PSYCHIATRIC SOLUTIONS, INC.

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JwsEsUmAV2SZ23zfbF4eDGxDBtF3YkUOcKIL2bsQrmQV4KGfeVCA4b0vAG9KZZZn XKPoThUJOKZ629hK15vRQw== 0000950144-05-007992.txt : 20050801 0000950144-05-007992.hdr.sgml : 20050801 20050801172618 ACCESSION NUMBER: 0000950144-05-007992 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050701 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050801 DATE AS OF CHANGE: 20050801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSYCHIATRIC SOLUTIONS INC CENTRAL INDEX KEY: 0000829608 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 232491707 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-20488 FILM NUMBER: 05989334 BUSINESS ADDRESS: STREET 1: 113 SEABOARD LANE STREET 2: SUITE C-100 CITY: FRANKLIN STATE: TN ZIP: 37067 BUSINESS PHONE: 615-312-5700 MAIL ADDRESS: STREET 1: 113 SEABOARD LANE STREET 2: SUITE C-100 CITY: FRANKLIN STATE: TN ZIP: 37067 FORMER COMPANY: FORMER CONFORMED NAME: PMR CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ZARON CAPITAL INC DATE OF NAME CHANGE: 19891116 8-K/A 1 g96587e8vkza.htm PSYCHIATRIC SOLUTIONS, INC. - FORM 8-K/A PSYCHIATRIC SOLUTIONS, INC. - FORM 8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K/A

(Amendment No. 2)

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): August 1, 2005 (July 1, 2005)

Psychiatric Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware	0-20488	23-2491707
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

840 Crescent Centre Drive, Suite 460, 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)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):


o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)


o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)


o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))


o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS


Item 2.01. Completion of Acquisition or Disposition of Assets
Item 9.01. Financial Statements and Exhibits
SIGNATURES
INDEX TO EXHIBITS
EX-23.1 CONSENT OF ERNST & YOUNG LLP
EX-99.1 COMBINED FINANCIAL STATEMENTS
EX-99.2 UNAUDITED FINANCIAL INFORMATION

Item 2.01. Completion of Acquisition or Disposition of Assets.

This Current Report on Form 8-K/A amends the Current Report on Form 8-K of Psychiatric Solutions, Inc. (the “Company”) filed on July 8, 2005 and is being filed solely for the purpose of including the combined financial statements of Behavioral Healthcare Services and certain unaudited pro forma condensed combined financial information for the Company. The Company filed the Current Report on Form 8-K on July 8, 2005 to report, among other things, the acquisition of all of the outstanding capital stock of Ardent Health Services, Inc. on July 1, 2005.

Item 9.01. Financial Statements and Exhibits.

	(a)		Financial Statements of Businesses Acquired.

			The combined financial statements of Behavioral Healthcare Services, as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, are attached hereto as Exhibit 99.1.

	(b)		Pro Forma Financial Information.

			Unaudited pro forma condensed combined financial information for Psychiatric Solutions, Inc. is attached hereto as Exhibit 99.2.

	(c)		Exhibits.

	23.1		Consent of Ernst & Young LLP, independent auditors.

	99.1		Combined Financial Statements of Behavioral Healthcare Services.

	99.2		Unaudited Pro Forma Condensed Combined Financial Information for Psychiatric Solutions, Inc.

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: August 1, 2005

INDEX TO EXHIBITS


Exhibit Number		Description of Exhibits
23.1		Consent of Ernst & Young LLP, independent auditors.

99.1		Combined Financial Statements of Behavioral Healthcare Services.

99.2		Unaudited Pro Forma Condensed Combined Financial Information for Psychiatric Solutions, Inc.

EX-23.1 2 g96587exv23w1.txt EX-23.1 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the following Registration Statements of Psychiatric Solutions, Inc.: (i) Registration Statement (Form S-3, No. 333-11679) of Psychiatric Solutions, Inc. and in the related Prospectus for the registration of 4,932,932 shares of common stock, (ii) Registration Statement (Form S-8, No. 333-100635) pertaining to the Psychiatric Solutions, Inc. 1997 Incentive and Nonqualified Stock Option Plan for Key Personnel of Psychiatric Solutions, Inc., (iii) Registration Statement (Form S-8, No. 333-94983) pertaining to the 1997 Equity Incentive Plan of PMR Corporation, (iv) Registration Statement (Form S-8, No. 333-38419) pertaining to the 1997 Equity Incentive Plan, 1995 Warrant Grant and the 1996 Stock Option Grants of PMR Corporation, and (v) Registration Statement (Form S-8, No. 333-118529) pertaining to the Amended and Restated Psychiatric Solutions, Inc. Equity Incentive Plan and the Amended and Restated Outside Directors' Non-Qualified Stock Option Plan; of our report dated June 20, 2005, with respect to the combined financial statements of Behavioral Healthcare Services included in this Form 8-K/A dated August 1, 2005. /s/ Ernst & Young LLP July 29, 2005 Nashville, Tennessee EX-99.1 3 g96587exv99w1.txt EX-99.1 COMBINED FINANCIAL STATEMENTS EXHIBIT 99.1 BEHAVIORAL HEALTHCARE SERVICES COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 AND THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED) AND 2005 (UNAUDITED) CONTENTS Report of Independent Auditors.............................. F-2 Combined Financial Statements Combined Balance Sheets..................................... F-3 Combined Statements of Income............................... F-4 Combined Statements of Equity............................... F-5 Combined Statements of Cash Flows........................... F-6 Notes to Combined Financial Statements...................... F-7

F-1 REPORT OF INDEPENDENT AUDITORS The Board of Managers Ardent Health Services LLC We have audited the accompanying combined balance sheets as of December 31, 2003 and 2004, of the entities described in Note 1 (collectively, "Behavioral Healthcare Services" or the "Company") and the related combined statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2004. 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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 Behavioral Healthcare Services at December 31, 2003 and 2004, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. The accompanying combined financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company is comprised of wholly owned subsidiaries of Ardent Health Services LLC (the "Parent Company"). Due to the Parent Company's current status with respect to certain covenants and cross-default provisions under its senior secured credit agreement and under the indenture to its senior subordinated notes, the Parent Company may be in default of certain restrictive covenants under its senior subordinated notes and under its credit agreement within the ensuing one year period. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt, including the Company's assets and stock. These conditions raise substantial doubt about the Parent Company's ability to continue as a going concern. (The Parent's plans as to these matters are described in Note 8.) Because of the aforementioned conditions, the Parent Company's actions could have a substantial effect on the Company's assets; therefore, there is substantial doubt about whether the Company will continue as a going concern. The accompanying combined financial statements of the Company do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP Nashville, Tennessee June 20, 2005 F-2 BEHAVIORAL HEALTHCARE SERVICES COMBINED BALANCE SHEETS
DECEMBER 31, ------------------- MARCH 31, 2003 2004 2005 -------- -------- ----------- (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 1,822 $ 2,671 $ 2,354 Accounts receivable, less allowance for doubtful accounts of $4,387 in 2003, $5,557 in 2004, and $6,537 (unaudited) in 2005.................................... 36,951 38,601 41,614 Inventories............................................... 1,129 1,232 1,256 Deferred income taxes..................................... 9,960 9,523 10,179 Prepaid expenses and other current assets................. 5,289 7,253 7,739 Assets held for sale...................................... 2,215 -- -- -------- -------- --------- Total current assets........................................ 57,366 59,280 63,142 Property and equipment, net................................. 76,562 83,355 83,465 Goodwill.................................................... 11,210 11,210 11,210 Deferred income taxes....................................... 8,926 6,534 6,287 Intercompany receivable from Ardent......................... 56,525 73,629 78,129 Other assets................................................ 225 283 240 -------- -------- --------- Total assets................................................ $210,814 $234,291 $ 242,473 ======== ======== ========= LIABILITIES AND EQUITY Current liabilities: Accounts payable.......................................... $ 8,225 $ 8,624 $ 7,727 Accrued salaries and benefits............................. 14,628 14,278 15,182 Liabilities held for sale................................. 486 -- -- Other accrued expenses and liabilities.................... 4,620 4,478 4,280 -------- -------- --------- Total current liabilities................................... 27,959 27,380 27,189 Self-insured liabilities.................................... 11,639 15,840 17,155 Commitments and contingencies (see Note 7) Equity...................................................... 171,216 191,071 198,129 -------- -------- --------- Total liabilities and equity................................ $210,814 $234,291 $ 242,473 ======== ======== =========
See accompanying notes. F-3 BEHAVIORAL HEALTHCARE SERVICES COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------- 2002 2003 2004 2004 2005 -------- -------- -------- -------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) Revenues: Net patient service revenue............. $232,898 $252,829 $277,566 $68,744 $75,013 Other revenue........................... 9,011 14,739 16,716 4,390 4,895 -------- -------- -------- ------- ------- Total net revenues........................ 241,909 267,568 294,282 73,134 79,908 Expenses: Salaries and benefits................... 134,340 148,392 167,926 41,294 44,447 Professional fees....................... 28,321 29,162 32,744 8,070 7,717 Supplies................................ 13,546 14,527 15,559 3,820 4,130 Provision for doubtful accounts......... 5,990 6,227 7,245 2,080 2,553 Interest, net........................... 8,481 4,940 2,854 1,749 (932) Depreciation and amortization........... 2,203 2,501 3,664 619 1,199 Management fees paid to Ardent.......... 18,373 12,255 16,483 4,259 3,192 Impairment of long-lived assets and restructuring costs.................. 78 -- -- -- -- Gain on divestitures.................... (1,208) (618) -- -- -- Other................................... 23,779 24,780 26,303 6,320 6,451 -------- -------- -------- ------- ------- Total expenses............................ 233,903 242,166 272,778 68,211 68,757 -------- -------- -------- ------- ------- Income from continuing operations before income tax.............................. 8,006 25,402 21,504 4,923 11,151 Income tax expense........................ 2,072 8,679 8,159 1,957 4,194 -------- -------- -------- ------- ------- Income from continuing operations, net.... 5,934 16,723 13,345 2,966 6,957 Discontinued operations: Income from discontinued operations..... 1,657 1,481 121 223 167 Gain on divestitures of discontinued operations........................... 2,349 1,032 3,843 -- -- Restructuring costs..................... (1,073) -- -- -- -- -------- -------- -------- ------- ------- Income from discontinued operations before income tax.............................. 2,933 2,513 3,964 223 167 Income tax expense........................ 1,053 970 1,570 88 66 -------- -------- -------- ------- ------- Income from discontinued operations, net..................................... 1,880 1,543 2,394 135 101 -------- -------- -------- ------- ------- Net income................................ $ 7,814 $ 18,266 $ 15,739 $ 3,101 $ 7,058 ======== ======== ======== ======= =======
See accompanying notes. F-4 BEHAVIORAL HEALTHCARE SERVICES COMBINED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, ------------------------------ 2002 2003 2004 -------- -------- -------- (DOLLARS IN THOUSANDS) Equity at beginning of period............................... $127,111 $144,925 $171,216 Contribution from Ardent.................................. 10,000 8,025 4,116 Net income................................................ 7,814 18,266 15,739 -------- -------- -------- Equity at end of period..................................... $144,925 $171,216 $191,071 ======== ======== ========
See accompanying notes. F-5 BEHAVIORAL HEALTHCARE SERVICES COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------ ------------------ 2002 2003 2004 2004 2005 -------- -------- -------- ------- -------- (UNAUDITED) (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Income from continuing operations, net..... $ 5,934 $ 16,723 $ 13,345 $2,966 $ 6,957 Adjustments to reconcile income from continuing operations, net, to net cash provided by (used in) operating activities, net of acquisitions and divestitures: Provision for doubtful accounts.......... 5,990 6,227 7,245 2,080 2,553 Depreciation and amortization............ 2,203 2,501 3,664 619 1,199 Impairment of long-lived assets and restructuring costs................... 78 -- -- -- -- Gain on divestitures..................... (1,208) (618) -- -- -- Deferred income taxes.................... 1,869 5,864 2,093 2,385 (410) Changes in operating assets and liabilities: Accounts receivable................... (8,792) (10,976) (10,304) (5,549) (5,681) Prepaid expenses and other current assets.............................. (58) (768) (2,244) (1,543) (1,050) Accounts payable...................... 982 8 381 (377) (452) Accrued salaries and benefits......... 2,904 2,168 (138) (1,314) 956 Other accrued expenses and liabilities......................... (172) (649) (405) (902) 57 Self-insured liabilities.............. 4,007 1,570 4,428 1,167 1,383 -------- -------- -------- ------ ------- Net cash provided by (used in) operating activities............................... 13,737 22,050 18,065 (468) 5,512 Net cash provided by (used in) discontinued operations............................... 1,439 (2,048) 382 54 (60) INVESTING ACTIVITIES Investments in acquisitions, less cash acquired................................. (14,971) (8,712) -- -- -- Purchases of property and equipment........ (6,425) (8,528) (10,457) (814) (1,309) Proceeds from divestitures................. 9,390 6,370 5,904 -- -- Other...................................... (27) (43) (58) (21) 42 -------- -------- -------- ------ ------- Net cash used in investing activities...... (12,033) (10,913) (4,611) (835) (1,267) FINANCING ACTIVITIES Change in intercompany receivable from Ardent................................... (3,232) (10,085) (12,987) 1,188 (4,502) -------- -------- -------- ------ ------- Net cash (used in) provided by financing activities............................... (3,232) (10,085) (12,987) 1,188 (4,502) -------- -------- -------- ------ ------- Net (decrease) increase in cash and cash equivalents.............................. (89) (996) 849 (61) (317) Cash and cash equivalents, beginning of period................................... 2,907 2,818 1,822 1,822 2,671 -------- -------- -------- ------ ------- Cash and cash equivalents, end of period... $ 2,818 $ 1,822 $ 2,671 $1,761 $ 2,354 ======== ======== ======== ====== ======= SUPPLEMENTAL CASH FLOW INFORMATION Net interest payments (receipts), net of capitalized interest of $0, $258, $142, and $0 and $57 for the periods ended December 31, 2002, 2003 and 2004, and March 31, 2004 and 2005, respectively.... $ 8,481 $ 4,940 $ 2,854 $1,749 $ (932) ======== ======== ======== ====== =======
See accompanying notes. F-6 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 2004 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION As of December 31, 2004, Behavioral Healthcare Services was comprised of 20 behavioral hospitals located in 11 states (collectively "Behavioral Healthcare Services" or the "Company"), each of which was a wholly owned subsidiary of Ardent Health Services LLC. Ardent Health Services LLC is a holding company whose affiliates operate acute care hospitals and other healthcare facilities, a health plan and behavioral hospitals. The term "Ardent" refers to Ardent Health Services LLC and its affiliates unless stated otherwise or indicated by context. The behavioral hospitals and other businesses related to the operations of these behavioral hospitals provide psychiatric and related mental health services. On March 10, 2005, Ardent announced that it entered into a definitive agreement to sell the operations and substantially all the net assets comprising the Company to Psychiatric Solutions, Inc., for approximately $560 million, less the redemption price for any of Ardent's senior subordinated notes which are not tendered pursuant to Ardent's ongoing tender offer and consent solicitation by the closing date of the sale. Under the terms of the agreement, the total consideration of approximately $560 million will consist of approximately $500 million in cash and $60 million in Psychiatric Solutions, Inc., common stock. The transaction is expected to be finalized on or about July 1, 2005. The combined financial statements include the accounts of the Company for the periods presented and have been prepared on the push-down basis of the historical cost to Ardent. Property and equipment on hand at August 1, 2001 were stated based upon the values assigned in connection with the initial capitalization of Ardent. All significant intercompany balances and transactions within the Company have been eliminated in combination. The majority of the Company's expenses are "cost of revenue" items. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Due to Ardent's current status with respect to certain covenants and cross-default provisions under its senior secured credit agreement and under the indenture to its senior subordinated notes, Ardent may be in default of certain restrictive covenants under its senior subordinated notes and under its credit agreement within the ensuing one year period. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt, including the Company's assets and stock. These conditions raise substantial doubt about Ardent's ability to continue as a going concern. (Ardent's plans as to these matters, including the expected sale of the Company and the use of the proceeds to repay the majority of its outstanding indebtedness, are described in Note 8.) Because of the aforementioned conditions, Ardent's actions could have a substantial effect on the Company's assets; therefore, there is substantial doubt about whether the Company will continue as a going concern. The accompanying combined financial statements of the Company do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The combined financial statements included herein may not necessarily be indicative of the results of operations, financial position, and cash flows of the Company in the future or had the Company operated as a separate and independent company during the periods presented. The combined financial statements included herein do not reflect any changes that may occur in the financing and operations of the Company related to the expected subsequent sale of the Company. UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS The accompanying unaudited combined balance sheet as of March 31, 2005 and the related unaudited combined statements of income and cash flows for the three months ended March 31, 2004 and 2005 (the "unaudited interim combined financial statements") have been prepared by the Company's management in F-7 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions of Regulation S-X and are unaudited. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of the Company's management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim results have been included. The unaudited interim combined financial statements should be read in conjunction with the audited financial statements appearing herein. The results of the three months ended March 31, 2005 may not be indicative of combined operating results for the full respective year. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING ESTIMATES The preparation of combined financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. ALLOWANCE FOR CONTRACTUAL DISCOUNTS (AND RELATED NET PATIENT SERVICE REVENUE) Net patient service revenue is recorded on the accrual basis in the period in which services are provided. Net patient service revenue includes amounts estimated by management to be reimbursable by Medicare, Medicaid and other payors under provisions of cost or prospective reimbursement formulas in effect. Amounts received are generally less than the established billing rates and the differences ("contractual discounts") are reported as deductions from patient service revenue at the time the service is rendered. The effects of other arrangements for providing services at less than established rates are also reported as deductions from patient service revenue. The Company derives a significant portion of its net patient service revenue from Medicare, Medicaid and other payors that receive discounts from its standard charges, requiring the Company to estimate an allowance for contractual discounts. Medicare, Medicaid and other payors that receive discounts from standard charges represented 72%, 73% and 75% of the Company's total patient days from continuing operations for the years ended December 31, 2002, 2003 and 2004, respectively. Net patient service revenue is recorded based upon the estimated amounts due from Medicare, Medicaid and other payors. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. The Company estimates the allowance for contractual discounts on a payor-specific basis given its interpretation of the applicable regulations or contract terms and the historical collections of each payor. However, the services authorized and provided and the resulting reimbursements are often subject to interpretation. These interpretations sometimes result in payments that differ from the Company's estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating regular review and assessment of the estimation process by management. Changes in estimates related to the allowance for contractual discounts affect net patient service revenue reported in the Company's combined results of operations and are recorded in the period the change in estimate occurs. F-8 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 and other third-party payor programs often occurs in subsequent years because of audits by the programs, rights of appeal, and the application of numerous technical provisions. Settlements are considered in the recognition of net patient service revenue on an estimated basis in the period the related services are rendered, and such amounts are subsequently adjusted in future periods as adjustments become known or as years are no longer subject to such audits and reviews. The net adjustments to estimated settlements from continuing operations resulted in increases (decreases) to net patient service revenue of $1.5 million, $1.8 million and $(1.8) million for the years ended December 31, 2002, 2003 and 2004, respectively. The state of West Virginia's Medicaid program has made a determination that one of the Company's hospitals was overpaid by the state's Medicaid program for cost reporting years ended December 31, 2000 to 2004. The aforementioned $1.8 million decrease in net patient revenue for the year ended December 31, 2004 includes a $7.5 million adjustment for this issue. See Note 7 under Net Revenue. 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 the Company's management, adequate provision has been made for any adjustments that may result from such reviews. The Company's hospitals provide care to patients who are financially unable to pay for the health care services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in net patient service revenue. OTHER REVENUE Other revenue consists primarily of fees for management services provided to other health care providers as well as fees for the provision of educational services and is recognized as the services are provided. Other revenue for the years ended December 31, 2002, 2003 and 2004 includes $1.1 million, $3.5 million and $3.7 million, respectively, of management fees from affiliates of Ardent. At December 31, 2003 and 2004, amounts due from affiliates of Ardent for such management services totaled $534,000 and $884,000, respectively, and are included in prepaid expenses and other current assets in the accompanying combined balance sheets. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of all highly liquid investments with maturity of 90 days or less when purchased. ALLOWANCE FOR DOUBTFUL ACCOUNTS (AND RELATED PROVISION FOR DOUBTFUL ACCOUNTS) The collection of receivables primarily from Medicare, Medicaid, managed care payors, other third-party payors and patients is critical to the Company's operating performance. The Company's primary collection risk that could result in bad debt relates to uninsured patient accounts and patient accounts whereby the primary insurance carrier has paid the amounts covered by the applicable agreement but the portion of the amount that is the patient's responsibility (primarily deductibles and co-payments) remains outstanding. The Company generally does not require any collateral or security for patient receivables. The Company estimates the allowance for doubtful accounts related to its net patient service revenue based primarily upon the effectiveness of historical collection efforts and the age of patient accounts receivable. The provision for doubtful accounts and the allowance for doubtful accounts relate primarily to self-pay amounts due from patients. The Company routinely monitors its accounts receivable balances and utilizes historical collection experience to support the basis for its estimates of the provision for doubtful accounts. F-9 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Significant changes in payor mix or business office operations could have a significant impact on the Company's combined results of operations and cash flows. The Company writes off accounts receivable once collection efforts have been exhausted or payment terms have been reached. A summary of activity in the Company's allowance for doubtful accounts follows (in thousands):
ACCOUNTS PROVISION WRITTEN OFF, BEGINNING FOR DOUBTFUL NET OF ENDING BALANCE ACCOUNTS RECOVERIES BALANCE --------- ------------ ------------ ------- Year Ended December 31, 2002..................................... $5,610 $7,963 $8,700 $4,873 2003..................................... 4,873 7,818 8,304 4,387 2004..................................... 4,387 9,109 7,939 5,557
The provision for doubtful accounts includes amounts related to discontinued operations of $2.0 million, $1.6 million and $1.9 million for the years ended December 31, 2002, 2003 and 2004, respectively. INVENTORIES Inventories consist primarily of hospital supplies and pharmaceuticals and are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment acquired as a result of acquisitions subsequent to the capitalization of Ardent, effective August 1, 2001, are stated based upon the fair market values assigned in connection with the respective purchase price allocations. Subsequent property and equipment additions are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase values, change capacities, or extend useful lives are capitalized. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, ranging generally from five to forty years for buildings and improvements and one to twenty years for equipment. Leasehold improvements are amortized over the shorter of the economic life or the initial lease term, which range from three to ten years. Property and equipment consisted of the following (in thousands):
DECEMBER 31, ----------------- 2003 2004 ------- ------- Land and improvements....................................... $13,984 $14,280 Buildings and improvements.................................. 55,835 61,279 Equipment................................................... 9,536 12,606 Leasehold improvements...................................... 377 495 Construction in progress.................................... 2,063 2,645 ------- ------- 81,795 91,305 Less accumulated depreciation and amortization.............. (5,233) (7,950) ------- ------- Property and equipment, net................................. $76,562 $83,355 ======= =======
The estimated cost to complete projects classified as construction in progress is $3.3 million at December 31, 2004 and is expected to be expended during fiscal 2005. Depreciation and amortization expense for the years ended December 31, 2002, 2003 and 2004 was $2.4 million, $2.6 million and F-10 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) $3.7 million, respectively, of which $228,000, $115,000 and $45,000, respectively, was included in discontinued operations for the years then ended. GOODWILL Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, ("SFAS No. 142"), on January 1, 2002. Under SFAS No. 142, goodwill acquired in a purchase business combination and determined to have an indefinite useful life is no longer amortized, but is subject to annual impairment tests. The Company compares the fair value of its hospitals, to which its goodwill is related, to their carrying amounts on at least an annual basis to determine if there is potential impairment. If the fair value is less than carrying value, the fair value of the respective hospitals is assigned to its respective assets and liabilities to determine if an impairment charge is required. Fair value of the respective hospitals and goodwill is estimated based upon internal evaluations that include quantitative analyses of cash flows. No impairment loss was recognized during the years ended December 31, 2002, 2003 and 2004 and for the three months ended March 31, 2005 related to goodwill. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS On January 1, 2002, the Company adopted SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). Prior to January 1, 2002, the Company recognized impairments of long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 144, when events, circumstances or operating results indicate that the carrying values of certain long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected to be held and used 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 are not expected to be recoverable, such amounts are reduced to estimated fair value. Fair value may be estimated based upon internal evaluations that include quantitative analyses of revenues and cash flows, reviews of recent sales of similar facilities and independent appraisals. Long-lived assets to be disposed of are reported at the lower of their carrying amounts or fair value less costs to sell or close. For the year ended December 31, 2002, the Company recognized impairment charges of $203,000 based on revised estimates of selling prices related to facilities identified for sale in 2001. The Company also reversed charges and related restructuring and exit costs accruals of $125,000 during the year ended December 31, 2002, based upon revised estimates of exit costs related to facilities identified for divestiture in prior periods. RISK MANAGEMENT AND SELF-INSURED LIABILITIES Effective October 31, 2003, the Company was insured for professional and general liability risks through a captive insurance affiliate of Ardent for claims up to $2 million, subject to a $500,000 deductible per occurrence. Ardent also maintained excess insurance coverage on behalf of its affiliates, including the Company, with a third party insurance carrier for claims up to $75 million per occurrence and in the aggregate. Effective October 31, 2004, Ardent increased the excess insurance coverage to $100 million per occurrence and in the aggregate. Prior to October 31, 2003, Ardent maintained general and professional liability coverage on behalf of its affiliates, including the Company, with third party insurance carriers for claims up to $50 million per occurrence and in the aggregate subject to a $500,000 deductible per occurrence. Ardent also carries on behalf of its affiliates, including the Company, workers' compensation insurance with statutory limits and employer's liability policy limits of $1 million for each occurrence from a third party commercial insurance carrier of which Ardent is responsible for deductibles of $250,000 per occurrence. F-11 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Company has provided an accrual for professional, general and workers' compensation liability risks based on actuarially determined estimates. Liabilities for professional, general and workers' compensation liability risks represent the estimated ultimate cost to the Company of all reported and unreported losses incurred through the respective balance sheet dates. The liabilities are estimated using individual case-basis valuations and actuarial analyses. As of December 31, 2003 and 2004, the Company's professional and general liability accrual for asserted and unasserted claims was $7.5 million and $12.1 million, respectively, of which $7.1 million and $11.2 million, respectively, was included in self-insured liabilities and $448,000 and $970,000, respectively, was included in other accrued expenses and liabilities in the accompanying combined balance sheets. The total costs for professional and general liability insurance allocated to the Company are based on the Company's actuarially determined portion of Ardent's total premiums and retention costs and was $7.5 million, $7.3 million and $6.8 million for the years ended December 31, 2002, 2003 and 2004, respectively, of which $7.1 million, $7.0 million and $6.7 million, respectively, were included in other operating expenses and $370,000, $324,000 and $78,000, respectively, were included in income from discontinued operations in the accompanying combined statements of income. As of December 31, 2003 and 2004, the Company's workers' compensation liability accrual for asserted and unasserted claims was $5.2 million and $5.0 million, respectively, of which $4.6 million and $4.7 million, respectively, was included in self-insured liabilities and $595,000 and $300,000, respectively, was included in other accrued expenses and liabilities in the accompanying combined balance sheets. The total costs for workers' compensation liability insurance allocated to the Company are based on the Company's actuarially determined portion of Ardent's total premiums and retention costs and was $4.1 million, $2.3 million and $2.9 million for the years ended December 31, 2002, 2003 and 2004, respectively, of which $3.7 million, $2.1 million and $2.9 million, respectively, was included in other operating expenses and $347,000, $147,000 and $22,000, respectively, was included in income from discontinued operations in the accompanying combined statements of income. Ardent provides funding to third-party insurance carriers to prepay certain workers' compensation claims deductibles. As of December 31, 2003 and 2004, Ardent had prepaid on behalf of the Company $3.2 million and $4.2 million, respectively, of claims deductibles, which prepaid amounts are included in prepaid expenses and other current assets in the accompanying combined balance sheets. EQUITY Equity represents the net investment in the Company by Ardent. It includes additional paid-in-capital and net earnings and losses. Ardent contributed $10.0 million and $8.0 million to the Company in the years ended December 31, 2002 and 2003, respectively, related to acquisitions discussed in Note 2. Ardent contributed $4.1 million to the Company in the year ended December 31, 2004 related to forgiveness of intercompany balances. MANAGEMENT FEES Ardent incurs various corporate general and administrative expenses related to centralized services including information systems, reimbursement, accounting, taxation, legal, internal audit and risk management. These corporate overhead expenses are allocated to the Company based on the direct costs associated with behavioral-specific departments and an allocation of all other indirect corporate overhead costs based on a percentage of operating expenses. In the opinion of Ardent's management, this allocation method is reasonable. INCOME TAXES Ardent files consolidated federal and state income tax returns, which include all of its eligible affiliates, including the Company. The provision for income taxes in the combined statements of income F-12 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) for all years presented have been computed on a separate return basis (i.e., assuming the Company had not been included in Ardent's consolidated income tax return). All income tax payments are made by the Company through Ardent. Ardent's tax sharing agreement with its affiliates allocates tax assets and liabilities on a separate return basis as well. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities, with the primary differences related to the allowance for doubtful accounts, accrued liabilities, depreciation methods and periods and deferred cost amortization methods. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company must assess the likelihood that deferred tax assets will more likely than not be recovered from future taxable income to determine whether an evaluation allowance should be established. For purposes of allocating intercompany expenses, the Company follows Internal Revenue Code section 482. The difference between this method and accounting principles generally accepted in the United States generates a permanent difference in the calculation of the Company's tax liability on a standalone basis. CONCENTRATIONS OF CREDIT RISK The Company's primary concentration of credit risk is patient accounts receivable, which consists of amounts owed by various governmental agencies, managed care payors, commercial insurance companies, employers and private patients. The Company manages its patient accounts receivable by regularly reviewing its accounts and contracts and by providing appropriate allowances for uncollectible amounts. Medicare and Medicaid programs comprised 9% and 36% of patient accounts receivable, respectively, at December 31, 2003 and 9% and 31% of patient accounts receivable, respectively, at December 31, 2004. Receivables from Medicaid include amounts from the various states in which the Company operates. Remaining receivables relate primarily to various commercial insurance carriers and managed care programs. The number of patients and payors limits concentration of credit risk from other payors. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable, prepaids, other current assets, accounts payable and accrued liabilities, including self-insured liabilities, approximate fair value because of the short-term nature of these items. SEGMENT INFORMATION Management has determined that the Company does not have separately reportable segments as defined under SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. Rather, the Company's hospitals are all similar in their business activities and the economic environments in which they operate. RECENTLY ISSUED ACCOUNTING STANDARDS In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities ("SFAS No. 150"). SFAS No. 150 requires issuers to classify as liabilities, or assets in some circumstances, three classes of freestanding financial instruments that embody obligations of the issuer. Generally, SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003 and was otherwise effective for interim periods beginning after June 15, 2003. For mandatorily F-13 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) redeemable financial instruments, as defined by SFAS No. 150, the statement is effective for fiscal periods beginning after December 15, 2003. The application of SFAS No. 150 did not have a material effect on the Company's combined financial position or results of operations. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R replaces Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which was issued in January 2003. FIN 46R addresses the consolidation by business enterprises of variable interest entities as defined within FIN 46R. The Company immediately applied the provisions of FIN 46R to variable interests in variable interest entities created after December 31, 2003. The Company must apply the provisions of FIN 46R to all other variable interests in variable interest entities effective January 1, 2005. The application of FIN 46R did not have a material effect on the Company's combined financial position or results of operations. 2. ACQUISITIONS, DIVESTITURES, IMPAIRMENTS AND RESTRUCTURING CHARGES AND LIABILITIES ACQUISITIONS Acquisitions are accounted for using the purchase method of accounting prescribed by SFAS No. 141, Business Combinations, and the results of operations are included in the combined statements of income from the respective dates of acquisition. The purchase prices of these transactions were allocated to the assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition and are subject to change during the twelve-month period subsequent to the acquisition date due to settling amounts related to purchased working capital and final determination of fair value estimates. 2002 ACQUISITIONS Effective June 1, 2002, the Company acquired certain assets and liabilities of Cumberland Hospital located in New Kent, Virginia from The Brown Schools. Ardent financed the acquisition through the sale of equity securities in 2001 and borrowings under its existing revolving credit facility. The Company financed the acquisition through a $10.0 million capital contribution from Ardent and the remainder financed through intercompany borrowings. The purchase price was determined as follows (in thousands): Purchase price paid......................................... $14,640 Acquisition costs........................................... 333 ------- $14,973 =======

The purchase price for the acquisition of Cumberland Hospital was allocated to the estimated fair value of the net assets acquired as follows (in thousands): Cash........................................................ $ 2 Other current assets........................................ 129 Property and equipment...................................... 6,134 Goodwill.................................................... 9,083 Other assets................................................ 9 Current liabilities assumed................................. (384) ------- $14,973 =======

The amount of goodwill deductible for income tax purposes is $9.1 million. F-14 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 2003 ACQUISITIONS Effective October 8, 2003, the Company acquired the Northwestern Institute of Psychiatry (renamed Brooke Glen), a private behavioral health services facility located in Fort Washington, Pennsylvania for $7.7 million, plus acquisition costs. The purchase price was paid by Ardent in cash. The Company financed the acquisition through an $8.0 million capital contribution from Ardent and the remainder through intercompany borrowings. The purchase price was determined as follows (in thousands): Purchase price paid......................................... $7,700 Acquisition costs........................................... 1,012 ------ $8,712 ======

The purchase price for the acquisition was allocated to the estimated fair value of the net assets acquired as follows (in thousands): Current assets.............................................. $ 115 Property and equipment...................................... 8,943 Current liabilities assumed................................. (346) ------ $8,712 ======

DIVESTITURES AND IMPAIRMENTS DISCONTINUED OPERATIONS As of December 31, 2003, net assets held for sale was comprised of one hospital, which was sold effective April 1, 2004 for consideration of approximately $6.0 million resulting in a pretax gain of $3.8 million. The assets and liabilities of the hospital are included in assets held for sale and liabilities held for sale in the combined balance sheet as of December 31, 2003. The carrying amounts of the major classes of these assets and liabilities were as follows (in thousands):
DECEMBER 31, 2003 ------------ Assets Prepaid expenses and other current assets................. $ 59 Inventories............................................... 24 Property and equipment, net............................... 2,132 ------ Assets held for sale........................................ 2,215 Liabilities Accounts payable.......................................... 132 Accrued salaries and benefits............................. 216 Other current liabilities................................. 138 ------ Liabilities held for sale................................... 486 ------ Net assets held for sale.................................... $1,729 ======
F-15 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The hospital's results of operations and cash flows are presented as discontinued operations in the accompanying combined statements of income and cash flows for the years ended December 31, 2002, 2003 and 2004, respectively. For the year ended December 31, 2002, the Company recorded a pretax gain of $2.3 million from the sale of one hospital. For the year ended December 31, 2003, the Company recorded pretax gains of $1.0 million from the sale of one hospital and recoveries of fully reserved items related to a hospital sold in 2002. Total net revenues for the facilities identified as held for sale under SFAS No. 144 were $19.6 million, $11.5 million and $3.5 million for the years ended December 31, 2002, 2003 and 2004 and $3.2 million (unaudited) for the three months ended March 31, 2004, respectively. OTHER DIVESTITURES For the year ended December 31, 2002, the Company recognized a net pre-tax gain of $902,000 on the sale of two hospitals, which were previously identified for sale under SFAS No. 121 and a net pre-tax gain of $306,000 on the net working capital settlement of a hospital sold in 2001. For the year ended December 31, 2003, the Company recorded a pre-tax gain of $618,000 on the sale of two hospitals which were previously identified as held for sale under SFAS No. 121. Under SFAS No. 121, the net gain is recorded in the accompanying combined statements of income as gain on divestitures and the historical results of operations and financial position are not reclassified as discontinued operations and assets or liabilities held for sale, respectively. The reconciliation of the pre-tax gain on divestitures and discontinued operations is as follows (in thousands):
YEARS ENDED DECEMBER 31, --------------------------- 2002 2003 2004 ------- ------- ------- Proceeds from divestitures, net of selling costs paid... $ 9,390 $ 6,370 $ 5,904 Net assets sold: Property and equipment................................ (4,159) (3,137) -- Prepaid expense and other current assets.............. (315) -- -- Assets held for sale.................................. (880) (1,766) (2,247) Other long-term assets................................ (479) -- -- Accounts payable...................................... -- -- 186 Other liabilities..................................... -- 183 -- ------- ------- ------- Gain on divestitures.................................... $ 3,557 $ 1,650 $ 3,843 ======= ======= =======
RESTRUCTURING CHARGES AND LIABILITIES The Company initiated restructuring activities during 2001 and 2002 in part through the divestiture of under performing or non-strategic hospitals that were identified as being not compatible with the Company's operating plans based upon management's review of all hospitals. For the year ended December 31, 2002, the Company recognized restructuring and exit cost charges of $1.1 million comprised of restructuring and exit costs related to a hospital identified for divestiture in 2002. The Company paid $507,000 of such costs during the year ended December 31, 2002. The Company also reversed charges of $125,000 based upon revised exit costs of facilities identified for divestiture in prior periods. F-16 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) For the years ended December 31, 2003 and 2004, respectively, the Company paid $906,000 and $529,000, respectively, in restructuring and exit costs related to three hospitals identified for divestiture in prior periods. Restructuring and exit costs accruals are included in other current liabilities in the accompanying combined balance sheets. The following table summarizes the changes in restructuring and exit costs accruals, consisting of facility exit costs, lease termination costs and other non-severance costs, for the following periods (in thousands): Balance at January 1, 2002.................................. $1,119 Charges................................................... 1,073 Payments.................................................. (507) Changes in estimates related to prior period charges...... (125) ------ Balance at December 31, 2002................................ 1,560 Payments.................................................. (906) ------ Balance at December 31, 2003................................ 654 Payments.................................................. (529) ------ Balance at December 31, 2004................................ 125 Payments (unaudited)...................................... (42) ------ Balance at March 31, 2005 (unaudited)....................... $ 83 ======

PRO FORMA RESULTS OF OPERATIONS (UNAUDITED) The following unaudited pro forma results of operations give effect to the operations of the acquisitions and divestitures as if the respective transactions had occurred as of the first day of the year immediately preceding the period in which the transaction occurred (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------ MARCH 31, 2002 2003 2004 2004 -------- -------- -------- ----------- (UNAUDITED) ~~Net revenues.............................. $249,930 $267,739 $294,282 $73,134 Net income................................ 8,026 17,371 14,071 3,190~~
The unaudited pro forma results of operations do not purport to represent what the Company's results of operations would have been had such transactions occurred at the beginning of the period presented or to project the Company's results of operations in any future period. 3. GOODWILL The Company completed its transition impairment tests of goodwill during the second quarter of 2002 and noted no impairment. The Company also performed its annual impairment tests as of October 1, 2002, 2003 and 2004, respectively, and noted no impairment. 4. INTERCOMPANY RECEIVABLE FROM ARDENT Intercompany balances represent amounts due from Ardent for funds generated by the Company in its operations, which are swept to Ardent under a centralized cash management agreement. Funds swept to Ardent are offset by funds paid by Ardent on behalf of the Company for purchases of assets and payments of certain operating expenses and costs, such as insurance, payroll, employee benefits, management fees and other expenses. The intercompany balances due to Ardent, which are due upon demand, and the F-17 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) intercompany balances due from Ardent accrue or earn interest, respectively, at LIBOR plus 3.5% which was 6.1% at December 31, 2004. Net interest expense and income related to intercompany balances due to and due from Ardent are reflected in the accompanying combined statements of income. In connection with the sale of the Company, intercompany balances at the date of the sale will be forgiven. See Note 1 under Organization and Basis of Presentation. 5. INCOME TAXES Significant components of the Company's deferred tax assets are as follows (in thousands):
DECEMBER 31, ----------------- 2003 2004 ------- ------- Deferred tax assets: Patient accounts receivable, net.......................... $ 3,076 $ 1,230 Accrued liabilities....................................... 6,835 8,244 Depreciation.............................................. 2,459 287 Amortization.............................................. 5,204 4,740 Federal AMT credit........................................ 206 428 State net operating loss carryforwards.................... 2,155 2,374 ------- ------- Total deferred tax assets................................... 19,935 17,303 Valuation allowance for deferred tax assets................. (1,049) (1,246) ------- ------- Net deferred tax assets..................................... $18,886 $16,057 ======= =======
The net deferred tax assets are presented in the accompanying combined balance sheets under the following captions (in thousands):
DECEMBER 31, ----------------- 2003 2004 ------- ------- Current deferred tax asset.................................. $ 9,960 $ 9,523 Noncurrent deferred tax asset............................... 8,926 6,534 ------- ------- Net deferred tax asset...................................... $18,886 $16,057 ======= =======
At December 31, 2003 and 2004, the Company has state net operating loss carryforwards of $38.2 million and $39.8 million, respectively, for income tax purposes that expire in 2005 through 2024. At December 31, 2003 and 2004, the Company has federal alternative minimum tax ("AMT") credits of $206,000 and $428,000, respectively, for income tax purposes. These AMT credits do not expire. During the years ended December 31, 2003 and 2004, the Company (decreased) increased the valuation allowance related to its deferred tax assets by $(825,000) and $197,000, respectively. As of December 31, 2003 and 2004, a valuation allowance of $1.0 million and $1.2 million, respectively, has been recognized as an offset to deferred tax assets related primarily to the estimated realizability of certain state net operating loss carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, F-18 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Subsequently recognized tax benefit or expense relating to the valuation allowance for deferred tax assets will be reported as an income tax benefit or expense in the combined statement of income. Significant components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 2002 2003 2004 ------ ------ ------ Current: Federal.................................................. $ (210) $2,625 $5,593 State.................................................... 413 190 473 ------ ------ ------ Total current.............................................. 203 2,815 6,066 ------ ------ ------ Deferred: Federal.................................................. 1,136 4,301 1,734 State.................................................... 733 1,563 359 ------ ------ ------ Total deferred............................................. 1,869 5,864 2,093 ------ ------ ------ Income tax expense......................................... $2,072 $8,679 $8,159 ====== ====== ======
The Company's combined effective tax rate differed from the amounts computed by applying the federal statutory rate to pre-tax income from continuing operations as set forth below (dollars in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2002 2003 2004 ----------------- ----------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------ ------- Tax at federal statutory rate.... $ 2,722 34.0% $ 8,637 34.0% $7,311 $34.0% States taxes, net of federal benefits....................... 756 9.4 1,062 4.2 549 2.6 Expiration of state net operating loss carryforwards............. -- -- 95 0.4 -- -- Management fees and other permanent differences.......... (1,415) (17.6) (1,087) (4.3) 522 2.4 Other, net....................... 9 0.1 (28) (0.1) (223) (1.0) ------- ----- ------- ---- ------ ----- Total............................ $ 2,072 25.9% $ 8,679 34.2% $8,159 38.0% ======= ===== ======= ==== ====== =====
6. EMPLOYEE BENEFIT PLANS 401(K) PLAN Ardent maintains a defined contribution retirement plan for its affiliates (including the Company), the Ardent Health Services Retirement Savings Plan (the "Plan"). The Plan covers all of the Company's employees who have attained the age of 21 and have completed ten hours of service in a three month period. The Plan provides for a discretionary employer matching contribution. In fiscal 2002, 2003 and 2004, the employer contribution was an amount equal to 100.0% of eligible employees' pre-tax contributions not to exceed a maximum of 3.0% of the eligible employees' compensation contributed to the F-19 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Plan. The Company's retirement plan expense totaled $1.3 million, $1.3 million and $1.2 million, for the years ended December 31, 2002, 2003 and 2004, respectively, of which $1.2 million, $1.2 million and $1.2 million were included in salaries and benefits and $103,000, $78,000 and $16,000, respectively, were included in income from discontinued operations in the accompanying combined statements of income. EMPLOYEE HEALTH PLAN Ardent maintains a self-insured medical and dental plan for substantially all of the Company's employees. Ardent charges its affiliates premiums for such medical and dental coverage and assumes the liability for self-insured medical and dental benefits. Accordingly, no liability for medical and dental benefits is recorded in the accompanying combined balance sheets. Ardent has entered into a reinsurance agreement with an independent insurance company to limit its exposure to losses on certain claims. Under the terms of the agreement, the insurance company will reimburse Ardent and its subsidiaries for claims amounts exceeding $150,000 per claim, subject to an additional aggregate of $115,000, up to $1.9 million per employee. The total costs allocated to the Company related to the self-insured employee medical and dental benefits are based on the Company's portion of Ardent's total estimated ultimate cost of settlement of known claims and claims incurred but not reported, including claim settlement expense. The estimated ultimate cost of settlement is based on an average lag time and past experience. The Company's allocated costs was $8.6 million, $9.2 million and $12.4 million, for the years ended December 31, 2002, 2003 and 2004, respectively, of which $7.6 million, $8.6 million and $12.1 million, respectively, were included in other operating expenses and $1.0 million, $607,000 and $337,000, respectively, were included in income from discontinued operations in the accompanying combined statements of income. 7. COMMITMENTS AND CONTINGENCIES NET REVENUE The Medicare and Medicaid regulations and various managed care contracts under which the discounts from the Company's standard charges must be calculated are complex and are subject to interpretation and adjustment. The Company estimates the allowance for contractual discounts on a payor-specific basis given its interpretation of the applicable regulations or contract terms. However, the services authorized and provided and resulting reimbursements are often subject to interpretation. These interpretations sometimes result in payments that differ from the Company's estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by management. In 2004 and 2005, the Company received notices from the state of West Virginia's Medicaid program that certain amounts paid by the program to its Fox Run behavioral hospital in prior years were paid pursuant to an incorrect reimbursement system and that the Company owes certain of the previously reimbursed amounts back to the program. The Company has accrued $7.5 million for this issue in 2004 and intends to appeal the program's decision. The final determination of amounts earned under Medicare and Medicaid programs often does not occur until fiscal years subsequent to submission of claims due to audits by the administering agency, rights of appeal and the application of numerous technical provisions. Differences between original estimates and subsequent revisions, including final settlements, are included in the results of operations of the period in which the revisions are made. LITIGATION AND REGULATORY MATTERS From time to time, claims and suits arise in the ordinary course of the Company's business. In certain of these actions, plaintiffs request punitive or other damages against the Company that may not be covered F-20 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) by insurance. The Company does not believe that it is a party to any proceeding that, in management's opinion, would have a material adverse effect on the Company's business, financial condition or results of operations. The Company was a defendant in a lawsuit originally filed under seal in July 1998, in San Diego Federal Court. The suit was filed under the False Claims Act and alleged, among other things, that the defendants filed or caused to be filed false claims seeking reimbursement from a federal payor program. The Government intervened in the suit for the sole purpose of settling certain of the allegations relating to how three of the Company's hospitals received reimbursement for certain bad debt claims and how certain administrative costs were allocated among two of the Company's hospitals. On or about November 19, 2001, the court conducted a hearing to address certain private parties' (the "Relators") objections. The non-Relator parties settled these claims in January 2002 for approximately $338,000 in restitution, fines, and penalties. The Company also agreed to a settlement with the Office of the Inspector General of the Department of Health and Human Services regarding these same claims whereby the Company has executed a declaration making certain representations as to the future conduct of its compliance program. In connection with a previous announcement by Ardent that, as a result of an independent investigation into certain accounting matters in its Albuquerque market, it planned to restate certain previously reported consolidated financial statements, the Securities and Exchange Commission ("SEC") has commenced an informal inquiry concerning these issues. Ardent intends to fully cooperate with the SEC. ACQUISITIONS The Company has acquired businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and anti-kickback laws. The Company has from time to time identified certain past practices of acquired companies that do not conform to its standards. Although the Company institutes policies designed to conform such practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for the past activities of these acquired facilities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines. OPERATING LEASES The Company leases various buildings, office space and equipment under non-cancelable operating leases that expire at various dates through 2009. As of December 31, 2004, the future minimum lease commitments under non-cancelable leases (with initial or remaining lease terms in excess of one year) are as follows (in thousands): 2005........................................................ $1,230 2006........................................................ 973 2007........................................................ 571 2008........................................................ 261 2009........................................................ 118 ------ Total rental payments..................................... $3,153 ======

F-21 BEHAVIORAL HEALTHCARE SERVICES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Rental expense totaled $3.5 million, $3.7 million and $3.6 million for the years ended December 31, 2002, 2003 and 2004, respectively, of which $3.2 million, $3.5 million and $3.6 million, respectively, were included in other operating expenses and $275,000, $163,000 and $33,000, respectively, were included in income from discontinued operations in the accompanying combined statements of income. Sublease rental income was $89,000 for the year ended December 31, 2004. The aggregate future minimum sublease income is $118,000 at December 31, 2004. 8. GUARANTEE OF DEBT The Company, except for one of its hospitals, has fully and unconditionally guaranteed Ardent's $225.0 million senior subordinated notes on an unsecured senior subordinated basis. The Company also guarantees a senior secured credit agreement of Ardent, which is secured, in part, by the Company's assets and capital stock. As of December 31, 2004, Ardent had outstanding borrowings under the senior secured credit agreement of $299.3 million. In connection with entering into a definitive agreement to sell the Company, Ardent commenced a tender offer and consent solicitation relating to its senior subordinated notes and intends to seek an amendment and restatement of its senior secured credit agreement. Ardent expects to use a portion of the proceeds from the sale of the Company to finance the tender offer. Ardent expects to use the remaining proceeds to, among other things, repay a portion of its senior indebtedness. However, there is no assurance that the sale of the Company will occur or that Ardent will be able to repay a portion if its indebtedness with the expected proceeds therefrom. If Ardent does not complete the tender offer and amendment and restatement of its credit agreement, Ardent will continue to be subject to the restrictive covenants and events of default intended to be eliminated or modified thereby. Due to Ardent's current status with respect to certain covenants and cross-default provisions under its senior secured credit agreement and under the indenture to its senior subordinated notes, Ardent may be in default of certain restrictive covenants under the senior subordinated notes and under the credit agreement within the ensuing one year period. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt, including the Company's assets and stock. F-22 EX-99.2 4 g96587exv99w2.txt EX-99.2 UNAUDITED FINANCIAL INFORMATION Exhibit 99.2 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following tables set forth the unaudited pro forma condensed combined financial data for Psychiatric Solutions, Inc., giving effect to the acquisitions of Ardent Health Services, Inc. ("Ardent Behavioral"), Heartland Healthcare ("Heartland"), Brentwood Behavioral Health ("Brentwood") and other non-significant acquisitions during the fiscal year ended December 31, 2004 and the Financing Transactions (as defined below) as if they had occurred on the dates indicated and after giving effect to certain pro forma adjustments discussed herein. The unaudited pro forma condensed balance sheet as of March 31, 2005 has been derived from Psychiatric Solutions' and Ardent Behavioral's historical balance sheets, adjusted to give effect to these acquisitions and the Financing Transactions as if they occurred on March 31, 2005. The pro forma condensed combined income statement for the twelve months ended March 31, 2005 gives effect to the acquisitions of Ardent Behavioral, Heartland and other non-significant acquisitions during 2004 and the Financing Transactions, as if they occurred at the beginning of the period presented. The pro forma condensed combined income statement for the three months ended March 31, 2005 gives effect to the acquisition of Ardent Behavioral and the Financing Transactions, as if they occurred at the beginning of the period presented. The pro forma condensed combined income statement for the year ended December 31, 2004 gives effect to the acquisitions of Ardent Behavioral, Heartland, Brentwood and other non-significant acquisitions during 2004 and the Financing Transactions, as if they occurred at the beginning of the period presented. For the purposes of this Current Report on Form 8-K/A, Financing Transactions shall refer to our offering of senior subordinated notes, the amendment and restatement of our existing credit facility and our new senior secured term loan. 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 Ardent Behavioral acquisition cannot be made at this time. 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 from Ardent Behavioral. 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. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2005
PRO FORMA OFFERING PSYCHIATRIC ARDENT ACQUISITION PRO FORMA PRO FORMA PRO FORMA SOLUTIONS BEHAVIORAL ADJUSTMENTS COMBINED ADJUSTMENTS PSI ----------- ---------- ----------- --------- ----------- ---------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.... $ 14,500 $ 2,354 $(500,000)(1) $(483,146) $489,000(1) $ 5,854 Accounts receivable, net..... 80,996 41,614 7,494(2) 130,104 130,104 Other current assets......... 16,700 19,174 -- 35,874 35,874 -------- -------- --------- --------- -------- ---------- Total current assets....... 112,196 63,142 (492,506) (317,168) 489,000 171,832 Property and equipment, net.... 220,762 83,465 65,910(3) 370,137 370,137 Costs in excess of net assets acquired..................... 130,134 11,210 380,292(4) 521,636 11,000(1) 532,636 Other assets................... 21,377 84,656 (84,416)(5) 21,617 9,000(1) 30,617 -------- -------- --------- --------- -------- ---------- Total assets................... $484,469 $242,473 $(130,720) $ 596,222 $509,000 $1,105,222 ======== ======== ========= ========= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............. $ 12,355 $ 7,727 $ -- $ 20,082 $ -- $ 20,082 Accrued liabilities.......... 55,579 19,462 -- 75,041 -- 75,041 Current portion of long-term debt....................... 478 -- -- 478 3,250(1) 3,728 -------- -------- --------- --------- -------- ---------- Total current liabilities.............. 68,412 27,189 -- 95,601 3,250 98,851 Long-term debt, less current portion...................... 153,483 -- -- 153,483 507,250(1) 660,733 Other liabilities.............. 13,991 17,155 7,409(6) 38,555 -- 38,555 -------- -------- --------- --------- -------- ---------- Total liabilities.............. 235,886 44,344 7,409 287,639 510,500 798,139 Stockholders' equity: Common stock................. 205 -- 14(7) 219 -- 219 Additional paid-in capital... 228,784 -- 59,986(7) 288,770 -- 288,770 Accumulated earnings......... 19,594 198,129 (198,129)(2) 19,594 (1,500)(8) 18,094 -------- -------- --------- --------- -------- ---------- Total stockholders' equity................... 248,583 198,129 (138,129) 308,583 (1,500) 307,083 -------- -------- --------- --------- -------- ---------- Total liabilities and stockholders' equity......... $484,469 $242,473 $(130,720) $ 596,222 $509,000 $1,105,222 ======== ======== ========= ========= ======== ==========
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheet. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (DOLLARS IN THOUSANDS) (1) Represents the sources and uses of funds from the Financing Transactions: Senior Subordinated Notes................................... $150,000 Senior secured term debt.................................... 325,000 Additional borrowings on amended and restated revolving credit facility........................................... 35,500 -------- Increase in debt............................................ 510,500 Excess cash on balance sheet at March 31, 2005.............. 9,500 Estimate of capitalized finance costs....................... (9,000) Estimate of purchase transaction costs...................... (11,000) -------- Cash paid to Ardent Behavioral and Ardent Health Services LLC....................................................... 500,000 Less excess cash on balance sheet at March 31, 2005......... (9,500) Non-recurring bridge loan commitment fee.................... (1,500) -------- Net increase to cash and cash equivalents................... $489,000 ========

(2) Represents the elimination of Medicare liabilities not assumed in the acquisition of $7,494 included in accounts receivable and Ardent Behavioral's accumulated earnings of $198,129. (3) Represents the adjustment to the value of the property and equipment of Ardent Behavioral to reflect their appraised value. (4) Represents adjustment to cost in excess of net assets acquired as follows: Cash paid to Ardent Behavioral and Ardent Health Services LLC....................................................... $ 500,000 Value of equity consideration issued to Ardent Health Services LLC.............................................. 60,000 Less: net assets acquired(a)................................ (168,498) --------- Cost in excess of net assets acquired....................... 391,502 Ardent Behavioral's historical cost in excess of net assets acquired.................................................. (11,210) --------- Pro forma adjustment to cost in excess of net assets acquired.................................................. $ 380,292 =========

- --------------- (a) Net assets of Ardent Behavioral..................... $ 198,129 Cost in excess of net assets acquired of Ardent Behavioral........................................ (11,210) Pro forma acquisition adjustments to: Accounts receivable, net....................... 7,494 Property and equipment, net.................... 65,910 Other assets................................... (84,416) Other liabilities.............................. (7,409) --------- Net assets acquired................................ $ 168,498 =========

(5) Represents elimination of Ardent's Behavioral intercompany receivables of $78,129 and reclassification of deferred tax assets to deferred tax liabilities of $6,287. (6) Represents an adjustment to long-term deferred tax liabilities related to the step-up in basis of the property and equipment of Ardent Behavioral and the reclassification of deferred tax assets of Ardent Behavioral and an adjustment to long-term deferred tax assets related to net operating losses acquired. Step up basis on property and equipment of Ardent facilities................................................ $ 26,364 Net operating losses obtained in acquisition of Ardent Behavioral................................................ (12,668) Reclassification of deferred tax assets of Ardent Behavioral................................................ (6,287) --------- $ 7,409 =========

(7) Represents the adjustment to common stock and additional paid in capital related to the issuance of 1,413,649 shares of our common stock, $.01 par value, at a price of $42.4434. The share price was calculated based upon a volume-weighted average (rounded to four decimal places) of the daily sale price for the shares of our common stock for 20 consecutive trading days ending two days prior to March 31, 2005. This calculation assumes the fair value of the shares to be issued in the acquisition are valued at $60.0 million. The actual valuation of the shares issued will be based upon the market value of our common stock for a reasonable period of time before and after the number of shares to be issued in the transaction becomes fixed. (8) Represents non-recurring loan commitment fee on bridge loan related to the Financing Transactions. UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE TWELVE MONTHS ENDED MARCH 31, 2005
OFFERING PSYCHIATRIC PRO FORMA PRO FORMA PRO FORMA PRO FORMA SOLUTIONS ACQUISITIONS(1) COMBINED ADJUSTMENTS PSI ----------- --------------- --------- ----------- --------- (DOLLARS IN THOUSANDS) Revenue........................ $522,490 $317,242 $839,732 $ -- $839,732 Expenses: Salaries, wages and employee benefits.................. 286,338 179,181 465,519 -- 465,519 Professional fees............ 55,823 37,990 93,813 -- 93,813 Rentals and leases........... 9,592 3,604 13,196 -- 13,196 Other operating expenses..... 90,803 41,718 132,521 -- 132,521 Provision for doubtful accounts.................. 11,515 8,466 19,981 -- 19,981 Depreciation and amortization.............. 10,663 4,928 15,591 -- 15,591 Interest expense............. 18,031 532 18,563 33,868(1)(i) 52,431 Other expenses............... 6,990 -- 6,990 -- 6,990 -------- -------- -------- -------- -------- Total expenses............ 489,755 276,419 766,174 33,868 800,042 -------- -------- -------- -------- -------- Income from continuing operations before income taxes........................ 32,735 40,823 73,558 (33,868) 39,690 Provision for (benefit from) income taxes................. 12,494 15,513 28,007 (12,925)(1)(h) 15,082 -------- -------- -------- -------- -------- Income from continuing operations................... $ 20,241 $ 25,310 $ 45,551 $(20,943) $ 24,608 ======== ======== ======== ======== ========
See Notes to Unaudited Pro Forma Consolidated Combined Income Statements. UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 2005
OFFERING PSYCHIATRIC ARDENT PRO FORMA PRO FORMA PRO FORMA PRO FORMA SOLUTIONS BEHAVIORAL ADJUSTMENTS COMBINED ADJUSTMENTS PSI ----------- ---------- ----------- --------- ----------- --------- (DOLLARS IN THOUSANDS) Revenue...................... $138,730 $79,908 $ -- $218,638 $ -- $218,638 Expenses Salaries, wages and employee benefits........ 76,367 44,447 140 (1)(a) 120,954 -- 120,954 Professional fees.......... 14,256 7,717 356 (1)(b) 22,329 -- 22,329 Rentals and leases......... 2,340 775 31 (1)(c) 3,146 -- 3,146 Other operating expenses... 24,229 9,806 82 (1)(d) 34,117 -- 34,117 Provision for doubtful accounts................. 2,668 2,553 -- 5,221 -- 5,221 Depreciation and amortization............. 2,902 1,199 (88)(1)(e) 4,013 -- 4,013 Interest expense (income)................. 3,523 (932) 932 (1)(f) 3,523 8,677 (1)(i) 12,200 Other expenses............. 6,990 3,192 (3,192)(1)(g) 6,990 -- 6,990 -------- ------- ------- -------- ------- -------- Total expenses........... 133,275 68,757 (1,739) 200,293 8,677 208,970 -------- ------- ------- -------- ------- -------- Income from continuing operations before income taxes...................... 5,455 11,151 1,739 18,345 (8,677) 9,668 Provision for (benefit from) income taxes............... 2,127 4,194 833 (1)(h) 7,154 (3,383)(1)(h) 3,771 -------- ------- ------- -------- ------- -------- Income from continuing operations................. $ 3,328 $ 6,957 $ 906 $ 11,191 $(5,294) $ 5,897 ======== ======= ======= ======== ======= ======== Basic pro forma earnings per share.................. $ 0.27 ======== Diluted pro forma earnings per share.................. $ 0.26 ======== Shares used in computing per share amounts(j): Basic...................... 21,845 Diluted.................... 22,536
See Notes to Unaudited Pro Forma Condensed Combined Income Statements. UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2004
OFFERING PSYCHIATRIC PRO FORMA PRO FORMA PRO FORMA PRO FORMA SOLUTIONS ACQUISITIONS(1) COMBINED ADJUSTMENTS PSI ----------- --------------- --------- ----------- --------- (DOLLARS IN THOUSANDS) Revenue......................... $487,190 $339,906 $827,096 $ -- $827,096 Expenses: Salaries, wages and employee benefits................... 265,678 190,472 456,150 456,150 Professional fees............. 53,258 41,744 95,002 -- 95,002 Rentals and leases............ 9,019 4,347 13,366 -- 13,366 Other operating expenses...... 85,670 45,505 131,175 -- 131,175 Provision for doubtful accounts................... 10,874 9,340 20,214 -- 20,214 Depreciation and amortization............... 9,868 5,477 15,345 -- 15,345 Interest expense.............. 18,964 1,148 20,112 34,217 (1)(i) 54,329 Other expenses................ 6,407 -- 6,407 -- 6,407 -------- -------- -------- -------- -------- Total expenses............. 459,738 298,033 757,771 34,217 791,988 -------- -------- -------- -------- -------- Income from continuing operations before income taxes......................... 27,452 41,873 69,325 (34,217) 35,108 Provision for (benefit from) income taxes.................. 10,432 15,912 26,344 (13,003)(1)(h) 13,341 -------- -------- -------- -------- -------- Income from continuing operations.................... $ 17,020 $ 25,961 $ 42,981 $(21,214) $ 21,767 ======== ======== ======== ======== ======== Basic pro forma earnings per share.................. $ 1.37 ======== Diluted pro forma earnings per share.................. $ 1.29 ======== Shares used in computing per share amounts(j): Basic...................... 15,933 Diluted.................... 16,936
See Notes to Unaudited Pro Forma Condensed Combined Income Statements. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS (DOLLARS IN THOUSANDS) (1) The following pro forma condensed combined income statement for the twelve months ended March 31, 2005 presents the incremental pro forma operations of Ardent Behavioral, Heartland and three non-significant acquisitions applying the purchase method of accounting as if the acquisitions, which were completed on July 1, 2005, June 1, 2004 and various dates during the second quarter of 2004, respectively, had all occurred on April 1, 2004.
NON- ACQUISITION ARDENT SIGNIFICANT ACQUISITIONS PRO FORMA PRO FORMA BEHAVIORAL HEARTLAND ACQUISITIONS COMBINED ADJUSTMENTS ACQUISITIONS ---------- --------- ------------ ------------ ----------- ------------ Revenue.............................. $301,056 $9,135 $7,051 $317,242 $ -- $317,242 Expenses: Salaries, wages and employee benefits......................... 171,079 4,012 4,205 179,296 (115)(a) 179,181 Professional fees.................. 32,391 2,881 618 35,890 2,100 (b) 37,990 Rentals and leases................. 3,458 323 214 3,995 (391)(c) 3,604 Other operating expenses........... 38,845 1,351 1,194 41,390 328 (d) 41,718 Provision for doubtful accounts.... 7,718 690 58 8,466 -- 8,466 Depreciation and amortization...... 4,244 42 94 4,380 548 (e) 4,928 Interest expense................... 173 57 49 279 253 (f) 532 Other expenses..................... 15,416 311 235 15,962 (15,962)(g) -- -------- ------ ------ -------- -------- -------- Total expenses................... 273,324 9,667 6,667 289,658 (13,239) 276,419 -------- ------ ------ -------- -------- -------- Income from continuing operations before income taxes................ 27,732 (532) 384 27,584 13,239 40,823 Provision for income taxes........... 10,396 -- -- 10,396 5,117 (h) 15,513 -------- ------ ------ -------- -------- -------- Income from continuing operations.... $ 17,336 $ (532) $ 384 $ 17,188 $ 8,122 $ 25,310 ======== ====== ====== ======== ======== ========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS -- (CONTINUED) The following pro forma condensed combined income statement for the year ended December 31, 2004 presents the incremental pro forma operations of Ardent Behavioral, Heartland, Brentwood and three non-significant acquisitions applying the purchase method of accounting as if the acquisitions, which were completed on July 1, 2005, June 1, 2004, March 1, 2004, and various dates during the second quarter of 2004, respectively, had all occurred on January 1, 2004.
NON- ACQUISITION ARDENT SIGNIFICANT ACQUISITIONS PRO FORMA PRO FORMA BEHAVIORAL HEARTLAND BRENTWOOD ACQUISITIONS COMBINED ADJUSTMENTS ACQUISITIONS ---------- --------- --------- ------------ ------------ ----------- ------------ Revenue......................... $294,282 $22,482 $5,612 $17,530 $339,906 $ -- $339,906 Expenses: Salaries, wages and employee benefits.................... 167,926 9,689 2,977 10,012 190,604 (132)(a) 190,472 Professional fees............. 32,744 4,841 653 1,389 39,627 2,117 (b) 41,744 Rentals and leases............ 3,564 788 37 559 4,948 (601)(c) 4,347 Other operating expenses...... 38,298 3,177 772 2,930 45,177 328 (d) 45,505 Provision for doubtful accounts.................... 7,245 1,500 370 225 9,340 -- 9,340 Depreciation and amortization................ 3,664 104 30 272 4,070 1,407 (e) 5,477 Interest expense.............. 2,854 127 2 136 3,119 (1,971)(f) 1,148 Other expenses................ 16,483 377 319 472 17,651 (17,651)(g) -- -------- ------- ------ ------- -------- -------- -------- Total expenses.............. 272,778 20,603 5,160 15,995 314,536 (16,503) 298,033 -------- ------- ------ ------- -------- -------- -------- Income from continuing operations before income taxes......................... 21,504 1,879 452 1,535 25,370 16,503 41,873 Provision for income taxes...... 8,159 -- -- -- 8,159 7,753 (h) 15,912 -------- ------- ------ ------- -------- -------- -------- Income from continuing operations.................... $ 13,345 $ 1,879 $ 452 $ 1,535 $ 17,211 $ 8,750 $ 25,961 ======== ======= ====== ======= ======== ======== ========
(a) Reflects adjustments to salaries, wages and employee benefits to include corporate level employees necessary to manage the facilities acquired from Ardent Behavioral and the reclassification of contract labor from salaries, wages and employee benefits to professional fees for Ardent Behavioral to conform to our presentation.
THREE TWELVE MONTHS ENDED MONTHS ------------------------ ENDED DECEMBER 31, MARCH 31, MARCH 31, 2004 2005 2005 ------------ --------- --------- Salaries, wages and employee benefits of corporate level employees to manage facilities acquired from Ardent Behavioral................................. $ 1,835 $ 1,835 $ 459 Reclassification of contract labor to professional fees to conform to our presentation............... (1,967) (1,950) (319) ------- ------- ------- $ (132) $ (115) $ 140 ======= ======= =======
(b) Reflects adjustment to professional fees to include additional costs at the corporate level for the acquisition of Ardent Behavioral and the reclassification of contract labor from salaries, wages and employee benefits to professional fees for Ardent Behavioral to conform to our presentation. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS -- (CONTINUED)
THREE TWELVE MONTHS ENDED MONTHS ------------------------ ENDED DECEMBER 31, MARCH 31, MARCH 31, 2004 2005 2005 ------------ --------- --------- Professional fees at corporate level to support facilities acquired from Ardent Behavioral........ $ 150 $ 150 $ 37 Reclassification from salaries, wages and employee benefits to conform to our presentation........... 1,967 1,950 319 ------- ------- ------- $ 2,117 $ 2,100 $ 356 ======= ======= =======
(c) Reflects adjustments to rentals and leases for real estate purchased subsequent to the acquisition of formerly leased facilities and adjustments to rentals and leases for additional office space at the corporate level necessary to accommodate employees hired as the result of the Ardent Behavioral acquisition.
THREE TWELVE MONTHS ENDED MONTHS ------------------------ ENDED DECEMBER 31, MARCH 31, MARCH 31, 2004 2005 2005 ------------ --------- --------- Lease expense on properties purchased related to acquisition of facilities......................... $(725) $(515) $ -- Lease expense on additional corporate office space required for additional corporate level employees to manage facilities acquired from Ardent Behavioral........................................ 124 124 31 ----- ----- ----- $(601) $(391) $ 31 ===== ===== =====
(d) Reflects adjustments to other operating expenses at the corporate level, primarily for travel and related expenses, to be incurred by employees hired as the result of the Ardent Behavioral acquisition. (e) Reflects adjustments to depreciation expense for purchase accounting step-ups of property and equipment acquired and for real estate purchased subsequent to the acquisition of formerly leased facilities. Buildings are depreciated over 35 years and equipment over 5 years.
THREE TWELVE MONTHS ENDED MONTHS ------------------------ ENDED DECEMBER 31, MARCH 31, MARCH 31, 2004 2005 2005 ------------ --------- --------- Additional (reduction in) depreciation on acquired facilities for purchase accounting basis step-up........................................... $ 932 $213 $(88) Depreciation on properties purchased related to acquisition of facilities......................... 475 335 -- ------ ---- ---- $1,407 $548 $(88) ====== ==== ====
(f) Reflects adjustments to include interest expense from the beginning of the period to the acquisition date and adjustments to eliminate interest expense (income) for Ardent Behavioral. A 1/8% change in our interest rate assumptions would increase or decrease our interest expense $638,000 for the NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENTS -- (CONTINUED) twelve months ended March 31, 2005 and the year ended December 31, 2004 and $160,000 for the three months ended March 31, 2005.
THREE TWELVE MONTHS ENDED MONTHS ------------------------ ENDED DECEMBER 31, MARCH 31, MARCH 31, 2004 2005 2005 ------------ --------- --------- Interest expense.................................... $ 883 $ 426 $ -- Less Ardent Behavioral Historical interest expense (income).......................................... (2,854) (173) 932 ------- ----- ---- $(1,971) $ 253 $932 ======= ===== ====
(g) Reflects adjustments to eliminate management fees and other related party amounts paid or payable to the sellers prior to acquisition. Incremental expenses we expect to incur on an on-going basis for additional personnel, office space, etc. to manage these facilities are reflected as acquisition pro-forma adjustments in the appropriate income statement line item. (h) Reflects adjustment to bring combined pro forma provision for income taxes to 38%, 39% and 38% of income from continuing operations before income taxes for the twelve months ended March 31, 2005, the three months ended March 31, 2005 and the year ended December 31, 2004, respectively.
THREE TWELVE MONTHS ENDED MONTHS ------------------------ ENDED DECEMBER 31, MARCH 31, MARCH 31, 2004 2005 2005 ------------ --------- --------- Pro forma acquisition income from continuing operations before income taxes.................... $ 41,873 $ 40,823 $18,345 Effective income tax rate........................... 38% 38% 39% -------- -------- ------- Provision for income taxes.......................... 15,912 15,513 7,154 Provision prior to pro-forma adjustment............. 8,159 10,396 6,321 -------- -------- ------- Pro forma acquisition adjustment to provision for income taxes...................................... $ 7,753 $ 5,117 $ 833 ======== ======== ======= Pro forma PSI income from continuing operations before income taxes............................... $ 35,108 39,690 $ 9,668 Effective income tax rates.......................... 38% 38% 39% -------- -------- ------- Pro forma provision for income taxes................ $ 13,341 15,082 3,771 Pro forma combined provision for income taxes....... 26,344 28,007 7,154 -------- -------- ------- Offering pro forma adjustment....................... $(13,003) $(12,925) $(3,383) ======== ======== =======
(i) Reflects adjustment to give effect to interest on the $150,000 senior subordinated notes at 8% and interest on the $325,000 senior secured term facility and $35,500 of additional borrowings under the amended and restated revolving credit facility at the LIBOR rate plus applicable margin. The adjustment also includes amortization on capitalized finance costs and expense anticipated on interest rate swap arrangements. A 1/8% increase (decrease) in our interest rate assumptions would increase (decrease) our interest expense $638,000 for both the twelve months ended March 31, 2005 and the year ended December 31, 2004 and $160,000 for the three months ended March 31, 2005. (j) Reflects adjustment to give effect to 1,362,760 shares issued in the acquisition of Ardent Behavioral. ~~-----END PRIVACY-ENHANCED MESSAGE-----~~

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