                              PSYCHIATRIC   RIVEREDGE              PURCHASE      SOLUTIONS      BROWN        SCHOOLS OF
                               SOLUTIONS    HOSPITAL      PMR     ADJUSTMENTS    PRO FORMA    SCHOOLS(2)   OKLAHOMA, INC.
                              -----------   ---------   -------   -----------   -----------   ----------   --------------
                                                                                      
Revenue.....................   $113,912      $14,152    $13,011    $     --       $141,075     $60,174        $17,820
                               --------      -------    -------    --------       --------     -------        -------
Expenses:
 Salaries, wages and
   employee benefits........     62,326        8,907      1,513      (1,267)(17)    71,479      33,931          8,507
 Professional fees..........     14,373        1,271      1,814          --         17,458       4,309            667
 Rentals and leases.........        870           52        264          --          1,186         708            297
 Other operating
   expenses(18).............     20,651        2,576      9,532          --         32,759      14,401          6,152
 Provision for (recovery of)
   doubtful accounts........      3,681          211     (1,964)         --          1,928       1,728             61
 Depreciation and
   amortization.............      1,770          140        181         348(13)      2,439       1,557            243
 Other expenses(5)..........         --           --      1,425          --          1,425          --             --
                               --------      -------    -------    --------       --------     -------        -------
   Total expenses...........    103,671       13,157     12,765        (919)       128,674      56,634         15,927
Interest expense............     (5,564)        (628)        (4)       (922)(14)    (7,118)     (5,629)          (853)
Other income -- interest....         --           --        209        (209)(15)         --         --             --
                               --------      -------    -------    --------       --------     -------        -------
Earnings from continuing
 operations before taxes....      4,677          367        451        (212)         5,283      (2,089)         1,040
Provision (benefit) for
 taxes......................     (1,007)         190     (3,255)         --         (4,072)         --             --
                               --------      -------    -------    --------       --------     -------        -------
Net earnings from continuing
 operations.................      5,684          177      3,706        (212)         9,355      (2,089)         1,040
Accrued dividends on series
 A convertible preferred
 stock......................         --           --         --          --             --          --             --
                               --------      -------    -------    --------       --------     -------        -------
Net earnings from continuing
 operations applicable to
 common stockholders........   $  5,684      $   177    $ 3,706    $   (212)      $  9,355     $(2,089)       $ 1,040
                               ========      =======    =======    ========       ========     =======        =======
Other Financial Data:
 Capital expenditures.......   $  1,470      $    --    $    --    $     --       $  1,470     $   645        $   343


                                                                RAMSAY AND FINANCING
                                                                    TRANSACTIONS
                             BROWN SCHOOLS ADJUSTMENTS
                                 ---------------------------   ----------------------

                                     PRO FORMA    PRO FORMA                PRO FORMA    PRO FORMA
                                    ADJUSTMENTS    COMBINED     RAMSAY    ADJUSTMENTS   COMBINED
                                    -----------   ----------   --------   -----------   ---------
                                                                         
Revenue.....................         $     --      $219,069    $145,156    $     --     $364,225
                                     --------      --------    --------    --------     --------
Expenses:
 Salaries, wages and
   employee benefits........               --       113,917      90,943      (3,000)(9)  201,860
 Professional fees..........               --        22,434       4,030          --       26,464
 Rentals and leases.........               --         2,191       4,163          --        6,354
 Other operating
   expenses(18).............           (3,391)(3)    49,921      32,172          --       82,093
 Provision for (recovery of)
   doubtful accounts........               --         3,717       1,867          --        5,584
 Depreciation and
   amortization.............             (187)(4)     4,052       2,577          --        6,629
 Other expenses(5)..........               --         1,425         125          --        1,550
                                     --------      --------    --------    --------     --------
   Total expenses...........           (3,578)      197,657     135,877      (3,000)     330,534
Interest expense............            1,114(6)    (12,486)     (2,475)     (5,235)(10) (20,196)
Other income -- interest....               --            --          --          --           --
                                     --------      --------    --------    --------     --------
Earnings from continuing
 operations before taxes....            4,692         8,926       6,804     (2,235)       13,495
Provision (benefit) for
 taxes......................            1,384(7)     (2,688)     (5,864)         --       (8,552)
                                     --------      --------    --------    --------     --------
Net earnings from continuing
 operations.................            3,308        11,614      12,668     (2,235)       22,047
Accrued dividends on series
 A convertible preferred
 stock......................              637(8)        637          --         637(12)    1,274
                                     --------      --------    --------    --------     --------
Net earnings from continuing
 operations applicable to
 common stockholders........         $  2,671      $ 10,977    $ 12,668    $(2,872)     $ 20,773
                                     ========      ========    ========    ========     ========
Other Financial Data:
 Capital expenditures.......         $     --      $  2,458    $  2,473    $     --     $  4,931


                                       7


       NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS
                             (DOLLARS IN THOUSANDS)

 (1) Includes the historical results of Aeries Healthcare Corporation and
     Subsidiary (d/b/a Riveredge Hospital) and PMR from the beginning of the
     period presented, except for capital expenditures, which are for
     Psychiatric Solutions only.

 (2) This column presents five of the six facilities acquired from The Brown
     Schools in April 2003, including The Brown Schools of Virginia, Inc., Cedar
     Springs Behavioral Health System, Inc., Healthcare San Antonio, Inc., The
     Brown Schools of San Marcos, Inc. and The Oaks Psychiatric Hospital, Inc.
     This group of five facilities was audited separately from The Brown Schools
     of Oklahoma, Inc.

 (3) Represents the elimination of overhead costs (salaries and expenses)
     historically allocated to the operation of The Brown Schools, plus
     Psychiatric Solutions' expected incremental costs to manage the business.

 (4) Reflects adjustment to depreciation and amortization resulting from changes
     in the valuation of The Brown Schools' fixed assets to reflect their
     appraised value.

 (5) Other expenses include (a) for the three months ended March 31, 2003,
     expense of $960 to revalue put warrants, income of $461 to release reserves
     on stockholder notes and a loss of $458 related to a sale of land; (b) for
     the three months ended March 31, 2002, asset impairment charges incurred at
     Ramsay of $125 and $18 of recoveries from the sale of previously written
     down assets at PMR; and (c) for the year ended December 31, 2002, asset
     impairment charges incurred at Ramsay of $125, $18 of recoveries from the
     sale of previously written down assets at PMR, $1,900 of employee severance
     and termination costs associated with the winding up of PMR and $457 of
     other various gains associated with PMR.

 (6) Represents the elimination of historical interest expense and the recording
     of interest expense relating to the financing of the acquisition of The
     Brown Schools.

 (7) Reflects the expected provision for income taxes resulting from the
     acquisition of The Brown Schools.

 (8) Reflects pay-in-kind dividends related to the issuance of $12,500 of
     Psychiatric Solutions' series A convertible preferred stock concurrently
     with the acquisition of The Brown Schools.

 (9) Reflects the elimination of duplicative costs related to executive
     compensation, the former board of directors of Ramsay and other
     administrative fees and expenses which are directly related to the
     acquisition of Ramsay.

(10) Represents the elimination of historical interest expense and the recording
     of interest expense relating to the financing of the acquisition of Ramsay
     and the Financing Transactions based on an assumed interest rate for the
     notes.

(11) Reflects the expected provision for income taxes resulting from the
     acquisition of Ramsay. For Ramsay's twelve months ended March 31, 2003, no
     income taxes were recorded for the period from April 1, 2002 to December
     31, 2002 due to Ramsay's net deferred tax valuation allowance.

(12) Reflects pay-in-kind dividends related to the issuance of $12,500 of
     Psychiatric Solutions' series A convertible preferred stock concurrently
     with the acquisition of Ramsay.

(13) Reflects adjustment to depreciation and amortization resulting from changes
     in the valuation of Riveredge Hospital's and PMR's fixed assets to reflect
     their appraised value.

(14) Represents the elimination of historical interest expense and the recording
     of interest expense relating to the financing of the acquisitions of
     Riveredge Hospital and PMR.

(15) Reflects lost interest income due to the reduction in cash, cash
     equivalents and short-term investments balances.

(16) Represents the elimination of a federal income tax provision as a result of
     the net deferred tax valuation allowance.

(17) Reflects the reversal of accrued payouts to Riveredge Hospital option
     holders.

(18) Other operating expenses are comprised of (a) for Psychiatric Solutions,
     other operating expenses plus supplies expense, (b) for Riveredge Hospital,
     other operating expenses plus supplies, contract services, insurance,
     utilities, real estate taxes less rentals and leases, (c) for PMR, other
     operating expenses plus research and development expenses, (d) for The
     Brown Schools, other operating expenses plus supplies and management fees,
     (e) for The Brown Schools of Oklahoma, other operating expenses plus
     supplies, purchased services and management fees and (f) for Ramsay, other
     operating expenses less professional fees and rentals and leases.

                                       8

EX-99.5

                                                                    EXHIBIT 99.5

THE BROWN SCHOOLS

     The following table sets forth selected historical financial and operating
data of The Brown Schools for, or as of the end of, the three months ended March
31, 2003 and 2002 and each of the years ended December 31, 2002, 2001 and 2000.
The selected historical financial data as of and for each of the years ended
December 31, 2002, 2001 and 2000 were derived from the audited consolidated
financial statements of The Brown Schools. The selected historical financial
data as of and for the three months ended March 31, 2003 and 2002 were derived
from the unaudited condensed consolidated financial statements of The Brown
Schools. These unaudited condensed consolidated financial statements include all
adjustments necessary (consisting of normal recurring accruals) for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended March 31, 2003, are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2003. You should read this table in conjunction with The
Brown Schools' consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- The Brown Schools" contained elsewhere in
this offering memorandum.



                                            THREE MONTHS ENDED
                                                 MARCH 31,           YEAR ENDED DECEMBER 31,
                                            -------------------   ------------------------------
                                              2003       2002       2002       2001       2000
                                            --------   --------   --------   --------   --------
                                               (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
                                                                         
STATEMENT OF OPERATIONS DATA:
Revenue...................................  $ 18,246   $ 19,271   $ 77,994   $ 78,078   $ 67,064
Costs and expenses:
  Salaries, wages and employee benefits...    10,465     10,966     42,438     42,759     36,960
  Other operating expenses(1).............     6,430      6,547     26,534     27,645     26,876
  Provision for bad debts.................       408        400      1,789      2,079      1,297
  Depreciation and amortization...........       338        363      1,800      1,672      1,853
  Interest expense........................     1,671      1,058      6,482      3,814      2,950
  Other expenses(2).......................       458         --         --         68         51
                                            --------   --------   --------   --------   --------
     Total costs and expenses.............    19,770     19,334     79,043     78,037     69,987
Income (loss) from continuing operations
  before income taxes.....................  $ (1,524)  $    (63)  $ (1,049)  $     41   $ (2,923)
                                            ========   ========   ========   ========   ========
Net income (loss).........................  $ (1,524)  $    (63)  $ (1,049)  $     41   $ (2,923)
                                            ========   ========   ========   ========   ========
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents.................  $      2   $     11   $      2   $      4   $      9
Working capital...........................     1,314      5,671      2,130      1,828      2,305
Property, plant and equipment, net........    15,547     18,461     16,495     17,305     17,487
Total assets..............................    30,201     36,813     32,491     33,526     33,114
Stockholders' equity......................    19,928     19,466     21,722     22,655     24,041
OTHER FINANCIAL DATA:
Capital expenditures......................  $    644        246   $    988   $  1,568   $    561
Net cash provided by operating
  activities..............................       352         15      1,417      3,412        585
EBITDA(3).................................       943      1,358      7,233      5,595      1,931







                                            THREE MONTHS ENDED
                                                 MARCH 31,           YEAR ENDED DECEMBER 31,
                                            -------------------   ------------------------------
                                              2003       2002       2002       2001       2000
                                            --------   --------   --------   --------   --------
                                               (DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
                                                                         
OPERATING DATA:
Number of facilities:
  Owned...................................         5          5          5          5          5
  Leased..................................         1          1          1          1          1
Number of licensed beds...................       879        869        885        869        869
Admissions................................     1,430      1,531      5,463      5,564      4,503
Patient days..............................    53,668     52,315    214,667    214,223    193,814
Average length of stay....................        38         34         39         39         43


- ---------------

 (1) Other operating expenses include rent expense which was $265, $236, $1,005,
     $962 and $718 for the three months ended March 31, 2003 and 2002, and each
     of the years ended December 31, 2002, 2001 and 2000, respectively.

 (2) Other expenses relate to losses on sales of assets.

 (3) EBITDA is defined as income from continuing operations before income taxes,
     interest expense (net of interest income), depreciation, amortization, and
     other items included in the caption above labeled "Other expenses" as more
     fully described in the accompanying reconciliation of EBITDA to income from
     continuing operations before income taxes. While you should not consider
     EBITDA in isolation or as a substitute for net income, operating cash flows
     or other cash flow statement data determined in accordance with accounting
     principles generally accepted in the United States, management understands
     that EBITDA is a commonly used analytical indicator within the health care
     industry and also serves as a measure of leverage capacity and debt service
     ability. In addition, we use EBITDA as the measure of operating
     profitability of its segments and their components. EBITDA, as presented,
     may not be comparable to similarly titled measures of other companies. The
     following are the components of EBITDA for the three months ended March 31,
     2003 and 2002 and each of the years ended December 31, 2002, 2001 and 2000:



                                                    THREE MONTHS
                                                  ENDED MARCH 31,     YEAR ENDED DECEMBER 31,
                                                  ----------------   --------------------------
                                                   2003      2002     2002      2001     2000
                                                  -------   ------   -------   ------   -------
                                                                 (IN THOUSANDS)
                                                                         
Income (loss) from continuing operations before
  income taxes..................................  $(1,524)  $  (63)  $(1,049)  $   41   $(2,923)
Interest expense................................    1,671    1,058     6,482    3,814     2,950
Depreciation and amortization...................      338      363     1,800    1,672     1,853
Other expenses(2)...............................      458       --        --       68        51
                                                  -------   ------   -------   ------   -------
EBITDA..........................................  $   943   $1,358   $ 7,233   $5,595   $ 1,931
                                                  =======   ======   =======   ======   =======


                                       2

EX-99.6

                                                                    EXHIBIT 99.6

THE BROWN SCHOOLS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

     Revenue.  Revenue was $18.2 million for the quarter ended March 31, 2003,
compared to $19.2 million for the quarter ended March 31, 2002, a decrease of
$1.0 million or 5.2%. This decrease is primarily attributable to decreased
revenues at our San Antonio facility due to a drop in admissions and patient
days.

     Salaries, wages and employee benefits.  Salaries, wages and employee
benefits expense was $10.5 million, or 57.4% of revenue for the quarter ended
March 31, 2003, compared to $11.0 million, or 56.9% of revenue for the quarter
ended March 31, 2002. In total, salaries, wages and employee benefits decreased
$0.5 million in the quarter ended March 31, 2003 as compared to the quarter
ended March 31, 2002, due largely to efforts to reduce non-essential
administrative staff, beginning in March 2002.

     Other operating expenses.  Other operating expenses were approximately $6.4
million, or 35.2% of revenue for the quarter ended March 31, 2003, compared to
$6.5 million, or 34.0% of revenue for the quarter ended March 31, 2002. Other
operating expenses include supplies, medical, professional and other expenses
necessary to serve patients and operate facilities. Other operating expenses
also include a management fee from parent of $0.9 million and $1.0 million for
the quarters ended March 31, 2003 and 2002, respectively. The Brown Schools
facilities are charged a management fee from parent equal to approximately 5% of
net revenues to cover accounting, data processing and management and
administrative services provided to the facilities by the parent.

     Provision for bad debts.  The provision for bad debts was relatively
unchanged at $0.4 million for the quarters ended March 31, 2003 and 2002. It is
the policy of The Brown Schools facilities to reserve 100% of accounts over 180
days.

     Depreciation and amortization.  Depreciation and amortization expense was
$338,000 for the quarter ended March 31, 2003 compared to $363,000 for the
quarter ended March 31, 2002, a decrease of $25,000. This decrease in
depreciation and amortization expense is the result of sales of assets during
the quarter ended March 31, 2003.

     Interest expense.  Interest costs were allocated by the parent to the
facilities based on the relation of total assets of each facility to the
consolidated assets of the parent. This allocation is not necessarily indicative
of interest expense had the facilities been separate from the parent.

     Other expenses.  Other expenses totaled $458,000 for the quarter ended
March 31, 2003. Other expenses for 2003 relate to losses on sale of assets
during the quarter.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

     Revenue.  Revenue was $78.0 million for the year ended December 31, 2002,
compared to $78.1 million for the year ended December 31, 2001, a decrease of
$0.1 million or less than 1%.

     Salaries, wages and employee benefits.  Salaries, wages and employee
benefits expense was $42.4 million, or 54.4% of revenue for the year ended
December 31, 2002, compared to $42.8 million, or 54.8% of revenue for the year
ended December 31, 2001. In total, salaries, wages and employee benefits
decreased $0.4 million in the year ended December 31, 2002 as compared to the
year ended December 31, 2001, due largely to efforts to reduce non-essential
administrative staff, beginning in March 2002.

     Other operating expenses.  Other operating expenses were approximately
$26.5 million, or 34.0% of revenue for the year ended December 31, 2002,
compared to $27.6 million, or 35.4% of revenue for the quarter ended December
31, 2001. Other operating expenses include supplies, medical professional and
other expenses necessary to serve patients and operate facilities. Other
operating expenses also include a management fee from parent of $3.8 million and
$4.3 million for the years ended December 31, 2002 and




2001, respectively. The Brown Schools facilities are charged a management fee
from parent equal to approximately 5% of net revenues to cover accounting, data
processing and other management and administrative services provided to the
facilities by the parent.

     Provision for bad debts.  The provision for bad debts was approximately
$1.8 million, or 2.3% of revenue for the year ended December 31, 2002, compared
to $2.1 million, or 2.7% of revenue for the year ended December 31, 2001. It was
the policy of The Brown Schools facilities to reserve 100% of accounts over 180
days.

     Depreciation and amortization.  Depreciation and amortization expense was
$1.8 million for the year ended December 31, 2002 compared to $1.7 million for
the year ended December 31, 2001, an increase of $0.1 million. This increase in
depreciation and amortization expense is the result of fixed asset additions at
our San Marcos and The Oaks Treatment Centers in late 2001.

     Interest expense.  Interest costs were allocated by the parent to the
facilities based on the relation of total assets of each facility to the
consolidated assets of the parent. This allocation is not necessarily indicative
of interest expense had the facilities been separate from the parent.

     Other expenses.  Other expenses totaled $68,000 for the year ended December
31, 2001. Other expenses for 2003 were losses on sale of assets during the year.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     Revenue.  Revenue was $78.1 million for the year ended December 31, 2001,
compared to $67.1 million for the year ended December 31, 2000, an increase of
$11.0 million or 16.4%. This increase was due in part to the opening of our
facility in Virginia in 2001, which generated $3.2 million in revenues during
the year. Excluding the opening of our Virginia facility, revenues increased
$7.8 million or 11.6% attributable to an increase in patient days of
approximately 10.5%.

     Salaries, wages and employee benefits.  Salaries, wages and employee
benefits expense was $42.8 million, or 54.8% of revenue for the year ended
December 31, 2001, compared to $37.0 million, or 55.1% of revenue for the year
ended December 31, 2000. This decrease in salaries, wages and employee benefits
as a percentage of revenues was the result of realizing efficiencies due to
increased patient volume.

     Other operating expenses.  Other operating expenses were approximately
$27.6 million, or 34.4% of revenue for the year ended December 31, 2001,
compared to $26.9 million, or 40.1% of revenue for the quarter ended December
31, 2000. Other operating expenses include supplies, medical professional and
other expenses necessary to serve patients and run facilities. The decrease in
other operating expenses as a percentage of revenues was the result of realizing
efficiencies due to increased patient volume. Other operating expenses also
include a management fee from parent of $4.3 million and $3.4 million for the
years ended December 31, 2001 and 2000, respectively. The Brown Schools
facilities are charged a management fee from parent equal to approximately 5% of
net revenues to cover accounting, data processing and other management and
administrative services provided to the facilities by the parent.

     Provision for bad debts.  The provision for bad debts was approximately
$2.1 million, or 2.7% of revenue for the year ended December 31, 2001, compared
to $1.3 million, or 1.9% of revenue for the year ended December 31, 2000. It was
the policy of The Brown Schools facilities to reserve 100% of accounts over 180
days.

     Depreciation and amortization.  Depreciation and amortization expense was
$1.7 million for the year ended December 31, 2001 compared to $1.9 million for
the year ended December 31, 2000, a decrease of $0.2 million. This decrease in
depreciation and amortization expense is the result of sales of assets during
2000 and 2001.

     Interest expense.  Interest costs were allocated by the parent to the
facilities based on the relation of total assets of each facility to the
consolidated assets of the parent. This allocation is not necessarily indicative
of interest expense had the facilities been separate from the parent.


                                       2


     Other expenses.  Other expenses totaled $68,000 for the year ended December
31, 2001, compared to $51,000 for the year ended December 31, 2000. Other
expenses for 2001 and 2000 were losses on sale of assets.


                                       3

EX-99.7

                                                                    EXHIBIT 99.7

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
The Brown Schools of Virginia, Inc., Cedar Springs Behavioral Health System,
Inc.,
Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and
The Oaks Psychiatric Hospital, Inc.

     We have audited the accompanying combined balance sheets of The Brown
Schools of Virginia, Inc., Cedar Springs Behavioral Health System, Inc.,
Healthcare San Antonio, Inc., The Brown Schools of San Marcos, Inc., and The
Oaks Psychiatric Hospital, Inc. (collectively the "Company") as of December 31,
2002 and 2001 and the related combined statements of operations, changes in
equity of parent, and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of The Brown Schools
of Virginia, Inc., Cedar Springs Behavioral Health System, Inc., Healthcare San
Antonio, Inc., The Brown Schools of San Marcos, Inc., and The Oaks Psychiatric
Hospital, Inc. at December 31, 2002 and the combined results of their operations
and their cash flows for each of the three years in the period ending December
31, 2002 and 2001 in conformity with accounting principles generally accepted in
the United States.

                                          ERNST & YOUNG LLP

Nashville, Tennessee
May 2, 2003



                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

                            COMBINED BALANCE SHEETS



                                                                DECEMBER 31,
                                                              -----------------    MARCH 31,
                                                               2001      2002        2003
                                                              -------   -------   -----------
                                                                                  (UNAUDITED)
                                                                      (IN THOUSANDS)
                                                                         
                                           ASSETS
Current assets:
  Accounts receivable, less allowance for doubtful accounts
     of $4,505, $3,602, and $3,194 at December 31, 2001,
     2002 and March 31, 2003, respectively..................  $10,336   $10,169     $ 8,913
  Prepaid expenses and other................................      336       360         345
                                                              -------   -------     -------
          Total current assets..............................   10,672    10,529       9,258
Property, plant and equipment, net..........................   15,187    14,277      13,321
Other.......................................................       68        39          39
                                                              -------   -------     -------
          Total assets......................................  $25,927   $24,845     $22,618
                                                              =======   =======     =======

                              LIABILITIES AND EQUITY OF PARENT
Current liabilities:
  Bank overdraft............................................  $   739   $   834     $   450
  Accounts payable..........................................    5,186     5,145       5,722
  Accrued salaries and benefits.............................    2,147     2,007       1,661
  Due to third party payors.................................      718       584         514
  Other current liabilities.................................      330       302         210
                                                              -------   -------     -------
          Total current liabilities.........................    9,120     8,872       8,557
Equity of parent............................................   16,807    15,973      14,061
                                                              -------   -------     -------
          Total liabilities and equity of parent............  $25,927   $24,845     $22,618
                                                              =======   =======     =======


                            See accompanying notes.


                                       2


                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

                       COMBINED STATEMENTS OF OPERATIONS



                                                                             THREE MONTHS ENDED
                                                YEARS ENDED DECEMBER 31,          MARCH 31,
                                               ---------------------------   -------------------
                                                2000      2001      2002       2002       2003
                                               -------   -------   -------   --------   --------
                                                                                 (UNAUDITED)
                                                                (IN THOUSANDS)
                                                                         
Revenue......................................  $50,955   $60,074   $60,174   $14,860    $13,851
Expenses:
  Salaries, wages and employee benefits......   28,623    34,568    33,931     8,920      8,319
  Supplies...................................    3,801     4,393     4,390     1,080      1,124
  Rentals and leases.........................      442       709       708       173        188
  Professional fees..........................    3,353     3,801     4,309     1,066        995
  Provision for doubtful accounts............    1,047     1,694     1,728       400        388
  Other operating expenses...................    9,320     8,107     7,108     1,744      1,616
  Depreciation...............................    1,485     1,317     1,557       300        279
  Management fee.............................    2,556     3,034     2,903       743        694
  Interest...................................    2,572     3,375     5,629       843      1,414
  Loss on sale of land.......................       --        --        --        --        458
                                               -------   -------   -------   -------    -------
  Loss before income taxes...................   (2,244)     (924)   (2,089)     (409)    (1,624)
                                               -------   -------   -------   -------    -------
  Provision for income taxes.................       --        --        --        --         --
  Net loss...................................  $(2,244)  $  (924)  $(2,089)  $  (409)   $(1,624)
                                               =======   =======   =======   =======    =======


                            See accompanying notes.


                                       3



                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

               COMBINED STATEMENTS OF CHANGES IN EQUITY OF PARENT



                                                                   TOTAL
                                                               --------------
                                                               (IN THOUSANDS)
                                                            
Equity of Parent at January 1, 2000.........................      $17,625
  Net loss..................................................       (2,244)
  Contribution from Parent..................................        1,502
                                                                  -------
Equity of Parent at December 31, 2000.......................       16,883
  Net loss..................................................         (924)
  Contribution from Parent..................................          848
                                                                  -------
Equity of Parent at December 31, 2001.......................       16,807
  Net loss..................................................       (2,089)
  Contribution from Parent..................................        1,255
                                                                  -------
Equity of Parent at December 31, 2002.......................       15,973
  Net loss..................................................       (1,624)
  Distribution to Parent....................................         (288)
                                                                  -------
Equity of Parent at March 31, 2003 (unaudited)..............      $14,061
                                                                  =======


                            See accompanying notes.


                                       4


                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

                       COMBINED STATEMENTS OF CASH FLOWS



                                                                                 THREE MONTHS
                                                   YEARS ENDED DECEMBER 31,     ENDED MARCH 31,
                                                  ---------------------------   ---------------
                                                   2000      2001      2002     2002     2003
                                                  -------   -------   -------   -----   -------
                                                                                  (UNAUDITED)
                                                                 (IN THOUSANDS)
                                                                         
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................  $(2,244)  $  (924)  $(2,089)  $(409)  $(1,624)
Adjustments to reconcile net loss to net cash
  provided by in operating activities:
  Depreciation..................................    1,485     1,317     1,557     300       279
  Provision for doubtful accounts...............    1,047     1,694     1,728     400       388
  Provision for professional liability risk.....    3,146       750       970     287       264
  Loss on land..................................       --        --        --      --       458
  Changes in operating assets and liabilities:
     Accounts receivable........................   (3,874)   (3,939)   (1,561)    157       868
     Prepaid and other current assets...........      (12)       37       (24)      7        15
     Accounts payable...........................    1,220       760       (41)   (328)      577
     Bank overdraft.............................      500        98        95     133      (384)
     Accrued salaries and benefits..............      481       268      (140)   (248)     (346)
     Due to third party payors..................      175       976      (134)   (212)      (70)
     Other Liabilities..........................      111        41       (28)   (176)      (93)
                                                  -------   -------   -------   -----   -------
       Net cash provided by (used in) operating
          activities............................    2,035     1,078       333     (89)      332
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.............     (385)   (1,196)     (645)   (119)     (569)
Proceeds from sale of land......................       --        --        --      --       789
Other assets....................................       (5)       19        29      25        --
                                                  -------   -------   -------   -----   -------
       Net cash (used in) provided by investing
          activities............................     (390)   (1,177)     (616)    (94)      220
CASH FLOWS FROM FINANCING ACTIVITIES
Transfers to and advances from Parent, net......   (1,645)       99       283     183      (552)
                                                  -------   -------   -------   -----   -------
       Net cash (used in) provided by financing
          activities............................   (1,645)       99       283     183      (552)
Increase (decrease) in cash.....................       --        --        --      --        --
Cash at beginning of year.......................       --        --        --      --        --
                                                  -------   -------   -------   -----   -------
Cash at end of year.............................  $    --   $    --   $    --   $  --   $    --
                                                  =======   =======   =======   =====   =======
SUPPLEMENTAL INFORMATION:
Interest payments...............................  $ 2,572   $ 3,375   $ 5,629   $ 843   $ 1,414
                                                  =======   =======   =======   =====   =======


                            See accompanying notes.


                                       5


                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

                     NOTES TO COMBINED FINANCIAL STATEMENTS
                                 (IN THOUSANDS)

1. ORGANIZATION

     The accompanying combined financial statements include the accounts of the
following entities (collectively, the Company) which are each subsidiaries of
The Brown Schools, Inc. (the Parent) which provides behavioral and psychiatric
services to children, adolescents, and adults.

     - The Brown Schools of Virginia, Inc. owns and operates a 64-bed hospital
       located in Charlottesville, Virginia.

     - Cedar Springs Behavioral Health System, Inc. owns and operates a 110-bed
       hospital located in Colorado Springs, Colorado.

     - Healthcare San Antonio, Inc. owns and operates a 196-bed hospital located
       in San Antonio, Texas.

     - The Oaks Psychiatric Hospital, Inc. owns and operates a 118-bed hospital
       in Austin, Texas.

     - The Brown Schools of San Marcos, Inc. owns and operates a 186-bed
       hospital in San Marcos, Texas.

     Substantially all of the net assets of the Company were purchased by
Psychiatric Solutions, Inc. for approximately $48 million during April 2003.

     The accompanying unaudited consolidated condensed financial statements as
of March 31, 2003 and for the three months ended March 31, 2002 and 2003, were
prepared in accordance with accounting principles generally accepted in the
United States of America and all applicable financial statement rules and
regulations of the Securities and Exchange Commission pertaining to interim
financial information. The interim financial statements do not include all
information or footnote disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements. All
adjustments which are, in the opinion of management, of a normal recurring
nature and are necessary for a fair presentation of the interim financial
statements have been included. The results of operations for the three months
ended March 31, 2003 are not necessarily indicative of the results to be
expected for the full year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Net Patient Service Revenue

     The Company receives payment for patient services from federal and various
state governments primarily under the Medicare and Medicaid programs, health
maintenance organizations, preferred provider organizations and other private
insurers and directly from patients. Patient service revenue is reported on the
accrual basis in the period in which services are provided, at established
rates, regardless of whether collection in full is expected.

     Net patient service revenue is based on established billing rates less
allowances and discounts for patients covered by Medicare, Medicaid and various
other discount arrangements. Payments received under these programs and
arrangements, which are based on either predetermined rates or the cost of
services, are generally less than the Company's customary charges, and the
differences are recorded as contractual adjustments or policy discounts at the
time service is rendered.

     Settlements under cost reimbursement agreements with third party payors are
estimated and recorded in the period in which the related services are rendered
and are adjusted in future periods as final settlements are determined. Final
determination of amounts earned under the Medicare and Medicaid programs often


                                       6

                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

occur in subsequent years because of audits by the programs, rights of appeal
and the application of numerous technical provisions.

  Intercompany Allocations

     Related Party Transactions

     The Company is allocated interest expense based upon a percentage of the
Company's fixed assets and working capital as compared to the Parent. Interest
expense totaled approximately $2,572, $3,375 and $5,629 for the years ended
December 31, 2000, 2001 and 2002, respectively.

     The Company is charged a management fee equal to 5% of its unaudited
revenues. Management fees were $2,556, $3,034 and $2,903 for the years ended
December 31, 2000, 2001 and 2002, respectively.

     The Parent carries employee health and dental insurance from an unrelated
commercial carrier. Premiums are allocated based on the number of enrolled
employees and dependents at the individual facilities. Health and dental
expenses were approximately $740, $829 and $1,270 for the years ended December
31, 2000, 2001 and 2002, respectively.

     Although management considers its allocation methods to be reasonable, due
to the relationship between the Company and its Parent, the terms of the
allocation may not necessarily be indicative of that which would have resulted
had the Company been a separate entity.

  Inventories

     Inventories, consisting principally of supplies, are stated at the lower of
cost (first-in, first-out) or market.

  Property, Plant and Equipment

     Property and equipment are stated at cost and depreciated using the
straight-line method over the useful lives of the assets, which are assigned by
the Company as follows:



ASSET CATEGORY                                                    DEPRECIABLE LIFE
- --------------                                                    ----------------
                                                            
Land improvements                                              15 years
Buildings                                                      30 years
Building improvements                                          10 years
Leasehold improvements                                         Remaining life of lease
Furniture, fixtures and equipment                              7 years
Computers, vehicles, and office equipment                      5 years
Software                                                       3 years


Depreciation expense was approximately $1,485, $1,317 and $1,557 for the years
ended December 31, 2000, 2001 and 2002, respectively.

     When events, circumstances and operating results indicate the carrying
values of certain long-lived assets might be impaired, the Company prepares
projections of the undiscounted future cash flows expected to result from the
use of the assets and their eventual disposition. If the projections indicate
that the recorded amounts


                                       7

                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

are not expected to be recoverable, such amounts are reduced to estimated fair
value. Fair value is estimated based upon projections of discounted cash flows.

  Income Taxes

     The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based upon
differences between the financial statement carrying amounts and tax bases of
assets and liabilities and are measured using the enacted tax laws that will be
in effect when the differences are expected to reverse.

  General and Professional Liability Risks

     The Parent, on behalf of the Company, carries general and professional
liability insurance from an unrelated commercial insurance carrier, on a
claims-made basis, for per occurrence losses up to $1 million in 2001 and 2002
with policy limits of $3 million in the aggregate in 2001 and 2002. The Parent
also carries workers' compensation insurance from an unrelated commercial
insurance carrier. The cost of general and professional liability and workers'
compensation coverage is allocated by the Parent based upon the percentage of
the number of the Company's full time employees as compared to the consolidated
total of the Parent. The cost for the years ended December 31, 2000, 2001 and
2002 was approximately $3,734, $1,384 and $1,680, respectively.

  Capital Transactions with Parent

     The Company maintains certain intercompany accounts with its Parent whereby
the Parent funds certain operating expenses and costs, such as insurance,
payroll, and employee benefits. Such costs are offset in the intercompany
accounts by transfers of cash collected by the Company to the Parent. Such
amounts were reflected as amounts due to Parent in the Company's internal
financial statements. As a result of the sale of the Company to an unrelated
party subsequent to December 31, 2002, these amounts due to the Parent at
December 31, 2001 and 2002 were not paid by the Company. Accordingly, the
amounts due to Parent are reflected in the accompanying financial statements
within equity of Parent. All changes in the amounts due to Parent have been
reflected as contributions from or distributions to Parent.

  Use of Estimates

     The preparation of 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.

  Advertising Costs

     Advertising costs are expensed as incurred. Advertising costs were $225,
$273 and $188 for the years ended December 31, 2000, 2001 and 2002,
respectively.

  Fair Values of Financial Instruments

     Bank Overdraft -- The carrying amounts reported in the balance sheet for
bank overdraft approximate fair value.

                                       8

                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

     Accounts Receivable and Accounts Payable -- The carrying amounts reported
in the balance sheet for accounts receivable and accounts payable approximate
fair value.

  Recently Issued Accounting Pronouncements

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS No. 144"), which supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, ("SFAS No. 121"), and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 removes goodwill from its scope and clarifies other
implementation issues related to SFAS No. 121. SFAS No. 144 also provides a
single framework for evaluating long-lived assets to be disposed of by sale. The
provisions of this statement were adopted effective January 1, 2002 and had no
material effect on the Company's results of operations or financial position.

     In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 prohibits the
classification of gains or losses from debt extinguishments as extraordinary
items unless the criteria outlined in APB Opinion No. 30, Reporting the Results
of Operations -- Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
are met. SFAS 145 also eliminates an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning
after May 15, 2002, with early adoption encouraged. The Company intends to adopt
the provisions of SFAS 145 effective January 1, 2003 and does not expect this
pronouncement to have a material effect on its financial position or results of
operations.

3. CONCENTRATIONS OF CREDIT RISK

     The Company's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by governmental agencies, insurance
companies, and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible accounts. Various state Medicaid programs comprised
approximately 70% and 59% of patient receivables at December 31, 2002 and 2001,
respectively. Remaining receivables relate primarily to various commercial
insurance carriers and HMO/PPO programs. Concentration of credit risk from other
payers is limited by the number of patients and payors. Three of the five
facilities are located in the state of Texas, making the Company somewhat
reliant on various laws and economic conditions in Texas.

4. RETIREMENT PLAN

     The Company participates in the Parent's defined contribution retirement
plan, The Brown Schools, Inc. 401(k) Plan (the "Plan"). The Plan covers
substantially all employees. Retirement expense was approximately $76, $98 and
$32 for the years ended December 31, 2000, 2001 and 2002, respectively. The
Company makes discretionary contributions to the Plan through the Parent each
year.


                                       9

                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES

  Current Operations

     Final determination of amounts earned under prospective payment and
cost-reimbursement activities is subject to review by appropriate governmental
authorities or their agents. In the opinion of management, adequate provision
has been made for any adjustments that may result from such reviews.

  OIG Investigation

     Healthcare San Antonio, Inc. is currently under investigation by the Office
of Inspector General of the Department of Health and Human Services (OIG). The
Company received a subpoena from the OIG requesting certain medical records
related to Champus-Tricare reimbursement issues. The Company has complied with
the subpoena and provided the requested documents. The Company is now awaiting
further instruction from the government. While management believes that it has
complied with all laws and regulations, it is unable to predict the outcome of
the investigation. If the Company were to be subject to an unfavorable outcome
to this investigation, the ultimate resolution of the investigation could have a
material adverse effect on the Company's financial position and results of
operations.

  Other

     Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing, except for the Champus-Tricare issue referred to above. While no
such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare and Medicaid programs.

     The Company is subject to claims and suits arising in the ordinary course
of business. Even though management is unable to predict such claims and their
potential outcomes, it is management's opinion, that the ultimate resolution of
such other pending legal proceedings will not have a material effect on the
Company's financial position or results of operations.

  Leases

     The Company leases the facility comprising The Brown Schools of Virginia,
Inc. as well as office space and certain equipment under operating agreements.

     Total rent expense under operating leases was approximately $442, $709 and
$708 for the years ended December 31, 2000, 2001 and 2002, respectively.


                                       10

                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

     Future minimum rental commitments under noncancelable operating leases
(with an initial or remaining term in excess of one year) at December 31, 2002,
are as follows (in thousands):



                                                               OPERATING LEASES
                                                               ----------------
                                                            
2003........................................................        $  631
2004........................................................           603
2005........................................................           330
2006........................................................             3
2007........................................................             1
Thereafter..................................................            --
                                                                    ------
Total minimum rental commitments............................        $1,568
                                                                    ======


6. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following (in thousands):



                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2002
                                                              --------   --------
                                                                   
Land and improvements.......................................  $  6,246   $  6,285
Buildings and improvements..................................    16,209     17,533
Equipment...................................................     8,404      7,848
Leasehold improvements......................................       185         58
Construction in progress....................................        64         --
                                                              --------   --------
                                                                31,108     31,724
Less accumulated depreciation...............................   (15,921)   (17,447)
                                                              --------   --------
Net property, plant and equipment...........................  $ 15,187   $ 14,277
                                                              ========   ========


                                       11

                      THE BROWN SCHOOLS OF VIRGINIA, INC.,
                 CEDAR SPRINGS BEHAVIORAL HEALTH SYSTEM, INC.,
                         HEALTHCARE SAN ANTONIO, INC.,
                   THE BROWN SCHOOLS OF SAN MARCOS, INC., AND
                      THE OAKS PSYCHIATRIC HOSPITAL, INC.

               NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) are as follows (in thousands):



                                                                DECEMBER 31,
                                                              ----------------
                                                               2001     2002
                                                              ------   -------
                                                                 
Deferred tax assets:
Net operating loss carryforwards............................  $1,167   $ 2,630
Allowance for bad debts.....................................   1,341       679
                                                              ------   -------
Total gross deferred tax assets.............................   2,508     3,309
Less: Valuation allowance...................................  (2,276)   (3,069)
                                                              ------   -------
Net deferred tax assets.....................................     232       240
Deferred tax liabilities:
Depreciation................................................    (232)     (240)
                                                              ------   -------
Total gross deferred tax liabilities........................    (232)     (240)
                                                              ------   -------
Net deferred tax asset (liability)..........................  $   --   $    --
                                                              ======   =======


     SFAS 109 requires the Company to record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets will
not be realized." It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is a negative evidence such as
cumulative losses in recent years." A 100% valuation allowance has been recorded
equal to the deferred tax assets after considering deferred tax assets that can
be realized through offset to existing taxable temporary differences. Assuming
the Company achieves sufficient profitability in future years to realize the
deferred income tax assets, the valuation allowance will be reduced in future
years through a credit to income tax expense. As of December 31, 2002, the
valuation allowance is approximately $3,069 which represents an increase of
approximately $794 from December 31, 2001.

     At December 31, 2002, the Company has federal and state net operating loss
carryforwards of approximately $6,820, which expire at various dates through
2022.

     A reconciliation of the federal statutory tax rate to the effective tax
rate is as follows (in thousands):



                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
                                                                       
Tax at U.S. statutory rate..................................  $(762)   $(314)   $(710)
State income tax, net of federal benefit....................    (90)     (37)     (84)
Change in valuation allowance...............................    852      351      794
                                                              -----    -----    -----
Total income tax expense....................................  $  --    $  --    $  --
                                                              =====    =====    =====


8. SUBSEQUENT EVENTS (UNAUDITED)

     On April 1, 2003, Psychiatric Solutions, Inc., which manages behavioral
health units and owns psychiatric facilities, purchased substantially all of the
assets of the Company for $48 million.


                                       12


               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
The Brown Schools of Oklahoma, Inc. and Subsidiary

     We have audited the accompanying consolidated balance sheets of The Brown
Schools of Oklahoma, Inc. and subsidiary (the Company) as of December 31, 2002
and 2001, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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.

     As discussed in Note 5 to the consolidated financial statements, the
Company is economically dependent upon certain government programs under which
it derived approximately 93%, 95% and 94% of its total revenues in 2002, 2001
and 2000, respectively. Additionally, the Company was dependent on its Parent
for operating and financial support during the three years ended December 31,
2002. Effective April 9, 2003, the Parent sold the Company to an unrelated
entity that manages behavioral health units and owns psychiatric facilities.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.

     As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill upon
adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets."

                                          BDO SEIDMAN, LLP

Houston, Texas
May 22, 2003

                                       13


                      THE BROWN SCHOOLS OF OKLAHOMA, INC.
                                 AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS



                                                               DECEMBER 31,
                                                         -------------------------    MARCH 31,
                                                            2001          2002          2003
                                                         -----------   -----------   -----------
                                                                                     (UNAUDITED)
                                                                            
                                             ASSETS
CURRENT ASSETS
  Cash and cash equivalents............................  $     3,630   $     1,950   $     1,950
  Patient accounts receivable, net of allowance for
     doubtful accounts of $485,442, $493,020 and
     $249,563 (unaudited), respectively................    1,929,475     2,243,487     2,212,995
  Prepaid expenses and other current assets............       94,715       124,707       114,408
                                                         -----------   -----------   -----------
Total current assets...................................    2,027,820     2,370,144     2,329,353
                                                         -----------   -----------   -----------
PROPERTY AND EQUIPMENT, at cost
  Land.................................................      969,828       969,828       969,828
  Building and improvements............................    1,468,703     1,775,176     1,841,675
  Equipment............................................    1,226,088     1,203,514     1,203,514
                                                         -----------   -----------   -----------
                                                           3,664,619     3,948,518     4,015,017
  Less accumulated depreciation........................   (1,546,488)   (1,730,067)   (1,789,389)
                                                         -----------   -----------   -----------
Property and equipment, net............................    2,118,131     2,218,451     2,225,628
GOODWILL, net of accumulated amortization of
  $421,325.............................................    3,004,339     3,004,339     3,004,339
DEFERRED INCOME TAXES, net.............................      432,788        38,129            --
OTHER ASSETS...........................................       16,135        14,912        23,500
                                                         -----------   -----------   -----------
TOTAL ASSETS...........................................  $ 7,599,213   $ 7,645,975   $ 7,582,820
                                                         ===========   ===========   ===========
                              LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
  Accounts payable and accrued expenses................  $ 1,002,143   $ 1,234,346   $ 1,054,490
  Accrued salaries and benefits........................      495,504       563,439       603,867
  Due to third-party payers............................      253,982        99,215        57,748
                                                         -----------   -----------   -----------
Total current liabilities..............................    1,751,629     1,897,000     1,716,105
                                                         -----------   -----------   -----------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDER'S EQUITY
  Common stock, par value $.01; 1,000 shares
     authorized; 100 shares issued and outstanding.....            1             1             1
  Additional paid-in capital...........................   11,870,186    10,731,907    10,749,202
  Accumulated deficit..................................   (6,022,603)   (4,982,933)   (4,882,488)
                                                         -----------   -----------   -----------
Total Stockholder's Equity.............................    5,847,584     5,748,975     5,866,715
                                                         -----------   -----------   -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.............  $ 7,599,213   $ 7,645,975   $ 7,582,820
                                                         ===========   ===========   ===========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       14


               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS



                                        YEAR ENDED DECEMBER 31,           QUARTER ENDED MARCH 31,
                                ---------------------------------------   -------------------------
                                   2000          2001          2002          2002          2003
                                -----------   -----------   -----------   -----------   -----------
                                                                                 (UNAUDITED)
                                                                         
REVENUES:
  Net patient revenue.........  $15,434,506   $17,092,904   $17,180,341   $4,194,657    $4,268,061
  Other revenue...............      674,734       911,673       639,991      215,935       126,969
                                -----------   -----------   -----------   ----------    ----------
Total revenues................   16,109,240    18,004,577    17,820,332    4,410,592     4,395,030
                                -----------   -----------   -----------   ----------    ----------
OPERATING EXPENSES:
  Salaries and benefits.......    8,336,902     8,191,457     8,507,256    2,045,959     2,146,513
  Purchased services..........    3,823,935     3,593,229     3,027,749      790,340       717,285
  Supplies....................      677,662       920,937       974,574      206,943       233,907
  Rent expense................      275,798       253,428       296,557       62,853        77,213
  Medical professional fees...      416,778       528,599       666,831      164,156       184,696
  Other operating expenses....    1,394,879     1,392,589     1,262,560      296,388       378,317
  Management fees and interest
     allocated by Parent......    1,193,474     1,351,392     1,740,880      435,194       477,092
  Provision for bad debts.....      249,563       384,929        60,828          180        20,240
  Loss on sale of assets......       50,558        67,544            --           --            --
  Depreciation and
     amortization.............      368,236       355,079       243,427       62,597        59,322
                                -----------   -----------   -----------   ----------    ----------
Total operating expenses......   16,787,785    17,039,183    16,780,662    4,064,610     4,294,585
                                -----------   -----------   -----------   ----------    ----------
INCOME (LOSS) BEFORE PROVISION
  (BENEFIT) FOR INCOME
  TAXES.......................     (678,545)      965,394     1,039,670      345,982       100,445
Provision (benefit) for income
  taxes (Note 3)..............           --            --            --           --            --
                                -----------   -----------   -----------   ----------    ----------
NET INCOME (LOSS).............  $  (678,545)  $   965,394   $ 1,039,670   $  345,982    $  100,445
                                ===========   ===========   ===========   ==========    ==========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       15


               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY



                                      COMMON STOCK     ADDITIONAL                         TOTAL
                                     ---------------     PAID-IN     ACCUMULATED      STOCKHOLDER'S
                                     SHARES   AMOUNT     CAPITAL       DEFICIT           EQUITY
                                     ------   ------   -----------   -----------   -------------------
                                                                    
BALANCE, December 31, 1999.........   100     $   1    $12,406,950   $(6,309,452)      $ 6,097,499
Net loss...........................    --        --             --      (678,545)         (678,545)
                                      ---     -----    -----------   -----------       -----------
BALANCE, December 31, 2000.........   100         1     12,406,950    (6,987,997)        5,418,954
Conversion of amounts due from
  Parent as reduction of paid-in
  capital..........................    --        --       (536,764)           --          (536,764)
Net income.........................    --        --             --       965,394           965,394
                                      ---     -----    -----------   -----------       -----------
BALANCE, December 31, 2001.........   100         1     11,870,186    (6,022,603)        5,847,584
Conversion of amounts due from
  Parent as reduction of paid-in
  capital..........................    --        --     (1,138,279)           --        (1,138,279)
Net income.........................    --        --             --     1,039,670         1,039,670
                                      ---     -----    -----------   -----------       -----------
BALANCE, December 31, 2002.........   100     $   1    $10,731,907   $(4,982,933)      $ 5,748,975
                                      ===     =====    ===========   ===========       ===========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       16


               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS



                                          YEAR ENDED DECEMBER 31,           QUARTER ENDED MARCH 31,
                                   --------------------------------------   -----------------------
                                      2000          2001          2002         2002         2003
                                   -----------   -----------   ----------   ----------   ----------
                                                                                  (UNAUDITED)
                                                                          
CASH FLOWS FROM OPERATING
  ACTIVITIES:
  Net income (loss)..............  $  (678,545)  $   965,394   $1,039,670   $ 345,982    $ 100,445
  Adjustments to reconcile net
     income (loss) to net cash
     provided by (used in)
     operating activities:
     Depreciation and
       amortization..............      368,236       355,079      243,427      62,597       59,322
     Provision for bad debts.....      249,563       384,929       60,828         180       20,240
     Loss on disposal of asset...       50,558        67,544           --          --           --
     Effect of changes in
       operating assets and
       liabilities:
       Patient accounts
          receivable.............     (824,196)      503,979     (374,840)   (383,925)      10,252
       Prepaid expenses and other
          assets.................      (39,873)        4,834      (29,992)     (1,277)      10,299
       Accounts payable and
          accrued expenses.......     (426,404)      138,584      232,203     (22,542)    (179,856)
       Accrued salaries and
          benefits...............     (166,662)       (5,273)      67,935      82,843       40,428
       Due to third party
          payees.................       16,852       (81,360)    (154,767)     19,903      (41,467)
                                   -----------   -----------   ----------   ---------    ---------
Net cash provided by (used in)
  operating activities...........   (1,450,471)    2,333,710    1,084,464     103,761       19,663
                                   -----------   -----------   ----------   ---------    ---------
CASH FLOWS FROM INVESTING
  ACTIVITIES:
  Purchase of property and
     equipment...................     (175,697)     (371,616)    (342,524)   (126,847)     (75,087)
                                   -----------   -----------   ----------   ---------    ---------
CASH FLOWS FROM FINANCING
  ACTIVITIES:
  Transfers to and advances from
     parent, net.................    1,521,205    (1,967,469)    (743,620)     22,086       55,424
                                   -----------   -----------   ----------   ---------    ---------
Net decrease in cash and cash
  equivalents....................     (104,963)       (5,375)      (1,680)     (1,000)          --
CASH AND CASH EQUIVALENTS,
  beginning of period............      113,968         9,005        3,630       3,630        1,950
                                   -----------   -----------   ----------   ---------    ---------
CASH AND CASH EQUIVALENTS, end of
  period.........................  $     9,005   $     3,630   $    1,950   $   2,630    $   1,950
                                   -----------   -----------   ----------   ---------    ---------
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  Cash paid to Parent for
     interest....................  $   377,743   $   439,451   $  853,375   $ 215,556    $ 257,341
                                   -----------   -----------   ----------   ---------    ---------
NON-CASH TRANSACTIONS:
Conversion of amounts due from
  Parent as reduction to paid-in
  capital........................  $        --   $   536,764   $1,138,279   $      --    $  17,295
                                   ===========   ===========   ==========   =========    =========


  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       17


               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Description of Organization and Basis of Presentation -- The Brown Schools
of Oklahoma, Inc. a Delaware corporation ("BSO" or "the Company"), was organized
in 1993 as Shadow Mountain Hospital, Inc. In 1998, through amendment to its
Articles of Incorporation, the Company was renamed to The Brown Schools of
Oklahoma, Inc. The Company was a wholly-owned subsidiary of The Brown Schools,
Inc. (the Parent) until April 9, 2003 at which date BSO, along with other
healthcare facilities owned by the Parent, was sold to an unrelated entity (see
Note 2). The Company provides psychiatric and other behavioral health services
principally to at-risk and troubled youth in Oklahoma. Services are provided
from multiple locations in Oklahoma, including the Company's main campus in
Tulsa, Oklahoma. The Parent conducts similar operations through other
subsidiaries throughout the United States and Puerto Rico.

     Basis of Consolidation -- The accompanying consolidated financial
statements include the accounts of Brown Schools of Oklahoma, Inc. and its
subsidiary, Therapeutic School Services, LLC. Significant intercompany balances
and transactions have been eliminated in consolidation.

     Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from these estimates.

     Cash and Cash Equivalents -- The Company considers cash and highly liquid
investments with original maturities of less than three months to be cash and
cash equivalents.

     Net Patient Service Receivables and Revenues -- The Company receives
payment for services rendered to patients from (1) federal and state governments
under Medicaid and other similar programs; (2) privately sponsored managed care
and commercial insurance plans for which payment is made based on terms defined
under contracts; and (3) other payers. Net patient service revenue consists of
net charges for services, which are based on the Company's established billing
rates less allowances and discounts for patients covered by third-party
programs, including estimated retroactive adjustments where applicable. Payments
under third-party programs are based on either costs of services or
predetermined rates and formulas that are generally less than the Company's
established billing rates. Patient service revenues, net of allowances and
discounts, are recorded in the period in which the related services are rendered
and are adjusted, as necessary, in future periods as final settlements are
determined. Final determination of amounts earned under third party programs
often occur in subsequent years because of audits by the programs, rights of
appeal and the application of numerous technical provisions. Receivables from,
or payables to, third-party payers reflect estimated settlements resulting from
intermediary reviews. In the opinion of management, the allowances, discounts
and liabilities to third-party payers recognized in the accompanying
consolidated financial statements are adequate.

     Regulations regarding reimbursements from government agencies are subject
to periodic change based upon administrative, legislative and judicial actions,
some of which may be retroactive. The Company currently does not anticipate any
material adverse effect from such matters. Management believes its estimates of
discounts, allowances and other adjustments are reasonable based on currently
available information. However, due to uncertainties inherent in the estimation
process and actions of government agencies regarding reimbursement, it is
reasonably possible that net patient service revenues, the allowance for
doubtful accounts, or estimated amounts due to third-party payers could be
adjusted by a material amount in the near term.

     Other Revenue -- Other revenue consists primarily of school counseling and
administrative fee revenue. Such other revenues are recognized in the period the
services are provided.

                                       18

               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Property and Equipment -- Property and equipment is stated at cost, net of
accumulated depreciation. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets as follows:



                                                              YEARS
                                                              -----
                                                           
Buildings and improvements..................................  5-30
Equipment...................................................  3-10


     The Company records impairments to property and equipment when it becomes
probable that the carrying values of the assets will not be fully recovered over
their estimated lives. Impairments are recorded to reduce the carrying value of
the assets to their estimated fair values determined by the Company based on
facts and circumstances in existence at the time of the determination, estimates
of probable future economic conditions and other information. No impairment
adjustments were required for the three years ended December 31, 2002.

     Goodwill -- Goodwill is the result of acquisition costs for a business
purchased in 1998 that exceeded the fair value of acquired net tangible assets
by $3,247,544. Prior to 2002, goodwill was amortized on a straight-line basis
over 30 years. A similar intangible asset of $128,120 was, prior to 2002,
amortized by the Company's subsidiary over 15 years. The recoverability of
goodwill was, prior to 2002, reviewed based primarily upon an analysis of
undiscounted cash flows from the acquired businesses. Other than amortization,
there were no changes in goodwill during 2000, 2001 and 2002.

     Effective January 1, 2002, BSO was required to adopt SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 required that the Company's
recorded goodwill no longer be amortized, but instead be periodically reviewed
for impairment. SFAS No. 142 required the Company to complete a transitional
goodwill impairment test within six months from the date of adoption, and any
resulting impairment loss recognized as a cumulative effect of a change in
accounting principle. Management's assessment, which was based primarily on the
proceeds from sale of the Company (see Note 2), did not indicate any material
impairment losses associated with the adoption of SFAS No. 142 at January 1,
2002. SFAS No. 142 requires a pro forma presentation of net income after the
add-back of goodwill amortization. Such pro forma analysis for 2000, 2001 and
2002 is as follows:



                                                      2000         2001         2002
                                                    ---------   ----------   ----------
                                                                    
Net income (loss), as reported....................  $(678,545)  $  965,394   $1,039,670
Add back goodwill amortization....................    116,793      116,793           --
                                                    ---------   ----------   ----------
Pro forma adjusted net income (loss)..............  $(561,752)  $1,082,187   $1,039,670
                                                    =========   ==========   ==========


     The Company had no acquisitions or dispositions of businesses during 2000,
2001 and 2002.

     Income Taxes -- The Company is included in the consolidated tax return of
its Parent and through an informal agreement with the Parent accounts for its
share of consolidated tax obligations (benefits) using an "as if separate
return" methodology. Deferred income taxes are recognized by applying enacted
statutory tax rates applicable to future years to temporary differences between
the tax bases and financial carrying values of the Company's assets and
liabilities. Valuation allowances are recorded to reduce deferred tax assets for
amounts that management determines are more likely than not to be realized.

     Fair Value of Financial Instruments -- The carrying amounts reported in the
consolidated balance sheets for cash, accounts receivable and accounts payable
approximate their fair value given the short-term maturity of these instruments.

     Recent Accounting Pronouncements -- In August 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the

                                       19

               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Impairment of Long-Lived Assets." This statement superceded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", ("APB No. 30") for
the disposal of a segment of a business. The Statement was required to be
adopted by the Company during 2002. The adoption of SFAS No. 144 did not have a
material effect on the Company's financial statements.

     In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 prohibits
the classification of gains or losses from debt extinguishments as extraordinary
items unless the criteria outlined in APB No. 30, are met. SFAS 145 also
eliminates an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS 145
is effective for fiscal years beginning after May 15, 2002, with early adoption
encouraged. The Company intends to adopt the provisions of SFAS 145 effective
January 1, 2003 and does not expect this pronouncement to have a material effect
on its financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". This standard
requires recognition of costs associated with exit or disposal activities as
they are incurred, rather than at the date of commitment to an exit or disposal
plan. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. As described in Note 7, the Company was sold
subsequent to year-end. This transaction may result in a material effect on the
Company's financial statements.

     In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". The interpretation requires that a guarantor recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken by issuing the guarantee. FIN No. 45 also requires
additional disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The accounting requirements for the initial recognition of guarantees
are applicable on a prospective basis for guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for all guarantees
outstanding, regardless of when they were issued or modified, during the first
quarter of fiscal 2003. The adoption of FIN No. 45 did not have a material
effect on the accompanying financial statements. The following is a summary of
the Company's agreements that have been determined to be within the scope of FIN
No. 45.

     The Company enters into standard indemnification agreements in the ordinary
course of business. Pursuant to these agreements, the Company indemnifies, holds
harmless, and agrees to reimburse the indemnified party for losses suffered or
incurred by the indemnified party. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited. The Company believes the estimated fair value of these
agreements is minimal. Accordingly, there are no liabilities recorded for these
agreements as of December 31, 2002 and March 31, 2003.

     In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The adoption of this Interpretation did not
have a material effect on the Company's financial statements.

                                       20

               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Interim Financial Statements -- The accompanying unaudited consolidated
condensed financial statements as of March 31, 2003 and for the three months
ended March 31, 2002 and 2003, were prepared in accordance with accounting
principles generally accepted in the United States of America and all applicable
financial statement rules and regulations of the Securities and Exchange
Commission pertaining to interim financial information. The interim financial
statements do not include all information or footnote disclosures required by
accounting principles generally accepted in the United States of America for
complete financial statements. All adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary for a fair
presentation of the interim financial statements have been included. The results
of operations for the three months ended March 31, 2003 are not necessarily
indicative of the results to be expected for the full year.

2. RELATED PARTY TRANSACTIONS

  Financing Arrangements with Parent

     Through April 9, 2003, the Company was dependent upon its Parent for
financing and operating support. The Company had access to funds through credit
arrangements obtained by its Parent. The Parent has a credit facility with
multiple banks (the Bank Facility). The Bank facility bears interest at LIBOR
plus 3.5% and expires on June 30, 2003. At December 31, 2002, the Parent had
$46.2 million outstanding under the Bank Facility.

     From December 2000 through December 2002, the Parent was not in compliance
with the financial covenants under the Bank Facility. The Parent negotiated
limited waivers for these violations and agreed to complete certain asset sales,
the proceeds from which were used to reduce its outstanding debt. In April 2003,
the Parent sold six of its healthcare facilities, including the Company, for
aggregate proceeds of approximately $63 million (see Note 7). Proceeds from the
sale were used by the Parent to retire all amounts outstanding under the Bank
Facility.

     In addition, as of December 31, 2002, the Parent had $16.1 million senior
subordinated notes outstanding with a non-bank creditor (the Subordinated Notes)
and $16.7 million of paid-in-kind notes (the PIK Notes) with its primary
investor. The Subordinated Notes and the PIK Notes bear interest at 18% and 12%
per annum, respectively.

     Effectively all of the assets of the Parent and its subsidiaries are
pledged as collateral under these debt agreements.

  Capital Transactions with Parent

     As of December 31, 1999, the Company's additional paid-in capital of
$12,406,950 represented amounts contributed by the Parent through the
forgiveness and permanent investment of certain intercompany balances due from
the Company. As a result of the sale of the Company to an unrelated party
subsequent to December 31, 2002, certain amounts due from the Parent at December
31, 2001 and 2002 were not collected by the Company. The reduction of amounts
due from Parent are reported in the accompanying financial statements as a
return of capital to the Parent in the amount of $536,764 and $1,138,279 for the
years ended December 31, 2001 and 2002, respectively.

  Intercompany Allocations

     During the three years ended December 31, 2002, the Parent maintained
financing arrangements to provide working capital and other advances to its
subsidiaries, including the Company. Interest costs were allocated to the
subsidiaries based upon the relation of total assets of each subsidiary to the
Parent's consolidated total assets, rather than on the specific borrowings
attributed to each subsidiary. Interest charges allocated to the Company for
fiscal years 2000, 2001 and 2002 were $377,743, $439,451, and $853,375,


                                       21

               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively. The terms of the allocation may not necessarily be indicative of
that which would have resulted had the Company been a separate entity.

     The Parent provides accounting, data processing, and other management and
administrative services to its subsidiaries, including the Company. A management
fee of approximately 5% of net revenues is charged to each subsidiary to cover
the costs of such services. Management fees allocated to the Company for fiscal
years 2000, 2001 and 2002 were $815,731, $911,941, and $887,505, respectively.
Although management considers the allocation method to be reasonable, due to the
relationship between the Company and its Parent, the terms of the allocation may
not necessarily be indicative of that which would have resulted had the Company
been a separate entity.

     The Parent purchases professional and general liability insurance coverage
and charged the Company $107,959, $118,210, and $185,486 for its share of such
insurance cost during the years ended December 31, 2000, 2001 and 2002,
respectively.

3. INCOME TAXES

     The Company is included in the consolidated tax return of its Parent and
through an informal agreement with the Parent, accounts for its share of
consolidated tax obligations (benefits) using an "as if separate return"
methodology.

     A reconciliation of income taxes computed by applying the U.S. federal
statutory rate to the actual income tax expense attributable to income before
provisions (benefit) for income taxes is as follows:



                                                            YEAR ENDED DECEMBER 31,
                                                       ---------------------------------
                                                         2000        2001        2002
                                                       ---------   ---------   ---------
                                                                      
Income tax provision (benefit) at U.S. federal
  statutory rate....................................   $(230,705)  $ 328,234   $ 353,488
State income taxes, net of federal tax benefit......     (26,870)     38,230      41,171
Utilization of net operating loss carryforwards.....          --    (366,464)   (394,659)
Change in valuation allowance.......................     257,575          --          --
                                                       ---------   ---------   ---------
Provision (benefit) for income taxes................   $      --   $      --   $      --
                                                       =========   =========   =========


     Deferred tax assets of the Company are primarily attributable to: (1)
built-in losses that resulted from declines in depreciable property values in
years prior to recapitalization and ownership change for the Parent in 1997; (2)
amortization of intangible assets; and (3) available net operating loss
carryforwards. The Internal Revenue code significantly limits the amount of
pre-acquisition net operating losses that are available to offset future taxable
income when a change of ownership occurs (see Note 7). As a result of
limitations on deductibility of the built-in losses and the uncertainty
surrounding the tax benefit to be realized from the operating loss
carryforwards, management has established a valuation allowance against the
related deferred tax assets. As of December 31, 2001 and 2002, the Company had
recorded net deferred tax assets of $432,788 and $38,129, respectively. The
recognition of these deferred taxes was based on management's assessment that
the realization of these deferred tax assets is more likely than not on an "as
if separate return" basis.

4. COMMITMENTS AND CONTINGENCIES

     As is typical in the at-risk youth treatment industry, the Company, the
Parent and other affiliated subsidiaries are subject to claims and lawsuits
arising in the ordinary course of business, including malpractice claims. In the
opinion of management, the ultimate resolution of the claims will not have a
material adverse effect on the business, results of operations or financial
condition of the Company, the Parent or other subsidiaries as sufficient
insurance coverage to mitigate risks of loss is maintained.

                                       22

               THE BROWN SCHOOLS OF OKLAHOMA, INC. AND SUBSIDIARY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.

     Final determination of amounts earned under certain government programs and
privately sponsored plans is subject to review by the appropriate payor or its
agents. In the opinion of management, adequate provision has been made for any
adjustments that may result from such reviews.

     BSO has incentive arrangements with certain of its employees. These provide
for incentive bonuses of 5% to 25% of annual salary amounts if specified goals
are attained. The incentive bonuses for 2000, 2001 and 2002 were approximately
$25,000, $30,000 and $101,000, respectively.

     As a result of the sale of the Company subsequent to December 31, 2002,
bonuses payable to certain executives totaling approximately $50,000 were
accrued at March 31, 2003.

     The Company has various operating leases for office equipment and clinic
space. At December 31, 2002, future minimum payments under noncancellable
operating leases are approximately: 2003 -- $199,256; 2004 -- $117,224;
2005 -- $52,081; 2006 -- $5,566; and 2007 -- $-0-.

5. CONCENTRATION OF CREDIT RISK

     The Company is particularly sensitive to regulatory and economic changes in
the state of Oklahoma. During the three years ended December 31, 2002,
substantially all of the Company's revenues were derived from services provided
and facilities operated in Oklahoma.

     Approximately 94%, 95% and 93% of the Company's net revenues for the years
ended December 31, 2000, 2001 and 2002, respectively, were derived from Medicaid
and other government programs. As of December 31, 2002 and 2001, substantially
all of the Company's patient accounts receivable related to services provided
under these programs.

6. RETIREMENT PLAN

     The Company participates in the Parent's defined contribution retirement
plan, The Brown Schools, Inc. 401(k) Plan (the "Plan"). The Company made
discretionary contributions to the Plan of $31,941, $42,843, and $19,594 for the
years ended December 31, 2000, 2001 and 2002, respectively.

7. SUBSEQUENT EVENTS (UNAUDITED)

     On April 9, 2003, Psychiatric Solutions, Inc., a company that manages
behavioral health units and owns psychiatric facilities, purchased substantially
all of the assets of the Company for approximately $15,000,000.

                                       23