exh99_2.htm


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Report of Independent Auditors		1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2010 and 2009 (Predecessor) and as of March 31, 2011 (Unaudited)		2
Consolidated Statements of Operations and Changes in Invested Equity (Deficit) for the period from November 16, 2010 to December 31, 2010, for the period from January 1, 2010 to November 15, 2010 (Predecessor), the year ended December 31, 2009 (Predecessor) and the three months ended March 31, 2011 (Unaudited) and March 31, 2010 (Predecessor) (Unaudited)		3
Consolidated Statements of Cash Flows for period from November 16, 2010 to December 31, 2010, for the period from January 1, 2010 to November 15, 2010 (Predecessor), the year ended December 31, 2009 (Predecessor)and the three months ended March 31, 2011 (Unaudied) and March 31, 2010 (Predecessor) (Unaudited)		4
Notes to Consolidated Financial Statements		5

We have audited the accompanying consolidated balance sheets of HHC Delaware, Inc. and Subsidiary (the Company) as of December 31, 2010 and December 31, 2009 (Predecessor), and the related consolidated statements of operations, invested equity (deficit), and cash flows for the period from November 16, 2010 to December 31, 2010 and for the period from January 1, 2010 to November 15, 2010 and the year ended December 31, 2009 (Predecessor periods). 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 the 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 also 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 consolidated financial position of HHC Delaware, Inc. and Subsidiary at December 31, 2010 and December 31, 2009 (Predecessor), and the consolidated results of operations and cash flows for the period from November 16, 2010 to December 31, 2010 and for the period from January 1, 2010 to November 15, 2010 and the year ended December 31, 2009 (Predecessor periods) in conformity with U.S. generally accepted accounting principles.

HHC DELAWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

				Predecessor
	December 31, 2010			December 31, 2009			March 31, 2011
							(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	197,197		$	240,642		$	27,734
Accounts receivable, less allowance for doubtful accounts of $1,137,478 , $1,459,521 and $1,315,045 (unaudited), respectively		1,371,276			1,835,603			1,687,240
Third party settlements		505,988			795,151			546,403
Deferred tax assets		558,057			655,445			493,230
Other current assets		144,579			149,407			121,765
Total current assets		2,777,097			3,676,248			2,876,372
Property and equipment:
Land		1,240,291			1,110,311			1,240,291
Buildings and improvements		6,899,017			6,253,181			6,899,017
Equipment		635,229			471,149			631,993
Construction in progress		248,507			237,316			309,212
Less accumulated depreciation		(903,869	)		(595,965	)		(994,648	)
		8,119,175			7,475,992			8,085,865
Goodwill		18,629,020			11,221,124			18,629,020
Other assets		141,413			297,120			177,621
Total assets	$	29,666,705		$	22,670,484		$	29,768,878

LIABILITIES AND INVESTED EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	298,354		$	286,813		$	161,483
Salaries and benefits payable		398,571			360,090			476,387
Income taxes payable		193,975			45,357			193,975
Other accrued liabilities		81,050			47,442			65,747
Current portion of long-term debt		140,153			114,614			159,132
Total current liabilities		1,112,103			854,316			1,056,724
Long-term debt, less current portion		6,648,128			6,706,683			6,595,946
Deferred tax liability		902,248			712,055			930,673
Due to Parent		21,028,879			14,277,002			21,080,685
Total liabilities		29,691,358			22,550,056			29,664,028
Invested equity (deficit):
Net investment by Parent		(24,653	)		120,428			104,850
Total liabilities and invested equity (deficit)	$	29,666,705		$	22,670,484		$	29,768,878

HHC DELAWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN INVESTED EQUITY (DEFICIT)

			Predecessor						Predecessor
	November 16, 2010 through December 31, 2010		January 1, 2010 through November 15, 2010		Year Ended December 31, 2009		Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
							(Unaudited)

Revenue	$	1,585,216	$	12,715,648	$	3,831,469	$	3,667,938	$	3,554,596

Operating expenses:
Salaries, wages and employee benefits		1,074,916		7,775,193		8,359,494		2,315,883		2,223,302
Professional fees		121,295		770,315		914,722		160,564		207,125
Supplies		102,673		793,846		800,749		235,489		226,961
Rentals and leases		1,545		19,145		36,439		13,389		5,124
Other operating expenses		96,521		703,815		809,517		252,732		194,190
Provision for doubtful accounts		75,483		436,249		483,388		133,342		87,687
Depreciation and amortization		39,849		268,232		292,689		90,779		75,664
Management fees allocated by the Parent		47,556		382,427		464,429		110,038		106,509
Interest expense		66,579		456,509		533,391		132,967		131,327
Total operating expenses		1,626,417		11,605,731		12,694,818		3,445,183		3,257,889
Income (loss) before income taxes		(41,201)		1,109,917		1,136,651		222,755		296,707
Provision (benefit) for income taxes		(16,548)		452,747		462,058		93,252		121,137
Net income (loss)		(24,653)		657,170		674,593		129,503		175,570

Invested equity (deficit):
Beginning of period		777,598		120,428		(554,165)		(24,653)		120,428
Elimination of predecessor invested equity		(777,598)		–		–		–		–
End of period	$	(24,653)	$	777,598	$	120,428	$	104,850	$	295,998

HHC DELAWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

				Predecessor									Predecessor
	November 16, 2010 through December 31, 2010			January 1, 2010 through November 15, 2010			Year Ended December 31, 2009			Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
										(Unaudited)
Operating activities:
Net income (loss)	$	(24,653	)	$	657,170		$	674,593		$	129,503		$	175,570
Adjustments to reconcile net income (loss) to net cash provided by continuing operating activities

Depreciation and amortization		39,849			268,232			292,689			90,779			75,664
Provision for bad debts		75,483			436,249			483,388			133,342			87,687
Deferred income taxes		(131,664	)		419,245			416,701			93,252			99,773
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable		273,343			(320,748	)		(460,881	)		(449,306	)		(656,488	)
Third party settlements		(22,650	)		311,813			(416,735	)		(40,415	)		(76,383	)
Prepaid expenses and other current assets		35,402			(30,574	)		(35,513	)		22,814			23,236
Other assets		(13,185	)		168,892			50,807			(36,208	)		96,469
Accounts payable and accrued expenses		230,408			(218,867	)		206,737			(136,871	)		(209,758	)
Income taxes payable		115,116			33,502			45,357			–			21,364
Salaries and benefits payable		(237,420	)		275,901			(227,230	)		77,816			102,769
Other current liabilities		43,363			(9,755	)		(76,627	)		(15,303	)		6,071
Net cash provided by (used in) operating activities		383,392			1,991,060			953,286			(130,597	)		(254,026	)

Investing activities:

Capital purchases of leasehold improvements and equipment		(310,380	)		(564,760	)		(374,729	)		(57,469	)		(43,426	)
Net cash used in investing activities		(310,380	)		(564,760	)		(374,729	)		(57,469	)		(43,426	)
Financing activities:
Principal payments on long-term debt, including capital leases		(10,519	)		(98,621	)		(84,674	)		(33,203	)		(26,158	)
Advances from (transfers to) Parent, net		6,098			(1,439,715	)		(435,589	)		51,806			311,125
Net cash provided by (used in) financing activities		(4,421	)		(1,538,336	)		(520,263	)		18,603			284,967
Net (decrease) increase in cash		68,591			(112,036	)		58,294			(169,463	)		(12,485	)
Cash and cash equivalents at beginning of period		128,606			240,642			182,348			197,197			240,642
Cash and cash equivalents at end of period	$	197,197		$	128,606		$	240,642		$	27,734		$	228,157

Cash paid for interest	$	47,153		$	476,407		$	533,873		$	133,147		$	131,453

HHC Delaware, Inc. (“MeadowWood”) is a wholly owned subsidiary of Universal Health Services, Inc. (“UHS”) and operates a behavioral health care facility known as MeadowWood Behavioral Health System located at 575 South DuPont Highway, New Castle, Delaware. HHC Delaware, Inc. is the sole member of Delaware Investment Associates, LLC (“MeadowWood Real Estate”), which owns the real estate located at 575 South DuPont Highway, New Castle, Delaware. Collectively, MeadowWood and MeadowWood Real Estate are hereinafter referred to as the Company. On November 15, 2010, UHS completed the acquisition of Psychiatric Solutions, Inc. (“PSI”), the previous owner of the Company. References herein to the Parent refer to PSI for periods prior to the acquisition by UHS and refer to UHS for all post-acquisition periods.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated in the consolidation of the Company.

Patient service revenue is recorded on the accrual basis in the period in which services are provided, at established billing rates less contractual adjustments. Contractual adjustments are recorded to state patient service revenue at the amount expected to be collected for the services provided based on amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates. Approximately 30%, 27% and 19% of revenue for the period November 16, 2010 through December 31, 2010, and the predecessor periods of January 1, 2010 through November 15, 2010 and the year ended December 31, 2009, respectively, was obtained from providing services to patients participating in the Medicaid program. Approximately 41%, 40% and 44% of revenue for the period November 16, 2010 through December 31, 2010, and the predecessor periods of January 1, 2010 through November 15, 2010 and the year ended December 31, 2009, respectively, was obtained from providing services to patients participating in the Medicare program.

The Company provides care without charge 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, these amounts are not reported as revenue. Charity care totaled $55,415, $194,121, and $177,570 for the period ended November 16, 2010 through December 31, 2010 and the predecessor periods January 1, 2010 through November 15, 2010 and the year ended December 31, 2009, respectively.

Accounts receivable is comprised of patient service revenue and is recorded net of allowances for contractual discounts and estimated doubtful accounts. Such amounts are owed by various governmental agencies, insurance companies and private patients. Medicare comprised approximately 20% and 19% of accounts receivable at December 31, 2010 and 2009 (Predecessor), respectively. Medicaid comprised approximately 19% and 18% of accounts receivable at December 31, 2010 and 2009 (Predecessor), respectively. Concentration of credit risk from other payors is reduced by the large number of patients and payors.

The ability to collect outstanding patient receivables from third party payors is critical to operating performance and cash flows. The primary collection risk with regard to patient receivables relates to uninsured patient accounts or patient accounts for which primary insurance has paid, but the portion owed by the patient remains outstanding. The Company estimates the allowance for doubtful accounts primarily based upon the age of the accounts since the patient discharge date. The Company continually monitors our accounts receivable balances and utilizes cash collection data to support our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows.

The Medicare and Medicaid regulations are complex and various managed care contracts may include multiple reimbursement mechanisms for different types of services provided and cost settlement provisions requiring complex calculations and assumptions subject to interpretation. The Company estimates the allowance for contractual discounts on a payor-specific basis given our interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could 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 the Company’s management.

The Company is included in the consolidated return of UHS and, through an agreement with the Parent, account for their share of the consolidated tax obligations using an “as if separate return” methodology. In that regard, the Company accounts for income taxes under the asset and liability method in accordance with FASB authoritative guidance regarding accounting for income taxes and its related uncertainty. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the temporary differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income to determine whether a valuation allowance should be established.

Property and equipment are stated at cost and depreciated using the straight-line method over the useful lives of the assets, which range from 25 to 40 years for buildings and improvements and 2 to 7 years for equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful lives of the assets. Depreciation expense was $39,849, $268,232 and $292,689 for the period November 16, 2010 through December 31, 2010, the predecessor periods January 1, 2010 through November 15, 2010 and the year ended December 31, 2009, respectively. Depreciation expense includes the amortization of assets recorded under capital leases.

The Company accounts for goodwill in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, and ASC 350, Goodwill and Other Intangible Assets. Goodwill is reviewed at least annually for impairment. Potential impairment exists if the Company’s carrying value exceeds its fair value. If the Company identifies a potential impairment of goodwill, the implied fair value of goodwill is determined. If the carrying value of goodwill exceeds its implied fair value, an impairment loss is recorded. The Company noted no goodwill impairment for any periods presented in the accompanying consolidated financial statements.

Due to Parent balances represent the initial capitalization of the Company as well as the excess of funds transferred to or paid on behalf of the Company over funds transferred to the centralized cash management account of the Parent. Generally, this balance is increased by automatic transfers from the account to reimburse the Company’s bank accounts for operating expenses and to pay the Company’s debt, completed construction project additions, fees and services provided by the Parent, including information systems services and other operating expenses such as payroll, insurance, and income taxes. Generally, this balance is decreased through daily cash deposits by the Company to the centralized cash management account of the Parent. The following paragraphs more fully describe the methodology of allocating costs to the Company.

The Parent allocates its corporate office expenses (excluding interest, depreciation, taxes, and amortization) to its owned and leased facilities (including the Company) as management fees. These management fees are allocated based upon the proportion of an individual facility’s total expenses to the total expenses of all owned and leased facilities in the aggregate. Management fees allocated to the Company for the period from November 16, 2010 to December 31, 2010, the predecessor periods from January 1, 2010 to November 15, 2010, and for the year ended December 31, 2009, were $47,556, $382,427, and $464,429, respectively. Although management considers the allocation method to be reasonable, due to the relationship between the Company and its Parent, the terms of the allocation may not necessarily be indicative of that which would have resulted had the Company been an unrelated entity.

The costs of general and professional liability coverage are allocated by the Parent’s wholly-owned captive insurance subsidiary to the Company based on a percentage of revenue adjusted by a factor which considers the type of entity as well as historical loss experience. The general and professional liability expense allocated to the Company was $20,380, $136,587, and $146,614 for the period November 16, 2010 through December 31, 2010, and the predecessor periods January 1, 2010 through November 15, 2010 and the year ended December 31, 2009, respectively.

The Parent, on behalf of its affiliates, carries workers’ compensation insurance from an unrelated commercial insurance carrier. The Parent’s workers’ compensation program is fully insured with a $500,000 deductible per accident. The cost of this program is allocated to all covered affiliates based on a percentage of anticipated payroll costs as adjusted for the state in which the affiliate is located. Such costs allocated to the Company totaled $15,378, $108,308 and $105,557 for the period November 16, 2010 through December 31, 2010, and the predecessor periods January 1, 2010 through November 15, 2010 and the year ended December 31, 2009, respectively.

The Company is subject to various claims and legal actions which arise in the ordinary course of business. The Parent assumes the responsibility for all general and professional liability claims incurred and maintains the related liabilities; accordingly, no liability for general and professional claims is recorded on the accompanying consolidated balance sheet. The Company believes that the ultimate resolution of such matters will be adequately covered by insurance and will not have a material adverse effect on their financial position or results of operations.

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

At December 31, 2010, the Company had $6,662,010 debt outstanding under a mortgage loan agreement insured by the U.S. Department of Housing and Urban Development (“HUD”). The mortgage loan insured by HUD is secured by real estate located at 575 South DuPont Highway, New Castle, Delaware. Interest accrues on the HUD loan at 6.99% and principal and interest are payable in 420 monthly installments through October 2036. The carrying amount of assets held as collateral approximated $6,101,753 at December 31, 2010.

____________Predecessor_________												Predecessor
	November 16, 2010 Through December 31, 2010			January 1, 2010 Through November 15, 2010		Year Ended December 31, 2009			Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
									(Unaudited)
Federal tax	$	(14,420	)	$	388,471	$	397,828			$	79,917		$	103,847
State income taxes (net of federal)		(2,304	)		62,976		64,268				13,140			16,838
Other		176			1,300		(38	)			195			452
Provision (benefit) for income taxes	$	(16,548	)	$	452,747	$	462,058			$	93,252		$	121,137

Deferred Tax Assets:
Net operating loss carryforwards	$	83,446		$	111,300		$	97,599
Allowance for doubtful accounts		444,814			564,854			408,843
Accured liabilities		108,044			85,344			79,179
Other		9,144			5,247			9,330
Total deferred fax assets		645,448			766,745			594,951
Deferred tax liabilities:
Intangible assets		(322,174	)		(232,236	)		(344,651	)
Property and equipment		(667,465	)		(586,278	)		(687,743	)
Other		--			(4,841	)		--
Total deferred tax liabilities		(989,639	)		(823.355	)		(1,032,394

Total net deferred tax liability	$	(344,191	)	$	(56,610	)	$	(437,443	)

The Company participates in a Parent-sponsored tax-qualified profit sharing plan with a cash or deferred arrangement whereby employees who have completed three months of service and are age 21 or older are eligible to participate. The Plan allows eligible employees to make contributions of 1% to 85% of their annual compensation, subject to annual limitations. The Plan enables the Parent to make discretionary contributions into each participant’s account that fully vest over a four year period based upon years of service. No contributions were made by the Parent to the Plan during the period November 16, 2010 through December 31, 2010, the predecessor periods January 1, 2010 through November 15, 2010, and for the year ended December 31, 2009, or the three months ended March 31, 2011 (unaudited).

2011		$	140,153
2012			144,624
2013			145,021
2014			120,407
2015			125,774
Thereafter			6,112,302
	Total	$	6,788,281

2011			14,461
2012			14,461
2013			14,461
2014			14,461
2015			14,461
	Total	$	72.305

			Predecessor
	December 31, 2010		December 31, 2009		March 31, 2011
					(Unaudited)

Mortgage loan on facility, maturing in 2036 bearing a fixed interest rate of 6.99%	$	6,662,010	$	6,750,776	$	6,638,834
Capital lease obligations		126,271		70,521		116,244
		6,788,281		6,821,297		6,755,078
Less current portion		140,153		114,614		159,132
Long-term debt	$	6,648,128	$	6,706,683	$	6,595,946

										(Unaudited)
Federal	$	115,116		$	33,502	$	45,357	$	--	$	21,364
State		--			--		--		--		--
		115,116			33,502		43,357		--		21,364
Deferred:
Federal		(128,119	)		322,359		317,827		73,036		73,868
State		(3,545	)		96,886		98,874		20,216		25,905
		(131,664	)		419,245		416,701		93,252		99,773

Provision (Benefit) for income taxes	$	(16,548	)	$	452,747	$	462,058	$	93,252	$	121,137