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EX-31.2 - EX-31.2 - PSYCHIATRIC SOLUTIONS INC | g22196exv31w2.htm |
EX-32.1 - EX-32.1 - PSYCHIATRIC SOLUTIONS INC | g22196exv32w1.htm |
EX-31.1 - EX-31.1 - PSYCHIATRIC SOLUTIONS INC | g22196exv31w1.htm |
EX-21.1 - EX-21.1 - PSYCHIATRIC SOLUTIONS INC | g22196exv21w1.htm |
EX-23.1 - EX-23.1 - PSYCHIATRIC SOLUTIONS INC | g22196exv23w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the fiscal year ended December 31, 2009 or |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission file number 0-20488
Psychiatric Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
23-2491707 (I.R.S. Employer Identification No.) |
6640 Carothers Parkway, Suite 500
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)
(Address of Principal Executive Offices, Including Zip Code)
(615) 312-5700
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class | Name of Each Exchange On Which Registered | |
Common Stock, $.01 par value | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. þ Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes þ No
Note Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those
Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicated by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of June 30, 2009, the aggregate market value of the shares of common stock of the
registrant held by non-affiliates of the registrant was approximately $1.0 billion. For purposes of
calculating such aggregate market value, shares owned by directors,
executive officers and 5% beneficial owners of the registrant have been excluded.
As
of February 22, 2010, 56,263,260 shares of the registrants common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for its 2010 annual meeting of
stockholders to be held on May 18, 2010 are incorporated by reference into Part III of this Form
10-K.
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EX-21.1 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 |
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Table of Contents
PART I
Unless the context otherwise requires, all references in this Annual Report on Form 10-K to
Psychiatric Solutions, the Company, we, us or our mean Psychiatric Solutions, Inc. and
its consolidated subsidiaries.
Item 1. Business
Overview
We are a leading provider of inpatient behavioral health care services in the United States.
We operate 94 inpatient behavioral health care facilities with approximately 11,000 beds in 32 states,
Puerto Rico, and the U.S. Virgin Islands. In 2009, we opened Rolling Hills Hospital, an 80-bed
inpatient facility in Franklin, Tennessee, acquired a 131-bed inpatient behavioral health care
facility located in Fargo, North Dakota, acquired a 90-bed inpatient behavioral health care
facility located in Panama City, Florida, and sold our employee assistance program (EAP) business
for approximately $68.5 million, net of fees and expenses. We generated revenue of approximately
$1.8 billion and $1.7 billion for the years ended December 31, 2009 and 2008, respectively. We
believe that our primary focus on the provision of inpatient behavioral health care services allows
us to operate more efficiently and provide higher quality care than our competitors.
Our inpatient behavioral health care facilities accounted for 93.0% of our revenue for the
year ended December 31, 2009. These inpatient facilities offer a wide range of inpatient behavioral
health care services for children, adolescents and adults. We offer these services through a
combination of acute inpatient behavioral facilities and residential treatment centers (RTCs).
Our acute inpatient behavioral facilities provide the most intensive level of care, including
24-hour skilled nursing observation and care, daily interventions and oversight by a psychiatrist
and intensive, highly coordinated treatment by a physician-led team of mental health professionals.
Our RTCs offer longer term treatment programs primarily for children and adolescents with chronic
behavioral health problems. Our RTCs provide physician-led, multi-disciplinary treatments that
address the overall medical, psychiatric, social and academic needs of the patients.
Other behavioral health care services accounted for 7.0% of our revenue for the year ended
December 31, 2009. This portion of our business primarily consists of our contract management
business and a managed care plan in Puerto Rico. Our contract management business involves the
development, organization and management of behavioral health and rehabilitation programs within
medical/surgical hospitals.
Psychiatric Solutions was incorporated in the State of Delaware in 1988. Our principal
executive offices are located at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067. Our
telephone number is (615) 312-5700. Information about Psychiatric Solutions and our filings with
the Securities and Exchange Commission can be found at our website at www.psysolutions.com.
Our Industry
According to the National Association of Psychiatric Health Systems 2008 Annual Survey, an
estimated 26.2% of Americans ages 18 and older, or slightly more than one in four adults, suffer
from a diagnosable mental disorder in a given year, and about 6%, or about one in seventeen, suffer
from a serious mental illness.
The behavioral health care industry is highly fragmented with only a few large national
providers. During the 1990s, the behavioral health care industry experienced a significant
contraction following a long period of growth. The reduction was largely driven by third-party
payors who decreased reimbursement, implemented more stringent admission criteria and decreased the
authorized length of stay. We believe this reduced capacity has resulted in an underserved patient
population.
Reduced capacity, mental health parity legislation, and increased demand for behavioral health
care services have resulted in favorable industry fundamentals over the last several years.
Behavioral health care providers have enjoyed increased reimbursement rates and admissions and
stabilized lengths of stay. According to the National Association of Psychiatric Health Systems,
inpatient admissions increased approximately 3.5% from 2006 to 2007, and total inpatient days of
care increased 3.2% from 2006 to 2007. In
order to meet strong demand, facilities have been adding beds resulting in a 2% increase in
licensed beds within existing facilities from 2006 to 2007. Following a rapid decrease during the
early 1990s, inpatient average length of stay stabilized between 9 and 11 days from 1997 to 2007.
The inpatient average length of stay was 9.7 days and 9.6 days in 2007 and 2006, respectively. The
average inpatient net revenue per day in 2007 was $616 for facilities with less than fifty beds,
$685 for facilities with between fifty and one hundred beds and $615 for facilities with more than
one hundred beds. The average residential net revenue per day in 2007 was $346 for facilities with
less than fifty beds, $420 for facilities with between fifty and one hundred beds and $358 for
facilities with more than one hundred beds. Total patient days of care decreased 3.3% from 2006 to
2007 for RTC facilities, while average length of stay increased 2.4% to 168 days in 2007 from 164
days in 2006.
Our Competitive Strengths
We believe the following competitive strengths contribute to our strong market share in each
of our markets and will enable us to continue to successfully grow our business and increase our
profitability:
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| Singular focus on behavioral health care We focus primarily on the provision of inpatient behavioral health care services. We believe this allows us to operate more efficiently and provide higher quality care than our competitors. In addition, we believe our focus and reputation have helped us to develop important relationships and extensive referral networks within our markets and to attract and retain qualified behavioral health care professionals. | ||
| Strong and sustainable market position Our inpatient facilities have an established presence in each of our markets, and many of our owned and leased inpatient facilities have the leading market share in their respective service areas. We believe that the relationships and referral networks we have established will further enhance our presence within our markets. In addition, many of the states in which we operate require a certificate of need to open a behavioral health care facility, which may be difficult to obtain and may further preclude new market participants. | ||
| Demonstrated ability to identify and integrate acquisitions We attribute part of our success in integrating acquired inpatient facilities to our due diligence review of these facilities prior to completing the acquisitions as well as our ability to retain key employees at the acquired facilities. We employ a disciplined acquisition strategy that is based on defined criteria including quality of service, return on invested capital and strategic benefits. We also have a comprehensive post-acquisition strategic plan to facilitate the integration of acquired facilities that includes improving facility operations, retaining and recruiting psychiatrists and expanding the breadth of services offered by the facilities. | ||
| Diversified payor mix and revenue base As we have grown our business, we have focused on diversifying our sources of revenue. For the year ended December 31, 2009, we received 28.7% of our revenue from Medicaid, 13.5% from Medicare, 37.5% from HMO/PPO, commercial and private payors, 14.9% from various state agencies and 5.4% from other payors. We receive Medicaid payments from more than 30 states. Substantially all of our Medicaid payments relate to the care of children and adolescents. We believe that children and adolescents are a patient class that is less susceptible to reductions in reimbursement rates. For the year ended December 31, 2009, no single inpatient facility represented more than 2.2% of our revenue. | ||
| Experienced management team Our senior management team has extensive experience in the health care industry. Joey A. Jacobs, our Chairman, President and Chief Executive Officer, has over 30 years of experience in various capacities in the health care industry. Our senior management operates as a cohesive, complementary group and has extensive operating knowledge of our industry and understanding of the regulatory environment in which we operate. Our senior managers employ conservative fiscal policies and have a successful track record in both operating our core business and integrating acquired assets. | ||
| Consistent free cash flow and minimal maintenance capital requirements We generate consistent free cash flow by profitably operating our business, actively managing our working capital and having low maintenance capital expenditure requirements. As the behavioral health care business does not require the procurement and replacement of expensive medical equipment, our maintenance capital expenditure requirements are less than that of other facility-based health care providers. Historically, our maintenance capital expenditures have amounted to approximately 2% to 3% of our revenue. In addition, our accounts receivable management is less complex than medical/surgical hospital providers because there are fewer billing codes for inpatient behavioral health care services. |
Our Growth Strategy
We have experienced significant growth in our operations as measured by the number of our
facilities, admissions, patient days, revenue and net income. We intend to continue growing our
business and increasing our profitability by improving the performance of our inpatient facilities
and through strategic acquisitions. The principal elements of our growth strategy are to:
| Continue to Drive Same-Facility Growth We increased our same-facility revenue by approximately 5.3% for the year ended December 31, 2009 compared to the year ended December 31, 2008. Same-facility revenue also increased by approximately 8.4%, 6.9%, and 9.0% for the years ended December 31, 2008, 2007, and 2006, respectively, compared to the immediately preceding years. Same-facility revenue refers to the comparison of the inpatient facilities we owned during a prior period with the comparable period in the subsequent period, adjusted for closures and combinations for comparability purposes. We intend to continue to increase our same-facility revenue by increasing our admissions and patient days and obtaining annual reimbursement rate increases. We plan to accomplish these goals by: |
| continuing to provide high quality service; | ||
| expanding bed capacity at our facilities to meet demand; | ||
| expanding our services and developing new services to take advantage of increased demand in select markets where we operate; | ||
| building and expanding relationships that enhance our presence in local and regional markets; and |
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| developing formal marketing initiatives and expanding referral networks. |
| Grow Through Strategic Acquisitions Our industry is highly fragmented and we plan to selectively pursue the acquisition of additional inpatient behavioral health care facilities. There are approximately 500 freestanding acute and residential treatment facilities in the United States and the top two providers operate approximately one-third of these facilities. We believe there are a number of acquisition candidates available at attractive valuations. We believe our focus on inpatient behavioral health care provides us with a strategic advantage when assessing a potential acquisition. We employ a disciplined acquisition strategy that is based on defined criteria, including quality of service, return on invested capital and strategic benefits. | ||
| Enhance Operating Efficiencies Our management team has extensive experience in the operation of multi-facility health care services companies. We intend to focus on improving our profitability by maintaining appropriate staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing. We believe that our focus on efficient operations increases our profitability and will attract qualified behavioral health care professionals and patients. |
Services
Inpatient Behavioral Health Care Facilities
We
operate 86 owned and 8 leased inpatient behavioral health care facilities. These facilities
offer a wide range of inpatient behavioral health care services for children, adolescents and
adults. Our inpatient facilities work closely with mental health professionals, including: licensed
professional counselors, therapists and social workers; psychiatrists; non-psychiatric physicians;
emergency rooms; school systems; insurance and managed care organizations; company-sponsored EAPs;
and law enforcement and community agencies that interact with individuals who may need treatment
for mental illness or substance abuse. During the year ended December 31, 2009, our inpatient
behavioral health care facilities produced approximately 93.0% of our revenue.
Through the diversity of programming and levels of care available, a patient can receive a
seamless treatment experience from acute care to residential long-term care to group home living to
outpatient treatment. This seamless system provides the continuity of care needed to step the
patient down and allow the patient to develop and use successful coping skills and treatment
interventions to sustain long-term treatment success. Treatment modalities include comprehensive
assessment, multi-disciplinary treatment planning including the patient and family, group,
individual and family therapy services, medical and dental services, educational services,
recreational services and discharge planning services. Specialized interventions such as skills
training include basic daily living skills, social skills, work/school adaptation skills and
symptom management skills. Collateral consultations are provided to significant others such as
family members, teachers, employers and other professionals when needed to help the patient
successfully reintegrate back into his or her world. Disorders treated and services offered at our
inpatient facilities include:
| bipolar disorder | ||
| major depression | ||
| schizophrenia | ||
| attention deficit/hyperactivity disorder | ||
| impulse disorder | ||
| oppositional and conduct disorders | ||
| developmentally delayed disorders | ||
| neurological disorders | ||
| acute eating disorders | ||
| reactive attachment disorder | ||
| dual diagnosis | ||
| chemical dependency |
| rehabilitation care | ||
| day treatment | ||
| detoxification | ||
| partial hospitalization | ||
| therapeutic foster care | ||
| intensive outpatient | ||
| rapid adoption services | ||
| independent living skills | ||
| vocational training |
Acute inpatient hospitalization is the most intensive level of care offered and typically
involves skilled nursing observation and care, daily oversight by a psychiatrist, and intensive,
highly coordinated treatment by a physician-led team of mental health professionals. Every patient
admitted to our acute inpatient facilities is assessed by a medical doctor within 24 hours of
admission. Patients with non-complex medical conditions are monitored during their stay by the
physician and nursing staff at the inpatient facility. Patients with more complex medical needs are
referred to more appropriate facilities for diagnosis and stabilization prior to treatment.
Patients admitted to our acute inpatient facilities also receive comprehensive nursing and
psychological assessments within 24 to 72 hours of admission. Oversight and management of a
patients medication is performed by licensed psychiatrists on staff at the facility, and
individual, family, and group therapy is performed by licensed counselors as appropriate to the
patients assessed needs. Education regarding a patients illnesses is also provided by trained
mental health professionals.
Our RTCs provide longer term treatment programs for children and adolescents with
long-standing behavioral/mental health problems. Our RTCs provide twenty-four hour care which
includes individualized therapy that usually consists of one-on-one sessions with a licensed
counselor, as well as process and rehabilitation group therapy. Another key component of the
treatment of children and adolescents in our inpatient facilities is family therapy. Participation
of the childs or adolescents immediate family is strongly encouraged in order to increase the
chance of success once the resident is discharged. Medications for residents are managed by
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licensed psychiatrists while they remain at the inpatient facility. Our RTCs also provide academic
programs conducted by certified teachers to child and adolescent residents. These programs are
individualized for each resident upon admission. Upon discharge, academic reports are forwarded to
the residents school. Specialized programs for children and adolescents in our RTCs include
programs for sexually reactive children, sex offenders, reactive attachment disorders, and children
and adolescents who are developmentally delayed with a behavioral component. Our RTCs often receive
out-of-state referrals to their programs due to the lack of specialized programs for these
disorders within a patients own state.
Our inpatient facilities programs are designed to meet the needs of various referral sources
to provide services to patients with multiple issues and specialized needs. We believe that our
success rate with these difficult to treat cases has expanded our network of referrals. The
services provided at each inpatient facility are continually assessed and monitored through an
ongoing quality improvement program. The purpose of this program is to strive for the highest
quality of care possible for individuals with behavioral health issues, and includes regular site
visits to each inpatient facility in order to assess compliance with legal and regulatory
standards, as well as adherence to our compliance program. Standardized performance measures based
on a national outcomes measurement database comparing our inpatient facilities performance with
national norms are also reported and reviewed and corrective steps are taken when necessary.
Other Behavioral Health Care Services
Other behavioral health care services accounted for 7.0% of our revenue for the year ended
December 31, 2009. This portion of our business primarily consists of our contract management
business and a managed care plan in Puerto Rico.
Through our contract management business we develop, organize and manage behavioral health and
rehabilitation programs within third-party general medical/surgical hospitals. Our broad range of
services can be customized into individual programs that meet specific inpatient facility and
community requirements. Our contract management business is dedicated to providing high quality
programs with integrity, innovation and sufficient flexibility to develop customized individual
programs. We provide our customers with a variety of management options, including clinical and
management infrastructure, personnel recruitment, staff orientation and supervision, corporate
consultation and performance improvement plans. Under the management contracts, the hospital is the
actual provider of the mental health services and utilizes its own facilities, support services,
and generally its own nursing staff in connection with the operation of its programs. Our
management contracts generally have an initial term of two to five years and are extended for
successive one-year periods unless terminated by either party.
Seasonality of Services
Due to the large number of children and adolescent patients served, our inpatient behavioral
health care facilities typically experience lower patient volumes and revenue during the summer
months, the year-end holidays and other periods when school is out of session.
Marketing
Our local and regional marketing is led by clinical and business development representatives
at each of our inpatient facilities. These individuals manage relationships among a variety of
referral sources in their respective communities. Our national marketing efforts are focused on
increasing the census at our RTCs from various state referral sources by developing relationships
and identifying contracting opportunities in their respective territories.
Competition
The inpatient behavioral health care industry is highly fragmented and is subject to continual
changes in the method in which services are provided and the types of companies providing such
services. We primarily compete with regional and local competitors. Some of our competitors are
owned by governmental agencies and supported by tax revenue and others are owned by nonprofit
corporations and may be supported to a large extent by endowments and charitable contributions.
In addition, we compete for patients with other providers of mental health care services,
including other inpatient behavioral health care facilities, medical/surgical hospitals,
independent psychiatrists and psychologists. We also compete with hospitals, nursing homes,
clinics, physicians offices and staffing companies for the services of registered nurses and other
professionals. We attempt to differentiate ourselves from our competition through our singular
focus on the provision of behavioral health care services, our reputation for the quality of our
services, recruitment of first rate medical staff and accessibility to our facilities. In addition,
we believe that the active development of our referral network and participation in selected
managed care provider panels enable us to successfully compete for patients in need of our
services.
Reimbursement
Our inpatient owned and leased facilities receive payment for services from the federal
government, primarily under the Medicare program; state governments, primarily under their
respective Medicaid programs; private insurers, including managed care plans; and directly from
patients. Most of our inpatient behavioral health facilities are certified as providers of Medicare
and/or Medicaid
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services by the appropriate governmental authorities. The requirements for
certification are subject to change, and, in order to remain qualified for such programs, it may be
necessary for us to make changes from time to time in our inpatient facilities, equipment,
personnel and services. If an inpatient facility loses its certification, it will be unable to
receive payment under the Medicare or Medicaid programs. Although we intend to continue
participating in such programs, there can be no assurance that we will continue to qualify for
participation.
Patient service revenue is recorded net of contractual adjustments at the time of billing by
our patient accounting systems at the amount we expect to collect. This amount is calculated
automatically by our patient accounting systems based on contractually determined rates, or amounts
reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement
formulas, or a combination thereof. Most payments are determined based on negotiated per-diem
rates. An estimate of contractual allowances is manually recorded for unbilled services based upon
these contractually negotiated rates.
Any co-payments and deductibles due from patients are estimated at the time of admission based
on the patients insurance plan, and payment of these amounts is requested prior to discharge. If
the payment is not received prior to discharge or completion of service, collection efforts are
made through our normal billing and collection process.
Our consolidated days sales outstanding were 49 and 52 for the years ended December 31, 2009
and 2008, respectively.
Medicare
Medicare provides insurance benefits to persons age 65 and over and some disabled persons. The
Centers for Medicare and Medicaid Services (CMS) implemented a three-year transition period to
reimbursement based on an inpatient services prospective payment system (PPS) from reimbursement
based on a reasonable cost basis, starting with the cost reporting periods beginning on or after
January 1, 2005. PPS was fully implemented for cost reporting periods beginning on or after January
1, 2008. Inpatient psychiatric facilities received a 2.19% increase in the Medicare prospective
base rate beginning July 1, 2009.
Under CMS regulations, the PPS base per diem is adjusted for specific patient and facility
characteristics that increase the cost of patient care. Payment rates for individual inpatient
facilities are adjusted to reflect geographic differences in wages and rural providers and
teaching facilities receive an increased payment adjustment. Additionally, the base rate is
adjusted by factors that influence the cost of an individual patients care, such as each patients
diagnosis related group, certain other medical and psychiatric comorbidities (i.e., other
coexisting conditions that may complicate treatment) and age. Because the cost of inpatient
behavioral care tends to be greatest at admission and a few days thereafter, the per diem rate is
adjusted for each day to reflect the number of days the patient has been in the facility. Medicare
pays this per diem amount, as adjusted, regardless of whether it is more or less than a hospitals
actual costs. Please see www.cms.hhs.gov/InpatientPsychFacilPPS for additional information.
Medicare generally deducts from the amount of its payments to hospitals an amount for patient
deductible or coinsurance, or the amount that the patient is expected to pay. These deductible or
coinsurance amounts that are not paid by the patient result in bad debts. Medicare will reimburse
70% of these bad debts to the extent that neither a Medicare patient, a guarantor or any secondary
payor for that patient pays the Medicare coinsurance amount, provided that a reasonable collection
effort or the patients indigence is documented.
Recovery Audit Contractors
In 2005, CMS began using recovery audit contractors (RACs) to detect Medicare overpayments
not identified through existing claims review mechanisms. The RAC program relies on private
auditing firms examining Medicare claims filed by health care providers. The RAC program began as a
demonstration project in three states (New York, California, and Florida), and was made permanent
by the Tax Relief and Health Care Act of 2006. The Act required CMS to have RACs in place in all 50
states no later than 2010.
RACs perform post-discharge audits of medical records to identify Medicare overpayments
resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and
duplicate services. CMS has given RACs the authority to look back at claims up to three years old,
provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments
will be subject to the Medicare appeals process.
RACs are paid a contingency fee based on the overpayments they identify and collect.
Therefore, we anticipate that RACs will review claims submitted by our facilities in an attempt to
identify possible overpayments. Although we believe the claims for reimbursement submitted to the
Medicare program are accurate, we cannot predict whether we will be subject to RAC audits in the
future, or if audited, what the result of such audits might be.
Medicaid
Medicaid, a joint federal-state program that is administered by the respective states,
provides health care benefits to qualifying individuals who are unable to afford medical care. All
Medicaid funding is generally conditioned upon financial appropriations to state Medicaid agencies
by the state legislatures. Many states face pressures to control their budgets, which has led some
state
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legislatures to reduce such appropriations.
Some states may adopt health care reform measures that could modify the manner in which all
health services are delivered and reimbursed, especially with respect to Medicaid recipients and
other individuals funded by public resources. Most states have applied for and been granted federal
waivers from current Medicaid regulations in order to allow them to serve some or all of their
Medicaid participants through managed care providers. The majority of our Medicaid payments relate
to the care of children and adolescents. We believe that children and adolescents are a patient
class that is less susceptible to reductions in reimbursement rates.
Managed Care and Commercial Insurance Carriers
Our inpatient facilities are also reimbursed for certain behavioral health care services by
private payors including health maintenance organizations (HMOs), preferred provider
organizations (PPOs), commercial insurance companies, employers and individual private payors.
Our inpatient facilities offer discounts from established charges to certain large group purchasers
of health care services. Generally, patients covered by HMOs, PPOs and other private insurers are
responsible for payment of certain co-payments and deductibles.
The Mental Health Parity Act of 1996 (MHPA) was a federal law that required annual or
lifetime limits for mental health benefits be no lower than the dollar limits for medical/surgical
benefits offered by a group health plan. MHPA applied to group health plans or health insurance
coverage offered in connection with a group health plan that offered both mental health and
medical/surgical benefits. However it did not require plans to offer mental health benefits. MHPA
was scheduled to sunset on December 31, 2003; however, MHPA has been extended several times on a
year to year basis, most recently through the end of 2009. The Mental Health and Addiction Equity
Parity Act of 2008 (the 2008 MHPA) was passed in October of 2008 and will take effect for plan
years beginning after July 1, 2010. The 2008 MHPA will substantially increase the mental health
benefits protection afforded by MHPA and will expand the coverage of MHPA to include substance
abuse treatment. On February 2, 2010, CMS published interim final rules governing implementation of
the 2008 MHPA. Among the changes in the interim final rules is an expansion of the parity
requirements for aggregate lifetime and annual dollar limits to include protections for substance
use disorder benefits. Approximately 45 states have also enacted some form of mental health parity
laws.
Annual Cost Reports
All facilities participating in the Medicare program and some Medicaid programs, whether paid
on a reasonable cost basis or under a PPS, are required to meet certain financial reporting
requirements. Federal regulations require submission of annual cost reports identifying costs
associated with the services provided by each facility to Medicare beneficiaries and Medicaid
recipients. Annual cost reports required under Medicare and some Medicaid programs are subject to
routine governmental audits, which may result in adjustments to the amounts ultimately determined
to be due to us under those reimbursement programs for periods prior to full implementation of PPS.
These audits often require several years to reach the final determination of amounts earned under
the programs. Nonetheless, once the Medicare fiscal intermediaries have issued a final Notice of
Program Reimbursement (NPR) after an audit, any disallowances of claimed costs are due and
payable within 30 days of receipt of the NPR. Providers have rights to appeal, and it is common to
contest issues raised in audits of prior years cost reports.
Regulation and Other Factors
Licensure, Certification and Accreditation
Health care facilities are required to comply with extensive regulation at the federal, state
and local levels. Under these laws and regulations, health care facilities must meet requirements
for state licensure as well as additional qualifications to participate in government programs,
including the Medicare and Medicaid programs. These requirements relate to the adequacy of medical
care, equipment, personnel, operating policies and procedures, fire prevention, maintenance of
adequate records, hospital use, rate-setting, and compliance with building codes and environmental
protection laws. Facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary for licensing and
accreditation.
All of the inpatient facilities operated by us are properly licensed under applicable state
laws. Most of the inpatient facilities operated by us are certified under Medicare and/or Medicaid
programs and accredited by The Joint Commission, a functional prerequisite to participation in the
Medicare and Medicaid programs. Should any of our inpatient facilities lose its accreditation by
The Joint Commission, or otherwise lose its certification under the Medicare and/or Medicaid
programs, that inpatient facility may be unable to receive reimbursement from the Medicare and/or
Medicaid programs. If a provider for whom we provide contract management services is excluded from
any federal health care program, no services furnished by that provider would be reimbursed by any
federal health care program. If one of our facilities is excluded from a federal health care
program, that facility would not be eligible for reimbursement by any federal health care program.
Additionally, many private third-party payors require Joint Commission accreditation and/or
Medicare certification in order to contract with a facility.
We believe that the inpatient facilities we own and operate are in substantial compliance with
current applicable federal, state, local and independent review body regulations and standards. The
requirements for licensure, certification and accreditation are subject to
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change and, in order to
remain qualified, it may be necessary for us to affect changes in our inpatient facilities,
equipment, personnel and services. Additionally, certain of the employed and contracted personnel
working at our inpatient facilities are subject to state laws and regulations governing their
particular area of professional practice.
Fraud and Abuse Laws
Participation in the Medicare and/or Medicaid programs is heavily regulated by federal law and
CMS regulation. If a hospital fails to substantially comply with the numerous federal laws
governing that facilitys activities, the facilitys participation in the Medicare and/or Medicaid
programs may be terminated and/or civil or criminal penalties may be imposed.
The portion of the Social Security Act commonly known as the Anti-Kickback Statute prohibits
the payment, receipt, offer or solicitation of anything of value with the intent of generating
referrals or orders for services or items covered by a federal or state health care program.
Violations of the Anti-Kickback Statute may be punished by criminal or civil penalties, exclusion
from federal and state health care programs, imprisonment and damages up to three times the total
dollar amount involved. While evidence of intent is a prerequisite to any finding that the
Anti-Kickback Statute has been violated, the statute has been interpreted broadly by federal
regulators and courts to prohibit the payment of anything of value if even one purpose of the
payment is to influence the referral of Medicare or Medicaid business.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) broadened the scope
of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of
payments from a federal health care program. HIPAA created civil penalties for proscribed conduct,
including upcoding and billing for medically unnecessary goods or services. HIPAA established new
enforcement mechanisms to combat fraud and abuse. These new mechanisms include a bounty system,
where a portion of any payments recovered is returned to the government agencies, as well as a
whistleblower program. HIPAA also expanded the categories of persons that may be excluded from
participation in federal and state health care programs.
The Office of Inspector General (the OIG) of the Department of Health and Human Services
(HHS) is responsible for
identifying fraud and abuse activities in government programs. In order to fulfill its duties, the
OIG performs audits, investigations and inspections.
The OIG is authorized to publish regulations outlining activities and business relationships
that would be deemed not to violate the Anti-Kickback Statute. These regulations are known as safe
harbor provisions. The safe harbor provisions delineate standards that, if complied with, protect
conduct that might otherwise be deemed to violate the Anti-Kickback Statute. While compliance with
the safe harbor provisions effectively insulates a practice from being found in violation of the
Anti-Kickback Statute, the failure of a particular activity to comply with the safe harbor
provisions does not mean that the activity violates the Anti-Kickback Statute. Rather, failure to
comply with the safe harbor provisions simply denies us the opportunity to avail ourselves of the
affirmative defense of safe harbor compliance. We have a variety of financial relationships with
physicians who refer patients to our owned and leased facilities, as well as to behavioral health
and rehabilitation programs we manage, including employment contracts, professional service
agreements with independent contractor agreements and medical/clinical director agreements. We use
our best efforts to structure each of our arrangements, especially each of our business
relationships with physicians, to fit as closely as possible within the applicable safe harbors. We
cannot guarantee that these arrangements will not be scrutinized by government authorities or, if
scrutinized, that they will be determined to be in compliance with the Anti-Kickback Statute or
other applicable laws. If we violate the Anti-Kickback Statute, we would be subject to criminal and
civil penalties and/or possible exclusion from participating in Medicare, Medicaid or other
governmental health care programs.
We provide unit management services to acute care hospitals. Some of our management agreements
provide for fees payable to us that are not fixed fees, but may vary based on revenue, the level of
services rendered or the number of patients treated in the unit. We believe that the management
fees reflect fair market value for the services rendered and are not determined in a manner that
takes into account the volume or value of any referrals. These management agreements satisfy many
but not all of the requirements of the Personal Services and Management Contract Safe Harbor. We
believe our management agreements comply with the Anti-Kickback Statute. As discussed above, the
preamble to the Safe Harbor regulations specifically indicates that the failure of a particular
business arrangement to comply with a Safe Harbor does not determine whether the arrangement
violates the Anti-Kickback Statute.
The Social Security Act also includes a provision commonly known as the Stark Law. This law
prohibits physicians from referring Medicare and Medicaid patients to health care entities in which
they or any of their immediate family members have an ownership or other financial interest for the
furnishing of any designated health services. These types of referrals are commonly known as
self referrals. A violation of the Stark Law may result in a denial of payment, require refunds
to patients and the Medicare program, civil monetary penalties of up to $15,000 for each violation,
civil monetary penalties of up to $100,000 for circumvention schemes, civil monetary penalties of
up to $10,000 for each day that an entity fails to report required information, exclusion from the
Medicare and Medicaid programs and other federal programs, and additionally could result in
penalties for false claims. There are ownership and compensation arrangement exceptions for many
customary financial arrangements between physicians and facilities, including employment contracts,
personal services agreements, leases and recruitment agreements. We have structured our financial
arrangements with physicians to comply with the statutory exceptions included in the Stark Law and
subsequent regulations. However, future Stark Law regulations may interpret provisions of this law
in a manner different from the manner in which we have interpreted them. We cannot predict the
effect such future regulations will have on us.
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Many states in which we operate also have adopted, or are considering adopting, laws similar
to the Anti-Kickback Statute and/or the Stark Law. Some of these state laws, commonly known as all
payor laws, apply even if the government is not the payor. These statutes typically provide
criminal and civil penalties as remedies. While there is little precedent for the interpretation or
enforcement of these state laws, we have attempted to structure our financial relationships with
physicians and others in accordance with these laws. However, if a state determines that we have
violated such a law, we may be subject to criminal and civil penalties.
Emergency Medical Treatment and Active Labor Act
The Emergency Medical Treatment and Active Labor Act (EMTALA) is a federal law that requires
any Medicare participating hospital to conduct an appropriate medical screening examination, within
the capabilities of the facility, of every person who presents at the hospital seeking treatment on
an urgent basis. If the patient is suffering from an emergency medical condition, the facility must
either stabilize that condition or make an appropriate transfer of the patient to a facility that
can stabilize the condition. The obligation to screen and stabilize emergency medical conditions
exists regardless of a patients ability to pay for treatment. There are severe penalties under
EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient, or if the
hospital delays appropriate treatment, in order to first inquire about the patients ability to
pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from
participation in the Medicare program. In addition, an injured patient, the patients family or a
medical facility that suffers a financial loss as a direct result of another hospitals violation
of the law can bring a civil suit against the hospital.
The regulations adopted to implement EMTALA do not provide an abundance of specific guidance.
These regulations effectively
limit the types of emergency services that a hospital subject to EMTALA is required to provide to
those services that are within the capability of the hospital. Although we believe that our
inpatient behavioral health care facilities comply with the EMTALA regulations, we cannot predict
whether CMS will implement additional requirements in the future or the cost of compliance with any
such regulations.
The Federal False Claims Act
The federal False Claims Act prohibits providers from, among other things, knowingly
submitting false claims for payment to the federal government. This law has been used not only by
the federal government, but also by individuals who bring an action on behalf of the government
under the laws qui tam or whistleblower provisions. When a private party brings a qui tam
action under the federal False Claims Act, the defendant will generally not be aware of the lawsuit
until the government determines whether it will intervene in the litigation.
Civil liability under the federal False Claims Act can be up to three times the actual damages
sustained by the government plus civil penalties for each separate false claim. There are many
potential bases for liability under the federal False Claims Act, including claims submitted
pursuant to a referral found to violate the Anti-Kickback Statute or the Stark Law. Although
liability under the federal False Claims Act arises when an entity knowingly submits a false claim
for reimbursement to the federal government, or knowingly and improperly avoids or decreases an
obligation to pay money to the federal government, the federal False Claims Act defines the term
knowingly broadly. Although simple negligence will not give rise to liability under the federal
False Claims Act, submitting a claim with reckless disregard to its truth or falsity can constitute
the knowing submission of a false claim. Additionally, the Fraud Enforcement and Recovery Act of
2009 (FERA) substantially broadened the scope of the False Claims Act. Most notably, FERA expands
the definition of false claim to include claims made to contractors for funds spent on the
governments behalf and the retention of government overpayments, expands whistleblower
protections, eases restrictions on the flow of information between the government and qui tam
relators, and increases funding for government investigation and prosecution of alleged false
claims. From time to time, companies in the health care industry, including us, may be subject to
actions under the federal False Claims Act.
HIPAA Transaction, Privacy and Security Requirements
HIPAA requires health plans, health care clearinghouses and health care providers (Covered
Entities) to use standard data formats and code sets when electronically transmitting information
in connection with various transactions, including health claims and equivalent encounter
information, health care payment and remittance advice and health claim status, and establishes
standards to protect the confidentiality, availability and integrity of health information
maintained by Covered Entities, regardless of format. In 2009, the Health Information Technology
for Economic and Clinical Health Act (HITECH) amended HIPAA to include a requirement that Covered
Entities, such as us, self-report breaches of unsecured protected health information to affected
patients, the HHS, and in some cases, the media. HITECH also
modifies the responsibilities of HIPAA business associates, such as our managed unit division,
and substantially increases the civil monetary penalties for HIPAA violations. We believe our
inpatient facilities and, where applicable, other operations are in substantial compliance with the
HIPAA regulations.
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Other Medical Record Disclosure Laws
Disclosure of health records relating to drug and alcohol treatment is regulated by the
Federal Confidentiality of Alcohol and Drug Abuse Patient Records law. This law prohibits the
disclosure and use of alcohol and drug abuse patient records that are maintained by any federally
assisted alcohol and drug abuse programs. The privacy protections afforded substance abuse
treatment records are much more stringent than the HIPAA privacy rules and in most cases permit
disclosure only when the patient has specifically consented to disclosure. Violations of this law
could result in criminal penalties, including fines of up to $500 for first offenses and up to
$5,000 for each subsequent offense.
Additionally, some states have laws specifically dealing with the disclosure of medical
records related to treatment for substance abuse and/or mental health disorders. Both HIPAA and the
Federal Confidentiality of Alcohol and Drug Abuse Patient Records law provide a baseline level of
protection for disclosure of health records. As such, they supersede state laws that are more
lenient on the same subject. However, the federal laws give way to any state law that provides more
stringent protection of health records.
Certificates of Need (CON)
The construction of new health care facilities, the acquisition or expansion of existing
facilities, the transfer or change of ownership and the addition of new beds, services or equipment
may be subject to laws in certain states that require prior approval by state regulatory agencies.
These CON laws generally require that a state agency determine the public need for construction or
acquisition of facilities or the addition of new services. Failure to obtain necessary state
approval can result in the inability to expand facilities, add services, or complete an
acquisition. Violations of these state laws may result in the imposition of civil sanctions or
revocation of a facilitys license.
Corporate Practice of Medicine and Fee Splitting
Some states have laws that prohibit unlicensed persons or business entities, including
corporations or business organizations that own hospitals, from employing physicians. Some states
also have adopted laws that prohibit direct and indirect payments or fee-splitting arrangements
between physicians and unlicensed persons or business entities. Possible sanctions for violation of
these restrictions include loss of a physicians license, civil and criminal penalties and
rescission of business arrangements. These laws vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies. Although we attempt to structure our
arrangements with health care providers to comply with the relevant state laws and the few
available regulatory interpretations, there can be no assurance that government officials charged
with responsibility for enforcing these laws will not assert that we, or certain transactions in
which we are involved, are in violation of such laws, or that such laws ultimately will be
interpreted by the courts in a manner consistent with our interpretation.
Health Care Industry Investigations
Significant media and public attention has focused in recent years on the hospital
industry. Because the law in this area is complex and constantly evolving, ongoing or future
governmental investigations or litigation may result in interpretations that are inconsistent with
industry practices, including our practices. It is possible that governmental entities could
initiate investigations of, or litigation against, inpatient facilities owned, leased, or managed
by us in the future and that such matters could result in significant penalties as well as adverse
publicity.
Risk Management
As is typical in the health care industry, we are subject to claims and legal actions by
patients in the ordinary course of business. To cover these claims, we maintain professional
malpractice liability insurance and general liability insurance in amounts we believe to be
sufficient for our operations, although it is possible that some claims may exceed the scope of the
coverage in effect. At various times in the past, the cost of malpractice insurance and other
liability insurance has fluctuated significantly. Therefore, there can be no assurance that such
insurance will continue to be available at reasonable prices which would allow us to maintain
adequate levels of coverage.
Conversion Legislation
Many states have adopted legislation regarding the sale or other disposition of hospitals
operated by not-for-profit entities. In other states that do not have such legislation, the
attorneys general have demonstrated an interest in these transactions under their general
obligations to protect charitable assets. These legislative and administrative efforts primarily
focus on the appropriate valuation of the assets divested and the use of the proceeds of the sale
by the not-for-profit seller. These reviews and, in some instances, approval processes can add
additional time to the closing of a not-for-profit hospital acquisition. Future actions by state
legislators or attorneys general may seriously delay or even prevent our ability to acquire certain
hospitals.
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Regulatory Compliance Program
We are committed to ethical business practices and to operating in accordance with all
applicable laws and regulations. Our compliance program was established to ensure that all employees have a solid framework for
business, legal, ethical, and employment practices. Our compliance program establishes mechanisms
to aid in the identification and correction of any actual or perceived violations of any of our
policies or procedures or any other applicable rules and regulations. We have appointed a Chief
Compliance Officer as well as compliance coordinators at each inpatient facility. The Chief
Compliance Officer heads our Compliance Committee, which consists of senior management personnel
and two members of our board of directors. Employee training is a key component of the compliance
program. All employees receive training during orientation and annually thereafter.
Insurance
We are subject to medical malpractice and other lawsuits due to the nature of the
services we provide. Our operations have professional and general liability insurance in umbrella
form for claims in excess of a $3.0 million self-insured retention with an insured excess limit of
$75.0 million. The self-insured reserves for professional and general liability risks are
calculated based on historical claims, demographic factors, industry trends, severity factors, and
other actuarial assumptions calculated by an independent third-party actuary. This estimated
accrual for professional and general liabilities could be significantly affected should current and
future occurrences differ from historical claim trends and expectations. We have utilized our
captive insurance company to manage the self-insured retention. While claims are monitored closely
when estimating professional and general liability accruals, the complexity of the claims and wide
range of potential outcomes often hampers timely adjustments to the assumptions used in these
estimates.
Employees
As of December 31, 2009, we employed approximately 23,000 employees, of whom
approximately 16,000 are full-time employees. Approximately 22,000 employees staff our owned and
leased inpatient behavioral health care facilities, approximately 1,100 employees staff our other
behavioral health care businesses and approximately 200 employees are in corporate management
including finance, accounting, legal, operations management, development, reimbursement,
compliance, risk management, information systems, internal audit and human resources. We consider
our employee relations to be in good standing.
Available Information
We make available free of charge through our website, which you can find at
www.psysolutions.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission.
Segments
See Note 13 to our Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K for financial information about our segments, as defined by U.S. generally accepted
accounting principles.
Executive Officers
Information regarding our executive officers is set forth in Part III, Item 10 of this Annual
Report on Form 10-K and is incorporated herein by reference.
Item 1A. | Risk Factors |
The following are some of the risks and uncertainties that could cause our actual financial
condition, results of operations, business and prospects to differ materially from those
contemplated by the forward-looking statements contained in this Annual Report on Form 10-K or our
other filings with the SEC. These risks, as well as the risks described in Reimbursement,
Regulation and Other Factors, and Forward-Looking Statements should be carefully considered
before making an investment decision regarding us. The risks and uncertainties described below are
not the only ones we face and there may be additional risks that we are not presently aware of or
that we currently consider not likely to have a significant impact. If any of the following risks
actually occurred, our business, financial condition and operating results could suffer, and the
trading price of our common stock could decline.
If we fail to comply with extensive laws and government regulations, we could
suffer penalties, lose our licenses or be excluded from health care programs.
Also, any changes to the laws and regulations governing our business, or the
interpretation and enforcement of those laws or regulations, could have a
material adverse effect on our business and consolidated financial condition,
results of operations and cash flows.
The health care industry is required to comply with extensive and complex laws and
regulations at the federal, state and local government levels relating to, among other things:
| licensure and certification; | ||
| relationships with physicians and other referral sources; |
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| quality of medical services; | ||
| qualifications of medical and support personnel; | ||
| confidentiality of health-related information and medical records; | ||
| billing for services; | ||
| cost reporting; | ||
| operating policies and procedures; and | ||
| addition of facilities and services. |
Among these laws are the Anti-Kickback Statute and the Stark Law. These laws impact the
relationships that we may have with physicians and other referral sources. The OIG has enacted safe
harbor regulations that outline practices that are deemed protected from prosecution under the
Anti-Kickback Statute. Our current financial relationships with physicians and other referral
sources may not qualify for safe harbor protection under the Anti-Kickback Statute. Failure to meet
a safe harbor does not mean that the arrangement automatically violates the Anti-Kickback Statute,
but may subject the arrangement to greater scrutiny. Further, we cannot guarantee that practices
that are outside of a safe harbor will not be found to violate the Anti-Kickback Statute.
Additionally, we are subject to various routine and non-routine reviews, audits and
investigations by the Medicare and Medicaid programs and other federal and state governmental
agencies, which have various rights and remedies against us if they assert that we have overcharged
the programs or failed to comply with program requirements.
If we fail to comply with the Anti-Kickback Statute, the Stark Law or other applicable
laws and regulations, we could be subjected to criminal penalties, civil penalties and exclusion of
one or more of our inpatient facilities from participation in the Medicare, Medicaid and other
federal and state health care programs. In addition, if we do not operate our inpatient facilities
in accordance with applicable law, our inpatient facilities may lose their licenses or the ability
to participate in third party reimbursement programs. If we become subject to material fines or, if
other sanctions or other corrective actions are imposed on us, our business and consolidated
financial condition, results of operations and cash flows could be materially adversely affected.
While we believe we are in substantial compliance with all applicable laws, we do not
always have the benefit of significant regulatory or judicial interpretation of these laws and
regulations. In the future, different interpretations or enforcement of these laws and regulations
could subject our current or past practices to allegations of impropriety or illegality, and could
have a material adverse effect on our business and consolidated financial condition, results of
operations and cash flows by:
| increasing our liability; | ||
| increasing our administrative and other costs by requiring us to make changes in our inpatient facilities, equipment or personnel; | ||
| increasing or decreasing mandated services; | ||
| forcing us to restructure our relationships with referral sources and providers; or | ||
| requiring us to implement additional or different programs and systems. |
A determination that we have violated these laws, or the public announcement that we are being
investigated for possible violations of these laws, could have a material adverse effect on our
business, financial condition, results of operations or prospects and our business reputation could
suffer significantly. In addition, we are unable to predict whether other legislation or
regulations at the federal or state level will be adopted or the effect such legislation or
regulations will have on us.
Health care reform measures could adversely affect our business.
The United States Congress is currently considering a variety of bills
intended to significantly reform the U.S. health care system. All versions
of the proposed legislation are intended, among other things, to increase
access to health insurance and slow the rate of growth of health care
spending. Any adopted reform measures could adversely impact the amount
paid for services we provide to our patients who are covered by Medicare,
Medicaid and other governmental agencies or third party payors. While we
cannot predict what, if any, legislative or regulatory proposals will be
adopted, adoption of such proposals could affect our reimbursement and
materially harm our business, financial condition and results of
operations.
The economic downturn and continued deficit spending by the federal government
and state budget pressures may result in a reduction in payments and covered
services. Lower reimbursement rates for our services would have an adverse
effect on our business, financial condition and results of operations.
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Approximately 57.1% of our revenue comes from the Medicare and Medicaid programs and
various state agencies. Continued deficit spending due to adverse developments in the United States
and global economies, bailout programs directed at specific industries and other governmental
measures could lead to a reduction in federal government expenditures, including governmentally
funded programs such as Medicare and Medicaid. In addition, state budget pressures may cause
reductions in state spending. Given that Medicaid outlays are a significant component of state
budgets, we expect continuing cost containment pressures on Medicaid outlays for our services.
Reductions in expenditures for these programs could have a material adverse effect on our business
and our consolidated financial condition, results of operations and cash flows.
Many of the patients admitted to the units we manage for acute care hospitals are
eligible for Medicare coverage. As a result, the providers rely upon payment from Medicare for the
services. Many of the patients are also eligible for Medicaid payments. To the extent that a
hospital deems revenue for a program we manage to be inadequate, it may seek to terminate its
contract with us or not renew the contract. Similarly, we may not add new management contracts if
prospective customers do not believe that such programs will generate sufficient revenue.
Government investigations may reduce our earnings. Companies within the health
care industry continue to be the subject of federal and state investigations,
which increases the risk that we may become subject to additional
investigations in the future.
Both federal and state government agencies as
well as private payors are devoting increased attention and resources to anti-fraud initiatives against health care providers and have heightened and
coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of
health care organizations. These investigations relate to a wide variety of topics, including:
| cost reporting and billing practices; | ||
| quality of care; | ||
| financial relationships with referral sources; | ||
| medical necessity of services provided; and | ||
| treatment of indigent patients, including emergency medical screening and treatment requirements. |
The OIG and the U.S. Department of Justice have, from time to time, undertaken national
enforcement initiatives that focus on specific billing practices or other suspected areas of abuse.
Moreover, health care providers are subject to civil and criminal false claims laws, including the
federal False Claims Act, which allows private parties to bring whistleblower lawsuits against
private companies doing business with or receiving reimbursement under federal health care
programs. Some states have adopted similar state whistleblower and false claims provisions.
Publicity associated with the substantial amounts paid by other health care providers to settle
these lawsuits may encourage our current and former employees and other health care providers to
bring whistleblower lawsuits.
In July 2008, we received a subpoena from the United States Department of Justice requesting
certain information regarding one of our inpatient facilities in Chicago, Illinois. We have been
cooperating, and will continue to cooperate, with the Department of Justice in connection with its
investigation. A hold prohibiting admissions to this facility of patients in the custody of the
Illinois Department of Children and Family Services remains in effect. We are uncertain when the
hold will be removed. The outcome of the Department of Justices inquiry is uncertain, and adverse
developments or outcomes can result in adverse publicity, significant expenses, monetary damages,
penalties or injunctive relief against us that could significantly reduce our earnings and cash
flows and harm our business.
The volatility and disruption of the capital and credit markets and adverse
changes in the United States and global economies could impact our ability to
access both available and affordable financing, and without such financing, we
may be unable to achieve our objectives for strategic acquisitions and internal
growth.
The United States and global capital and credit markets have been experiencing extreme
volatility and disruption at unprecedented levels. Significant declines in the United States
housing market, including falling home prices, the increasing number of foreclosures and higher
unemployment rates, have resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and investment banks.
These write-downs have caused many financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail. Many lenders and institutional
investors have reduced, and in some cases, ceased to provide funding to borrowers, including other
financial institutions or have increased their rates significantly compared to the prior year.
Our acquisition program requires capital resources. Likewise, the operation of existing
inpatient facilities requires ongoing capital expenditures for renovation, expansion and the
upgrade of equipment and technology. While we intend to finance strategic acquisitions and internal
growth with cash flows from operations and borrowings under our revolving credit facility, we may
require sources of capital in addition to those presently available to us. Due to the existing
uncertainty in the capital and credit markets, as well as our level of indebtedness and
restrictions set forth in our debt agreements, additional capital may not be available on terms
acceptable to us or at all, and this may result in our inability to achieve objectives for
strategic acquisitions and capital expenditures.
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Further, in the event we need additional funds, and we are unable to raise the necessary funds on
acceptable terms, our business and consolidated financial condition, results of operations and cash
flows could be materially adversely affected. If we are not able to obtain additional financing,
then we may not be able to consummate acquisitions or undertake capital expenditures.
As a provider of health care services, we are subject to claims and legal actions by patients and others.
We are subject to medical malpractice and other lawsuits due to the nature of the
services we provide. Facilities acquired by us may have unknown or contingent liabilities,
including liabilities related to patient care and liabilities for failure to comply with health
care laws and regulations, which could result in large claims and significant defense costs.
Although we generally seek indemnification covering these matters from prior owners of facilities
we acquire, material liabilities for past activities of acquired facilities may exist and such
prior owners may not be able to satisfy their indemnification obligations. We are also susceptible
to being named in claims brought related to patient care and other matters at inpatient facilities
owned by third parties and managed by us.
A stockholder lawsuit alleging violation of federal securities laws was filed
during the third quarter of 2009. We
believe the lawsuit is without merit and are defending it vigorously. We believe the ultimate
outcome of the lawsuit will not have a material adverse effect on our results of operations,
financial position or cash flows; however, there can be no assurance that an adverse determination
will not have a material adverse effect on us.
To protect ourselves from the cost of these claims, professional malpractice liability
insurance and general liability insurance coverage is maintained in amounts and with self-insured
retention common in the industry. We have professional and general liability insurance in umbrella
form for claims in excess of a $3.0 million self-insured retention with an insured excess limit of
$75.0 million for all of our inpatient facilities. The self-insured reserves for professional and
general liability risks are calculated based on historical claims, demographic factors, industry
trends, severity factors and other actuarial assumptions calculated by an independent third-party
actuary. This estimated accrual for professional and general liabilities could be significantly
affected should current and future occurrences differ from historical claim trends and
expectations. We have utilized our captive insurance company to manage the self-insured retention.
While claims are monitored closely when estimating professional and general liability accruals, the
complexity of the claims and wide range of potential outcomes often hampers timely adjustments to
the assumptions used in these estimates. There are no assurances that our insurance will cover all
claims (e.g., claims for punitive damages) or that claims in excess of our insurance coverage will
not arise. A successful lawsuit against us that is not covered by, or is in excess of, our
insurance coverage may have a material adverse effect on our business, financial condition and
results of operations. This insurance coverage may not continue to be available at a reasonable
cost, especially given the significant increase in insurance premiums generally experienced in the
health care industry.
We depend on our ability to attract and retain key management personnel.
We are highly dependent on our senior management team, which has many years of experience
addressing the broad range of concerns and issues relevant to our business. Our senior management
team includes the talented managers of our divisions, who have extensive experience in all aspects
of health care. The loss of key management or the inability to attract, retain and motivate
sufficient numbers of qualified management personnel could have a material adverse effect on our
business and consolidated financial condition, results of operations and cash flows.
The agreements governing our indebtedness contain various covenants that limit
our discretion in the operation of our business and our failure to satisfy
requirements in these agreements could have a material adverse effect on our
business and consolidated financial condition, results of operations and cash
flows.
Our senior secured credit facilities and the indentures governing the 73/4% Senior
Subordinated Notes due 2015 (the 73/4% Notes) contain, among other things, covenants that may
restrict our ability and our subsidiary guarantors ability to finance future operations or capital
needs or to engage in other business activities. These debt instruments restrict, among other
things, our ability and the ability of our subsidiaries to:
| incur additional indebtedness and issue preferred stock; | ||
| redeem or repurchase stock, pay dividends or make other distributions; | ||
| make certain restricted payments and investments; | ||
| create liens; | ||
| sell assets, including the capital stock of our restricted subsidiaries; | ||
| merge or consolidate with other entities; and | ||
| engage in transactions with affiliates. |
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In addition, our senior secured credit facilities require us to meet specified financial
ratios and tests that may require that we take action to reduce our debt or act in a manner
contrary to our business objectives. Events beyond our control, including changes in general
business and economic conditions, may affect our ability to meet the specified financial ratios and
tests. We cannot assure you that we will meet the specified ratios and tests or that the lenders
under our senior secured credit facilities will waive any failure to meet the specified ratios or
tests. A breach of any of these covenants would result in a default under our senior secured credit
facilities and any resulting acceleration thereunder may result in a default under the indentures
governing the 73/4% Notes. If an event of default under our senior secured credit facilities occurs,
the lenders could elect to declare all amounts outstanding thereunder, together with accrued
interest, to be immediately due and payable, and terminate their commitments to make further
extensions of credit (including our ability to borrow under our revolving credit facility). Any
breach or default under our debt agreements could have a material adverse effect on our business
and consolidated financial condition, results of operations and cash flows.
Our substantial indebtedness could adversely affect our financial condition and our ability to fulfill other obligations.
As of December 31, 2009, our total outstanding indebtedness was approximately $1.2
billion. Our indebtedness could have a material adverse effect on our business and consolidated
financial position, results of operations and cash flows and impair our ability to fulfill other
obligations in several ways, including:
| increasing our vulnerability to general adverse economic and industry conditions; | ||
| requiring that a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate requirements; | ||
| limiting our ability to obtain additional financing to fund future capital expenditures, acquisitions, working capital and general corporate requirements; and | ||
| placing us at a competitive disadvantage to our competitors that have less indebtedness. |
In the event we incur additional indebtedness, the risks described above could increase.
Acquired businesses expose us to increased operating risks.
Acquisitions of inpatient facilities and other businesses may strain our resources,
including management, information systems, regulatory compliance and other areas. Acquisitions
expose us to additional business and operating risk and uncertainties, including:
| our ability to effectively manage the expanded activities; | ||
| our ability to realize our investment in the increased number of inpatient facilities and other businesses; | ||
| our exposure to unknown liabilities; and | ||
| our ability to meet contractual obligations. |
If we are unable to manage the acquired businesses efficiently or effectively, or are
unable to attract and retain additional qualified management personnel to run the expanded
operations, it could have a material adverse effect on our business, financial condition and
results of operations.
If we fail to integrate or improve, where necessary, the operations of existing
and acquired inpatient facilities, we may be unable to achieve our growth
strategy, which could have a material adverse effect on our business and
consolidated financial condition, results of operations and cash flows.
We may be unable to maintain or increase the profitability of, or operating cash flows
at, existing behavioral health care facilities and acquired inpatient facilities, fully integrate
the operations of an acquired facility or business in an efficient and cost-effective manner or
otherwise achieve the intended benefit of our growth strategy. To the extent that we are unable to
enroll in third party payor plans in a timely manner following an acquisition, we may experience a
decrease in cash flow or profitability. The failure to effectively integrate any acquired
businesses could have a material adverse effect on our business and consolidated financial
condition, results of operations and cash flows.
Hospital acquisitions generally require a longer period to complete than acquisitions in
many other industries and are subject to additional regulatory uncertainty. Many states have
adopted legislation regarding the sale or other disposition of facilities operated by
not-for-profit entities. In other states that do not have specific legislation, the attorneys
general have demonstrated an interest in these transactions under their general obligations to
protect charitable assets from waste. These legislative and administrative efforts focus primarily
on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the
non-profit seller. In addition, the acquisition of facilities in certain states requires advance
regulatory approval under certificate of need or state licensure regulatory regimes. These
state-level procedures could seriously delay or even prevent us from acquiring inpatient
facilities, even after significant transaction costs have been incurred, and prevent us from
achieving our growth strategy, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash
flows.
16
Table of Contents
We depend on our relationships with physicians and other health care professionals who provide services at our inpatient facilities.
Our business depends upon the efforts and success of the physicians and other health care
professionals who provide health care services at our inpatient facilities and the strength of the
relationships with these physicians and other health care professionals.
Our business and consolidated financial condition, results of operations and cash flows
could be adversely affected if a significant number of physicians or a group of physicians:
| terminate their relationship with, or reduce their use of, our inpatient facilities; | ||
| fail to maintain acceptable quality of care or to otherwise adhere to professional standards; | ||
| suffer damage to their reputation; or | ||
| exit the market entirely. |
Failure to maintain effective internal controls in accordance with Section 404
of the Sarbanes-Oxley Act could have a material adverse effect on our business
and stock price.
Each year we are required to document and test our internal control procedures in order
to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual
management assessments of the effectiveness of our internal controls over financial reporting and a
report by our independent registered public accounting firm addressing the effectiveness of
internal control over financial reporting. During the course of our annual testing we may identify
deficiencies that we may not be able to remediate in time to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to
maintain the adequacy of our internal controls, as such standards are modified, supplemented or
amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis
that we have effective internal controls over financial reporting in accordance with Section 404 of
the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment
could have a material adverse effect on our business and stock price.
We may be required to spend substantial amounts to comply with legislative and
regulatory initiatives relating to privacy and security of patient health
information and standards for electronic transactions.
There are currently numerous legislative and regulatory initiatives at the federal and
state levels addressing patient privacy and security concerns. In particular, federal regulations
issued under HITECH require our facilities to comply with additional standards to protect the
privacy, security and integrity of health care information. These regulations may require extensive
administrative requirements, technical and physical information security requirements, restrictions
on the use and disclosure of individually identifiable patient health and related financial
information and have provided patients with additional rights with respect to their health
information. Compliance with these regulations requires substantial expenditures, which could
negatively impact our financial results. In addition, our management has spent, and may spend in
the future, substantial time and effort on compliance measures.
Forward-Looking Statements
This Annual Report on Form 10-K and other materials we have filed or may file with the
Securities and Exchange Commission (the SEC), as well as information included in oral statements
or other written statements made, or to be made, by our senior management, contain, or will
contain, disclosures that are forward-looking statements. Forward-looking statements include all
statements that do not relate solely to historical or current facts and can be identified by the
use of words such as may, will, expect, believe, intend, plan, estimate, project,
continue, should and other comparable terms. These forward-looking statements are based on the
current plans and expectations of management and are subject to a number of risks and
uncertainties, including those set forth below, which could significantly affect our current plans
and expectations and future financial condition and results.
We undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Stockholders and investors are
cautioned not to unduly rely on such forward-looking statements when evaluating the information
presented in our filings and reports.
While it is not possible to identify all these factors, we continue to face many risks
and uncertainties that could cause actual results to differ from those forward-looking statements,
including:
| risks inherent to the health care industry, including the impact of unforeseen changes in regulation and the potential adverse impact of government investigations, liabilities and other claims asserted against us; | ||
| uncertainty as to changes in U.S. general economic activity and the impact of these changes on our business; |
17
Table of Contents
| economic downturn resulting in efforts by federal and state health care programs and managed care companies to reduce reimbursement rates for our services; | ||
| health care reform proposals that, if adopted, could adversely impact reimbursement rates for our services; | ||
| potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms; | ||
| our ability to comply with applicable licensure and accreditation requirements; | ||
| our ability to comply with extensive laws and government regulations related to billing, physician relationships, adequacy of medical care and licensure; | ||
| our ability to retain key employees who are instrumental to our operations; | ||
| our ability to successfully integrate and improve the operations of acquired inpatient facilities; | ||
| our ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act; | ||
| our substantial indebtedness and adverse changes in credit markets impacting our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs; | ||
| our ability to maintain favorable and continuing relationships with physicians and other health care professionals who use our inpatient facilities; | ||
| our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards; | ||
| our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology; | ||
| our ability to obtain adequate levels of general and professional liability insurance; | ||
| future trends for pricing, margins, revenue and profitability that remain difficult to predict in the industries that we serve; | ||
| fluctuations in the market value of our common stock; | ||
| negative press coverage of us or our industry that may affect public opinion; and | ||
| those risks and uncertainties described from time to time in our filings with the SEC. |
We caution you that the factors listed above, as well as the risk factors included in this
Annual Report on Form 10-K, may not be exhaustive. We operate in a continually changing business
environment, and new risk factors emerge from time to time. We cannot predict such new risk factors
nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to
which any factor or combination of factors may cause actual results to differ materially from those
expressed or implied by any forward-looking statements.
Item 1B. | Unresolved Staff Comments. |
We have no unresolved SEC staff comments.
Item 2. | Properties. |
We
operate 94 owned or leased inpatient behavioral health care facilities with
approximately 11,000 licensed beds in 32 states, Puerto Rico, and the U.S. Virgin Islands. The
following table sets forth the name, location, number of licensed beds and the acquisition date for
each of our owned and leased inpatient behavioral health care facilities.
Date | ||||||||||
Facility | Location | Beds | Own/Lease | Acquired/Opened | ||||||
Cypress Creek Hospital
|
Houston, TX | 96 | Own | 9/01 | ||||||
West Oaks Hospital
|
Houston, TX | 160 | Own | 9/01 | ||||||
Texas NeuroRehab Center
|
Austin, TX | 151 | Own | 11/01 | ||||||
Holly Hill Hospital
|
Raleigh, NC | 152 | Own | 12/01 | ||||||
Riveredge Hospital
|
Forest Park, IL | 224 | Own | 7/02 |
18
Table of Contents
Date | ||||||||||
Facility | Location | Beds | Own/Lease | Acquired/Opened | ||||||
Jefferson Trail Treatment Center for Children
|
Charlottesville, VA | 100 | Lease | 4/03 | ||||||
Cedar Springs Hospital
|
Colorado Springs, CO | 110 | Own | 4/03 | ||||||
Laurel Ridge Treatment Center
|
San Antonio, TX | 252 | Own | 4/03 | ||||||
San Marcos Treatment Center
|
San Marcos, TX | 265 | Own | 4/03 | ||||||
Shadow Mountain Behavioral Health System
|
Tulsa, OK | 209 | Own | 4/03 | ||||||
Laurel Oaks Behavioral Health Center
|
Dothan, AL | 115 | Own | 6/03 | ||||||
Hill Crest Behavioral Health Services
|
Birmingham, AL | 205 | Own | 6/03 | ||||||
Gulf Coast Treatment Center
|
Fort Walton Beach, FL | 168 | Own | 6/03 | ||||||
Manatee Palms Youth Services
|
Bradenton, FL | 60 | Own | 6/03 | ||||||
Havenwyck Hospital
|
Auburn Hills, MI | 184 | Own | 6/03 | ||||||
Heartland Behavioral Health Services
|
Nevada, MO | 159 | Own | 6/03 | ||||||
Brynn Marr Hospital
|
Jacksonville, NC | 88 | Own | 6/03 | ||||||
Benchmark Behavioral Health System
|
Woods Cross, UT | 151 | Own | 6/03 | ||||||
Macon Behavioral Health Treatment Center
|
Macon, GA | 155 | Own | 6/03 | ||||||
Manatee
Adolescent Treatment Services
|
Bradenton, FL | 85 | Own | 6/03 | ||||||
Gulf Coast RTCs
|
Crestview, FL | 254 | Lease | 6/03 | ||||||
Alliance Health Center
|
Meridian, MS | 194 | Own | 11/03 | ||||||
Calvary Center
|
Phoenix, AZ | 50 | Lease | 12/03 | ||||||
Brentwood Hospital
|
Shreveport, LA | 200 | Own | 3/04 | ||||||
Brentwood Behavioral Healthcare of Mississippi
|
Flowood, MS | 107 | Own | 3/04 | ||||||
Palmetto Lowcountry Behavioral Health
|
North Charleston, SC | 112 | Own | 5/04 | ||||||
Palmetto Pee Dee Behavioral Health
|
Florence, SC | 59 | Own | 5/04 | ||||||
Fort Lauderdale Hospital
|
Fort Lauderdale, FL | 100 | Lease | 6/04 | ||||||
Millwood Hospital
|
Arlington, TX | 120 | Lease | 6/04 | ||||||
Pride Institute
|
Eden Prairie, MN | 42 | Own | 6/04 | ||||||
Summit Oaks Hospital
|
Summit, NJ | 126 | Own | 6/04 | ||||||
North Spring Behavioral Healthcare
|
Leesburg, VA | 77 | Own | 6/04 | ||||||
Peak Behavioral Health Services
|
Santa Teresa, NM | 84 | Own | 6/04 | ||||||
Alhambra Hospital
|
Rosemead, CA | 97 | Own | 7/05 | ||||||
Belmont Pines Hospital
|
Youngstown, OH | 102 | Own | 7/05 | ||||||
Brooke Glen Behavioral Hospital
|
Fort Washington, PA | 146 | Own | 7/05 | ||||||
Columbus Behavioral Center
|
Columbus, IN | 61 | Own | 7/05 | ||||||
Cumberland Hospital
|
New Kent, VA | 136 | Own | 7/05 | ||||||
Fairfax Hospital
|
Kirkland, WA | 133 | Own | 7/05 | ||||||
Fox Run Hospital
|
St. Clairsville, OH | 100 | Own | 7/05 | ||||||
Fremont Hospital
|
Fremont, CA | 96 | Own | 7/05 | ||||||
Heritage Oaks Hospital
|
Sacramento, CA | 76 | Own | 7/05 | ||||||
Intermountain Hospital
|
Boise, ID | 125 | Own | 7/05 | ||||||
Meadows Hospital
|
Bloomington, IN | 78 | Own | 7/05 | ||||||
Mesilla Valley Hospital
|
Las Cruces, NM | 168 | Own | 7/05 | ||||||
Montevista Hospital
|
Las Vegas, NV | 101 | Own | 7/05 | ||||||
Pinnacle Pointe Hospital
|
Little Rock, AR | 124 | Own | 7/05 | ||||||
Sierra Vista Hospital
|
Sacramento, CA | 72 | Own | 7/05 | ||||||
Streamwood Behavioral Health
|
Streamwood, IL | 371 | Own | 7/05 | ||||||
Valle Vista Hospital
|
Greenwood, IN | 102 | Own | 7/05 | ||||||
West Hills Hospital
|
Reno, NV | 95 | Own | 7/05 | ||||||
Willow Springs Center
|
Reno, NV | 76 | Own | 7/05 | ||||||
Canyon Ridge Hospital
|
Chino, CA | 106 | Own | 8/05 | ||||||
Atlantic Shores Hospital
|
Fort Lauderdale, FL | 72 | Own | 1/06 | ||||||
Wellstone Regional Hospital
|
Jeffersonville, IN | 100 | Own | 1/06 | ||||||
Diamond Grove Center
|
Louisville, MS | 55 | Own | 5/06 | ||||||
Hickory Trail Hospital
|
DeSoto, TX | 86 | Own | 7/06 | ||||||
National Deaf Academy
|
Mount Dora, FL | 132 | Own | 7/06 | ||||||
Windmoor Healthcare
|
Clearwater, FL | 100 | Own | 9/06 | ||||||
University Behavioral Center
|
Orlando, FL | 104 | Own | 9/06 | ||||||
Sandy Pines Hospital
|
Tequesta, FL | 80 | Own | 9/06 | ||||||
Cumberland Hall
|
Hopkinsville, KY | 64 | Own | 12/06 | ||||||
Panamericano
|
Cidra, Puerto Rico | 240 | Own | 12/06 | ||||||
The Pines Residential Treatment Center
|
Portsmouth, VA | 424 | Own | 12/06 |
19
Table of Contents
Date | ||||||||||
Facility | Location | Beds | Own/Lease | Acquired/Opened | ||||||
Palmetto Summerville
|
Summerville, SC | 60 | Lease | 12/06 | ||||||
Three Rivers Residential Treatment Midlands
Campus
|
West Columbia, SC | 59 | Own | 12/06 | ||||||
Virgin Islands Behavioral Services
|
St. Croix, U.S. Virgin Islands | 30 | Own | 12/06 | ||||||
Virginia Beach Psychiatric Center
|
Virginia Beach, VA | 100 | Own | 12/06 | ||||||
Three Rivers Behavioral Health
|
West Columbia, SC | 118 | Own | 01/07 | ||||||
Copper Hills Youth Center
|
West Jordan, UT | 153 | Own | 05/07 | ||||||
MeadowWood Behavioral Health System
|
New Castle, DE | 58 | Own | 05/07 | ||||||
High Point Treatment Center
|
Cooper City, FL | 68 | Own | 05/07 | ||||||
Focus by the Sea
|
St. Simons, GA | 101 | Own | 05/07 | ||||||
Arrowhead Behavioral Health
|
Maumee, OH | 42 | Own | 05/07 | ||||||
Friends Hospital
|
Philadelphia, PA | 219 | Own | 05/07 | ||||||
Kingwood Pines Hospital
|
Kingwood, TX | 78 | Own | 05/07 | ||||||
Windsor-Laurelwood Center
|
Willoughby, OH | 160 | Lease | 05/07 | ||||||
Lighthouse Care Center of Augusta
|
Augusta, GA | 106 | Own | 05/07 | ||||||
Lighthouse Care Center of Conway
|
Conway, SC | 108 | Own | 05/07 | ||||||
Michiana Behavioral Health Center
|
Plymouth, IN | 80 | Own | 05/07 | ||||||
Poplar Springs Hospital
|
Petersburg, VA | 199 | Own | 05/07 | ||||||
River Park Hospital
|
Huntington, WV | 187 | Own | 05/07 | ||||||
Lighthouse Care Center of Berkley
|
Summerville, SC | * | Own | 05/07 | ||||||
Austin Lakes Hospital
|
Austin, TX | 48 | Lease | 08/07 | ||||||
The Hughes Center for Exceptional Children
|
Danville, VA | 56 | Own | 09/07 | ||||||
The Brook Dupont
|
Louisville, KY | 66 | Own | 03/08 | ||||||
River Point Behavioral Health
|
Jacksonville, FL | 99 | Own | 03/08 | ||||||
The Brook KMI
|
Louisville, KY | 106 | Own | 03/08 | ||||||
The Vines
|
Ocala, FL | 88 | Own | 03/08 | ||||||
Wekiva Springs
|
Jacksonville, FL | 68 | Own | 03/08 | ||||||
Lincoln Prairie Behavioral Health Center
|
Springfield, IL | 80 | Own | 05/08 | ||||||
Rolling Hills Hospital
|
Franklin, TN | 80 | Own | 01/09 | ||||||
Prairie St. Johns
|
Fargo, ND | 131 | Own | 09/09 | ||||||
Emerald Coast Behavioral Hospital
|
Panama City, FL | 90 | Own | 09/09 |
* | We acquired a non-operating facility, Lighthouse Berkley, in the acquisition of Horizon Health. Currently no patients are being served at this facility. | |
| Operated beds. |
In addition, our principal executive offices are located in approximately 65,000
square feet of leased space in Franklin, Tennessee. We do not anticipate that we will experience
any difficulty in renewing our lease upon its expiration in February 2012, or obtaining different
space on comparable terms if such lease is not renewed. We believe our executive offices and our
hospital properties and equipment are generally well maintained, in good operating condition and
adequate for our present needs.
Item 3. | Legal Proceedings. |
A stockholder lawsuit alleging violations of federal securities laws was filed during the
third quarter of 2009. We believe the lawsuit is without merit and are defending it vigorously.
We are subject to various claims and legal actions that arise in the ordinary course of
our business. In the opinion of management, we are not currently a party to any proceeding that
would have a material adverse effect on our financial condition or results of operations.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
20
Table of Contents
PART II
Item 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Our common stock trades on The NASDAQ Global Select Market under the symbol PSYS. The table
below sets forth, for the calendar quarters indicated, the high and low sales prices per share for
our common stock as reported on The NASDAQ Global Select Market.
High | Low | |||||||
2008 |
||||||||
First Quarter |
$ | 34.31 | $ | 27.17 | ||||
Second Quarter |
$ | 39.62 | $ | 30.45 | ||||
Third Quarter |
$ | 40.90 | $ | 32.89 | ||||
Fourth Quarter |
$ | 39.00 | $ | 22.86 | ||||
2009 |
||||||||
First Quarter |
$ | 28.74 | $ | 12.49 | ||||
Second Quarter |
$ | 23.25 | $ | 13.03 | ||||
Third Quarter |
$ | 30.14 | $ | 20.98 | ||||
Fourth Quarter |
$ | 27.99 | $ | 17.63 |
At the close of business on February 22, 2009, there were approximately 191 holders of
record of our common stock.
We currently intend to retain future earnings for use in the expansion and operation of our
business. Our Credit Agreement, as amended, prohibits us from paying dividends on our common stock.
Also, the indenture governing our 73/4% Notes provides certain financial
conditions that must be met in order for us to pay dividends. Subject to the terms of applicable
contracts, the payment of any future cash dividends will be determined by our Board of Directors in
light of conditions then-existing, including our earnings, financial condition and capital
requirements, restrictions in financing agreements, business opportunities and conditions, and
other factors.
Item 6. Selected Financial Data.
The selected financial data presented below for the years ended December 31, 2009, 2008 and
2007, and at December 31, 2009 and 2008, are derived from our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. The selected financial data for
the years ended December 31, 2006 and 2005, and at December 31, 2007, 2006 and 2005, are derived
from our audited consolidated financial statements not included herein. The audited consolidated
financial statements for the years ended December 31, 2006 and 2005 and at December 31, 2007, 2006
and 2005 have been reclassified for discontinued operations. The selected financial data presented
below should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and with our consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K.
21
Table of Contents
Psychiatric Solutions, Inc.
Selected Financial Data
As of and for the Years Ended December 31,
Selected Financial Data
As of and for the Years Ended December 31,
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(In thousands, except per share amounts and operating data) | ||||||||||||||||||||
Income Statement Data: |
||||||||||||||||||||
Revenue |
$ | 1,805,361 | $ | 1,696,116 | $ | 1,414,700 | $ | 991,724 | $ | 689,408 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Salaries, wages and employee benefits |
1,005,204 | 938,363 | 787,301 | 559,715 | 377,762 | |||||||||||||||
Other operating expenses |
452,356 | 438,499 | 365,258 | 255,206 | 193,851 | |||||||||||||||
Provision for doubtful accounts |
36,414 | 34,334 | 27,343 | 19,364 | 13,678 | |||||||||||||||
Depreciation and amortization |
44,778 | 38,843 | 30,113 | 20,001 | 14,335 | |||||||||||||||
Interest expense |
71,549 | 75,982 | 73,887 | 39,967 | 26,169 | |||||||||||||||
Other expenses |
| | 8,179 | | 21,871 | |||||||||||||||
Total costs and expenses |
1,610,301 | 1,526,021 | 1,292,081 | 894,253 | 647,666 | |||||||||||||||
Income from continuing operations before
income taxes |
195,060 | 170,095 | 122,619 | 97,471 | 41,742 | |||||||||||||||
Provision for income taxes |
74,889 | 64,457 | 46,200 | 36,785 | 16,080 | |||||||||||||||
Income from continuing operations |
$ | 120,171 | $ | 105,638 | $ | 76,419 | $ | 60,686 | $ | 25,662 | ||||||||||
Net income attributable to PSI stockholders |
$ | 117,617 | $ | 104,953 | $ | 76,208 | $ | 60,632 | $ | 27,154 | ||||||||||
Basic earnings per share from continuing
operations attributable to PSI stockholders |
$ | 2.16 | $ | 1.89 | $ | 1.40 | $ | 1.15 | $ | 0.57 | ||||||||||
Basic earnings per share attributable to PSI
stockholders |
$ | 2.12 | $ | 1.89 | $ | 1.40 | $ | 1.15 | $ | 0.61 | ||||||||||
Shares used in computing basic earnings per
share |
55,564 | 55,408 | 54,258 | 52,953 | 44,792 | |||||||||||||||
Diluted earnings per share from continuing
operations attributable to PSI stockholders |
$ | 2.14 | $ | 1.87 | $ | 1.37 | $ | 1.12 | $ | 0.55 | ||||||||||
Diluted earnings per share attributable to PSI
stockholders |
$ | 2.10 | $ | 1.87 | $ | 1.37 | $ | 1.12 | $ | 0.59 | ||||||||||
Shares used in computing diluted earnings per
share |
56,116 | 56,267 | 55,447 | 54,169 | 46,296 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash |
$ | 6,815 | $ | 51,271 | $ | 39,970 | $ | 18,520 | $ | 54,533 | ||||||||||
Working capital |
177,918 | 233,906 | 161,681 | 103,287 | 138,843 | |||||||||||||||
Property and equipment, net |
931,730 | 820,453 | 678,012 | 529,658 | 368,977 | |||||||||||||||
Total assets |
2,507,240 | 2,505,990 | 2,179,505 | 1,581,746 | 1,176,131 | |||||||||||||||
Total debt |
1,187,079 | 1,314,397 | 1,172,024 | 743,307 | 482,389 | |||||||||||||||
Stockholders equity |
1,030,335 | 889,885 | 754,742 | 627,779 | 539,712 | |||||||||||||||
Operating Data: |
||||||||||||||||||||
Number of facilities at period end |
94 | 91 | 86 | 70 | 55 | |||||||||||||||
Number of licensed beds |
11,290 | 10,520 | 9,931 | 8,114 | 6,396 | |||||||||||||||
Admissions |
177,967 | 163,616 | 138,454 | 106,451 | 76,795 | |||||||||||||||
Patient days |
2,881,063 | 2,749,658 | 2,406,368 | 1,875,635 | 1,413,231 | |||||||||||||||
Average length of stay |
16 | 17 | 17 | 18 | 18 |
22
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the selected
financial data and the accompanying consolidated financial statements and related notes thereto
included in this Annual Report on Form 10-K.
Overview
Our business strategy is to acquire inpatient behavioral health care facilities and improve
operating results within our inpatient facilities and our other behavioral health care operations.
From 2001 to 2004, we acquired 34 inpatient behavioral health care facilities. During 2005, we
acquired 20 inpatient behavioral health care facilities in the acquisition of Ardent Health
Services, Inc. and one other inpatient facility. During 2006, we acquired 19 inpatient behavioral
health care facilities, including nine inpatient facilities with the acquisition of the capital
stock of Alternative Behavioral Services, Inc. on December 1, 2006. During 2007, we acquired 16
inpatient behavioral health care facilities, including 15 inpatient facilities in the acquisition
of Horizon Health Corporation (Horizon Health). During 2008, we acquired five inpatient
behavioral health care facilities from United Medical Corporation (UMC) and opened Lincoln
Prairie Behavioral Health Center, an 80-bed inpatient facility in Springfield, Illinois. During
2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin, Tennessee,
acquired two inpatient behavioral health care facilities, and completed the sale of our EAP business.
We strive to improve the operating results of our inpatient behavioral health care operations
by providing the highest quality service, expanding referral networks and marketing initiatives and
meeting increased demand for behavioral health care services by expanding our services and
developing new services. We also attempt to improve operating results by maintaining appropriate
staffing ratios, controlling contract labor costs and reducing supply costs through group
purchasing. Our same-facility revenue from owned and leased inpatient facilities increased 5.3% for
the year ended December 31, 2009 compared to the year ended December 31, 2008, primarily as a
result of increases in same-facility patient days and same-facility revenue per patient day.
Same-facility patient days increased 3.5% and same-facility revenue per patient day increased 1.8%
in 2009 compared to 2008. Same-facility growth refers to the comparison of each inpatient facility
owned during 2008 with the comparable period in 2009, adjusted for closures and combinations for
comparability purposes.
Income from continuing operations before income taxes increased to $195.1 million, or 10.8% of
revenue, for the year ended December 31, 2009 compared to $170.1 million, or 10.0% of revenue, for
the same period of 2008. This increase in income from continuing operations before income taxes for
the year ended December 31, 2009 compared to the same period of 2008 was primarily the result of
same-facility revenue growth at our behavioral health care facilities of 5.3% for 2009 as compared
to 2008 and a reduction in interest expense as a percentage of revenue to 4.0% in 2009 compared to
4.5% in 2008.
Sources of Revenue
Patient Service Revenue
Patient service revenue is generated by our inpatient facilities for services provided to
patients on an inpatient and outpatient basis within the inpatient behavioral health care facility
setting. Patient service revenue is recorded at our established billing rates less contractual
adjustments. Contractual adjustments are recorded to state our patient service revenue at the
amount we expect to collect 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. Patient service revenue comprised
approximately 93.0% of our total revenue in 2009.
Other Revenue
Other behavioral health care services accounted for 7.0% of our revenue for the year ended
December 31, 2009. This portion of our business primarily consists of our contract management
business and a managed care plan in Puerto Rico. Our contract management business involves the
development, organization and management of behavioral health and rehabilitation programs within
medical/surgical hospitals. Services provided are recorded as revenue at contractually determined
rates in the period the services are rendered, provided that collectability of such amounts is
reasonably assured.
Results of Operations
The following table illustrates our consolidated results of operations from continuing
operations for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):
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Results of Operations, Consolidated Psychiatric Solutions | ||||||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Revenue |
$ | 1,805,361 | 100.0 | % | $ | 1,696,116 | 100.0 | % | $ | 1,414,700 | 100.0 | % | ||||||||||||
Salaries, wages, and employee benefits (including
share-based compensation of $17,505, $19,913
and $16,104 in 2009, 2008 and 2007, respectively) |
1,005,204 | 55.7 | % | 938,363 | 55.3 | % | 787,301 | 55.7 | % | |||||||||||||||
Professional fees |
166,785 | 9.2 | % | 162,491 | 9.6 | % | 135,803 | 9.6 | % | |||||||||||||||
Supplies |
92,572 | 5.1 | % | 92,393 | 5.5 | % | 77,738 | 5.5 | % | |||||||||||||||
Provision for doubtful accounts |
36,414 | 2.0 | % | 34,334 | 2.0 | % | 27,343 | 1.9 | % | |||||||||||||||
Other operating expenses |
192,999 | 10.7 | % | 183,615 | 10.8 | % | 151,717 | 10.7 | % | |||||||||||||||
Depreciation and amortization |
44,778 | 2.5 | % | 38,843 | 2.3 | % | 30,113 | 2.1 | % | |||||||||||||||
Interest expense, net |
71,549 | 4.0 | % | 75,982 | 4.5 | % | 73,887 | 5.2 | % | |||||||||||||||
Other expenses: |
||||||||||||||||||||||||
Loss on refinancing long-term debt |
| 0.0 | % | | 0.0 | % | 8,179 | 0.6 | % | |||||||||||||||
Income from continuing operations before
income taxes |
195,060 | 10.8 | % | 170,095 | 10.0 | % | 122,619 | 8.7 | % | |||||||||||||||
Provision for income taxes |
74,889 | 4.1 | % | 64,457 | 3.8 | % | 46,200 | 3.3 | % | |||||||||||||||
Income from continuing operations |
120,171 | 6.7 | % | 105,638 | 6.2 | % | 76,419 | 5.4 | % | |||||||||||||||
Less: Net income attributable to noncontrolling interest |
(93 | ) | 0.0 | % | (604 | ) | 0.0 | % | (285 | ) | 0.0 | % | ||||||||||||
Income from continuing operations attributable to
PSI stockholders |
$ | 120,078 | 6.7 | % | $ | 105,034 | 6.2 | % | $ | 76,134 | 5.4 | % | ||||||||||||
Year Ended December 31, 2009 Compared To Year Ended December 31, 2008
The following table compares key total facility statistics and same-facility statistics for
2009 and 2008 for owned and leased inpatient facilities:
Year Ended December 31, | % | |||||||||||
2009 | 2008 | Change | ||||||||||
Total facility results: |
||||||||||||
Revenue (in thousands) |
$ | 1,678,449 | $ | 1,571,141 | 6.8 | % | ||||||
Number of facilities at period end |
94 | 91 | 3.3 | % | ||||||||
Admissions |
177,967 | 163,616 | 8.8 | % | ||||||||
Patient days |
2,881,063 | 2,749,658 | 4.8 | % | ||||||||
Average length of stay |
16.2 | 16.8 | -3.6 | % | ||||||||
Revenue per patient day |
$ | 583 | $ | 571 | 2.1 | % | ||||||
Same-facility results: |
||||||||||||
Revenue (in thousands) |
$ | 1,654,258 | $ | 1,571,141 | 5.3 | % | ||||||
Number of facilities at period end |
91 | 91 | 0.0 | % | ||||||||
Admissions |
174,874 | 163,616 | 6.9 | % | ||||||||
Patient days |
2,845,536 | 2,749,658 | 3.5 | % | ||||||||
Average length of stay |
16.3 | 16.8 | -3.0 | % | ||||||||
Revenue per patient day |
$ | 581 | $ | 571 | 1.8 | % |
Revenue. Revenue from continuing operations increased $109.2 million, or 6.4%, to
$1.8 billion for the year ended December 31, 2009 compared to the year ended December 31, 2008.
Revenue from owned and leased inpatient facilities increased $107.3 million, or 6.8%, to $1.7
billion in 2009 compared to 2008. The increase in revenue from owned and leased inpatient
facilities relates primarily to same-facility growth in patient days of 3.5% and revenue per
patient day of 1.8%. Other revenue was $126.9 million in 2009 compared to $125.0 million in 2008.
Salaries, wages, and employee benefits. Salaries, wages and employee benefits (SWB) expense
was $1.0 billion in 2009 compared to $938.4 million in 2008, an increase of $66.8 million, or 7.1%.
SWB expense includes $17.5 million and $19.9 million of shared-based compensation expense for the
years ended December 31, 2009 and 2008, respectively. Based on our stock option and
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restricted
stock grants outstanding at December 31, 2009, we estimate remaining unrecognized share-based
compensation expense to
be approximately $31.3 million with a weighted-average remaining amortization period of 2.1 years.
Excluding share-based compensation expense, SWB expense was $987.7 million, or 54.7% of total
revenue, in 2009 compared to $918.5 million, or 54.2% of total revenue, in 2008. SWB expense for
owned and leased inpatient facilities was $905.5 million in 2009, or 53.9% of revenue.
Same-facility SWB expense for owned and leased inpatient facilities was $891.9 million in 2009, or
53.9% of revenue, compared to $842.5 million in 2008, or 53.6% of revenue. This increase in
same-facility SWB expense for owned and leased inpatient facilities is primarily the result of a
shift from utilization of contract labor included in professional fees to the utilization of
employees and an increase in health insurance claims for health insurance coverage for our
employees and their dependents. SWB expense for other operations was $48.5 million in 2009 compared
to $49.0 million in 2008. SWB expense for our corporate office was $51.2 million, including $17.5
million in share-based compensation, for 2009 compared to $46.4 million, including $19.9 million in
share-based compensation, for 2008. This increase in SWB for our corporate office primarily relates
to the increase in corporate employees to support our operations and an increase in incentive
compensation expense.
Professional fees. Professional fees were $166.8 million in 2009, or 9.2% of total revenue,
compared to $162.5 million in 2008, or 9.6% of total revenue. Professional fees for owned and
leased inpatient facilities were $150.3 million in 2009, or 9.0% of revenue. Same-facility
professional fees for owned and leased inpatient facilities were $148.3 million in 2009, or 9.0% of
revenue, compared to $142.9 million in 2008, or 9.1% of revenue. Professional fees for other
operations and our corporate office decreased to $16.5 million in 2009 compared to $19.5 million in
2008.
Supplies. Supplies expense was $92.6 million in 2009, or 5.1% of total revenue, compared to
$92.4 million in 2008, or 5.5% of total revenue. Supplies expense for owned and leased inpatient
facilities was $91.9 million in 2009, or 5.5% of revenue. Same-facility supplies expense for owned
and leased inpatient facilities was $90.6 million in 2009, or 5.5% of revenue, compared to $91.6
million in 2008, or 5.8% of revenue.
Provision for doubtful accounts. The provision for doubtful accounts was $36.4 million in
2009, or 2.0% of total revenue, compared to $34.3 million in 2008, or 2.0% of total revenue. The
provision for doubtful accounts at owned and leased inpatient facilities comprised substantially
all of our provision for doubtful accounts.
Other operating expenses. Other operating expenses consist primarily of rent, utilities,
insurance, travel, and repairs and maintenance expenses. Other operating expenses were $193.0
million in 2009, or 10.7% of total revenue, compared to $183.6 million in 2008, or 10.8% of total
revenue. Other operating expenses for owned and leased inpatient facilities were $133.4 million in
2009, or 7.9% of revenue. Same-facility other operating expenses for owned and leased inpatient
facilities were $131.7 million in 2009, or 8.0% of revenue, compared to $131.8 million in 2008, or
8.4% of revenue. This decrease in other operating expenses as a percent of revenue is primarily a
result of a normalization of professional and general liability reserve activity compared with
2008. Other operating expenses for other operations and our corporate office increased to $59.6
million in 2009 compared to $51.6 million in 2008. This increase in other operating expenses for
other operations and our corporate office was primarily the result of claims expense from a new
at-risk contract within our managed care plan in Puerto Rico.
Depreciation and amortization. Depreciation and amortization expense increased to $44.8
million in 2009 compared to $38.8 million in 2008, primarily as a result of depreciation on
expansion projects at existing inpatient facilities and facilities acquired/opened in 2008 and
2009.
Interest expense, net. Interest expense, net of interest income, decreased to $71.5 million in
2009 compared to $76.0 million in 2008 primarily as a result of a reduction in interest rates on
our variable rate debt.
Income attributable to noncontrolling interest. We own controlling interests in two joint
ventures that own two of our inpatient behavioral health care facilities. Income attributable to
noncontrolling interest represents the pro rata portion of each joint ventures net profit
belonging to the noncontrolling partner.
Loss from discontinued operations, net of taxes. The loss from discontinued operations, net of
income tax effect, was $2.5 million for the year ended December 31, 2009 compared to $81,000 for
the year ended December 31, 2008. During 2009, we completed the sale of our EAP business, elected
to close and make The Oaks Treatment Center and Cumberland Hall of Chattanooga available for sale,
and terminated one contract with a South Carolina juvenile justice agency. We also elected to
close and make Nashville Rehabilitation Hospital available for sale and transferred its behavioral
health services to Rolling Hills Hospital in the first quarter of 2009. During the year ended
December 31, 2008, we elected to dispose of a leased inpatient facility and terminate two
contracts with a Puerto Rican juvenile justice agency to manage inpatient facilities. Accordingly, these operations are included in discontinued operations.
Year Ended December 31, 2008 Compared To Year Ended December 31, 2007
The following table compares key total facility statistics and same-facility statistics for
2008 and 2007 for owned and leased inpatient facilities.
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Year Ended December 31, | % | |||||||||||
2008 | 2007 | Change | ||||||||||
Total facility results: |
||||||||||||
Revenue (in thousands) |
$ | 1,571,141 | $ | 1,314,203 | 19.6 | % | ||||||
Number of facilities at period end |
91 | 86 | 5.8 | % | ||||||||
Admissions |
163,616 | 138,454 | 18.2 | % | ||||||||
Patient days |
2,749,658 | 2,406,368 | 14.3 | % | ||||||||
Average length of stay |
16.8 | 17.4 | -3.4 | % | ||||||||
Revenue per patient day |
$ | 571 | $ | 546 | 4.6 | % | ||||||
Same-facility results: |
||||||||||||
Revenue (in thousands) |
$ | 1,419,904 | $ | 1,309,453 | 8.4 | % | ||||||
Number of facilities at period end |
86 | 86 | 0.0 | % | ||||||||
Admissions |
144,563 | 137,830 | 4.9 | % | ||||||||
Patient days |
2,472,292 | 2,399,812 | 3.0 | % | ||||||||
Average length of stay |
17.1 | 17.4 | -1.7 | % | ||||||||
Revenue per patient day |
$ | 574 | $ | 546 | 5.1 | % |
Revenue. Revenue from continuing operations increased $281.4 million, or 19.9%, to
$1.7 billion for the year ended December 31, 2008 compared to the year ended December 31, 2007.
Revenue from owned and leased inpatient facilities increased $256.9 million, or 19.6%, to $1.6
billion in 2008 compared to 2007. The increase in revenue from owned and leased inpatient
facilities relates primarily to the acquisitions of Horizon Health in 2007 and five inpatient
facilities from UMC in 2008. The remainder of the increase in revenue from owned and leased
inpatient facilities is primarily attributable to same-facility growth in patient days of 3.0% and
revenue per patient day of 5.1%. Other revenue was $125.0 million in 2008 compared to
$100.5 million in 2007, an increase of $24.5 million, resulting primarily from the management
contract business purchased in the Horizon Health acquisition.
Salaries, wages, and employee benefits. SWB expense was $938.4 million in 2008 compared
to $787.3 million in 2007, an increase of $151.1 million, or 19.2%. SWB expense includes $19.9
million and $16.1 million of shared-based compensation expense for the years ended December 31,
2008 and 2007, respectively. Excluding share-based compensation expense, SWB expense was $918.5
million, or 54.2% of total revenue, in 2008 compared to $771.2 million, or 54.5% of total revenue,
in 2007. SWB expense for owned and leased inpatient facilities was $843.0 million in 2008, or 53.7%
of revenue. Same-facility SWB expense for owned and leased inpatient facilities was $759.3 million
in 2008, or 53.5% of revenue, compared to $707.3 million in 2007, or 54.0% of revenue. SWB expense
for other operations increased to $49.0 million in 2008 compared to $35.1 million in 2007,
primarily as a result of the management contract business purchased in the Horizon Health
acquisition. SWB expense for our corporate office was $46.4 million, including $19.9 million in
share-based compensation, for 2008 compared to $41.5 million, including $16.1 million in
share-based compensation, for 2007.
Professional fees. Professional fees were $162.5 million in 2008, or 9.6% of total
revenue, compared to $135.8 million in 2007, or 9.6% of total revenue. Professional fees for owned
and leased inpatient facilities were $143.0 million in 2008, or 9.1% of revenue. Same-facility
professional fees for owned and leased inpatient facilities were $128.2 million in 2008, or 9.0% of
revenue, compared to $120.8 million in 2007, or 9.2% of revenue. Professional fees for other
operations and our corporate office increased to $19.5 million in 2008 compared to $14.2 million in
2007, primarily due to the other operations acquired in the Horizon Health acquisition.
Supplies. Supplies expense was $92.4 million in 2008, or 5.5% of total revenue, compared
to $77.7 million in 2007, or 5.5% of total revenue. Supplies expense for owned and leased inpatient
facilities was $91.6 million in 2008, or 5.8% of revenue. Same-facility supplies expense for owned
and leased inpatient facilities was $81.2 million in 2008, or 5.7% of revenue, compared to
$76.7 million in 2007, or 5.9% of revenue. Supplies expense for other operations as well as our
corporate office consisted primarily of office supplies and is negligible to our supplies expense
overall.
Provision for doubtful accounts. The provision for doubtful accounts was $34.3 million in
2008, or 2.0% of total revenue, compared to $27.3 million in 2007, or 1.9% of total revenue. The
provision for doubtful accounts at owned and leased inpatient facilities comprised substantially
all of our provision for doubtful accounts.
Other operating expenses. Other operating expenses consist primarily of rent, utilities,
insurance, travel, and repairs and maintenance expenses. Other operating expenses were
$183.6 million in 2008, or 10.8% of total revenue, compared to $151.7 million in 2007, or 10.7% of
total revenue. Other operating expenses for owned and leased inpatient facilities were
$132.0 million in 2008, or 8.4% of revenue. Same-facility other operating expenses for owned and
leased inpatient facilities were $118.2 million in 2008, or 8.3% of revenue, compared to
$104.3 million in 2007, or 8.0% of revenue. The increase in same-facility other operating expenses
for owned and leased inpatient facilities was primarily the result of an increase in our
self-insured reserves for professional and general liability risks, which is primarily due to the revised assessment of certain claims at amounts
higher than originally anticipated and the
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actuarial implications of such revisions. Other
operating expenses for other operations and our corporate office increased to $51.6 million in 2008
compared to $46.3 million in 2007, primarily due to the management contract business purchased in
the Horizon Health acquisition.
Depreciation and amortization. Depreciation and amortization expense increased to
$38.8 million in 2008 compared to $30.1 million in 2007, primarily as a result of the acquisitions
of inpatient facilities and capital expenditures during 2007 and 2008.
Interest expense, net. Interest expense, net of interest income, increased to
$76.0 million in 2008 compared to $73.9 million in 2007 primarily as a result of an increase in our
long-term debt offset by a reduction in our overall effective interest rate. We borrowed $443.2
million in May 2007 to finance the Horizon Health acquisition and borrowed $149.3 million in 2008
to finance the acquisition of five inpatient behavioral health care facilities from UMC,
acquisitions of EAP businesses that were later moved to discontinued operations, capital
expenditures and other general corporate purposes. In February 2009, as part of an amendment to our
revolving credit facility, the interest rate margins on borrowings based on LIBOR were increased to
a range of 5.0% to 5.75% depending upon a certain leverage ratio. This interest rate margin was
1.5% at December 31, 2008. For further information on the February 2009 amendment to our revolving
credit facility, see Liquidity and Capital Resources within this Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Income attributable to noncontrolling interest. During 2008 and 2007, we owned a
controlling interest in a joint venture that owned one of our inpatient behavioral health care
facilities. Income attributable to noncontrolling interest represents the pro rata portion of each
joint ventures net profit belonging to the noncontrolling partner.
Loss on refinancing of long-term debt. During 2007 we incurred a loss on refinancing
long-term debt of $8.2 million that consisted primarily of the amount above par value we paid to
repurchase our 105/8% Senior Subordinated Notes due 2013
(105/8 Notes), the write-off of capitalized financing costs associated with
our 105/8% Notes and the amount paid to exit the related interest rate swap
agreements.
(Loss) income from discontinued operations, net of taxes. The loss from discontinued
operations, net of income tax effect, was $81,000 for the year ended December 31, 2008 compared to
income from discontinued operations, net of income tax effect, of $74,000 for the year ended
December 31, 2007. During 2009, we completed the sale of our EAP business, elected to close and make The Oaks
Treatment Center and Cumberland Hall of Chattanooga available for sale, and terminated one contract
with a South Carolina juvenile justice agency. We also elected to close and make Nashville Rehabilitation
Hospital available for sale. During the year ended December 31, 2008, we elected to dispose of a
leased inpatient facility and recorded a $1.9 million write-down to fair value of the assets
held-for-sale for this facility. Additionally, two contracts with a Puerto Rican juvenile justice
agency to manage inpatient facilities were terminated in 2008. During the year ended December 31,
2007, we elected to dispose of one inpatient facility. Accordingly these operations are included in
discontinued operations.
Liquidity and Capital Resources
We currently have $295.7 million available for borrowings under our $300 million revolving
credit facility. Additionally, our cash flow from continuing operating activities was $205.4 million for the
year ended December 31, 2009 and we had $177.9 million of working capital at December 31, 2009. We
believe that our cash flow from operations, revolving credit facility availability and working
capital are sufficient to fund our known future cash requirements for operations and capital
expenditures. We historically spend approximately 2% to 3% of our revenue on routine capital
expenditures and currently have plans for construction projects with expected costs of
approximately $57 million over the next year, which will add approximately 300 new beds to our
inpatient facilities.
As part of our long-term growth strategy we are actively seeking acquisitions that fit our
corporate growth strategy and may acquire additional inpatient behavioral health care facilities
and other operations as well as incur expenditures for the expansion of our inpatient facilities.
Management continually assesses our capital needs and, should the need arise, we will seek
additional financing, including debt or equity, to fund potential acquisitions, facility
expansions, repayment of indebtedness or for other corporate purposes. In negotiating such
financing, there can be no assurance that we will be able to raise additional capital on terms
satisfactory to us. Failure to obtain additional financing on reasonable terms could have a
negative effect on our plans to acquire additional inpatient psychiatric facilities or expand our
facilities.
Working capital at December 31, 2009 was $177.9 million, including cash and cash
equivalents of $6.8 million, compared to working capital of $233.9 million, including cash and cash
equivalents of $51.3 million, at December 31, 2008. The $44.5 million decrease in cash and cash
equivalents is primarily a result of principal payments in excess of borrowings to reduce debt by
$127.9 million, cash used for acquisitions of $32.9 million and capital expenditures of $150.0
million, offset by cash provided by continuing operations of $205.4 million and cash received on
the sale of our EAP business of $68.5 million, net of fees and expenses. The net reduction in debt
included a $229.3 million reduction in our revolving credit facility such that there was no balance
outstanding at December 31, 2009, thereby increasing our borrowing availability to $295.7 million
from $63.9 million at December 31, 2008.
Working capital includes net current assets held for sale of discontinued operations totaling
$19.3 million and $72.3 million at December 31, 2009 and 2008, respectively. At December 31, 2008,
the net current assets held for sale included assets and liabilities of
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our EAP business that was sold in the fourth quarter of 2009 for approximately $68.5 million, net
of fees and expenses. Excluding net current assets held for sale of discontinued operations,
working capital was $158.6 million and $161.6 million at December 31, 2009 and 2008, respectively.
This change in working capital is primarily attributable to increases in accounts receivable of
$8.0 million and decreases in other accrued liabilities of $19.0 million to purchase a hospital
building previously leased and current maturities under our revolving credit facility of $29.3
million, offset by decreases in cash of $44.5 million, income tax receivable of $6.3 million and
deferred tax assets of $4.5 million, and an increase in accrued interest expense of $4.8 million.
Cash provided by continuing operating activities was $205.4 million in 2009 compared to
$139.3 million in 2008. The increase in cash flows from continuing operating activities was
primarily the result of cash provided by improved operating results, improved collections on
accounts receivable and a reduction in payments for income taxes and interest. Income tax payments
decreased to $49.9 million in 2009 compared to $68.1 million in 2008, primarily as a result of
applying income tax overpayments for 2008 to income taxes due for 2009. Interest payments decreased
to $62.0 million in 2009 compared to $79.8 million in 2008, primarily due to decreasing interest
rates on our variable rate debt and timing of interest payments. During 2009, the balance of
accounts receivable increased $3.9 million, net of acquisitions, compared to an increase of $17.8
million, net of acquisitions, during 2008, primarily as a result of improved collections on our
accounts receivables. The increase in the balance of accounts receivable, net of acquisitions,
during 2008 was primarily the result of post-acquisition receivables generated in 2008 from the
five facilities acquired from UMC in March 2008, for which no accounts receivable were purchased.
Our consolidated days sales outstanding were 49 and 52 at December 31, 2009 and 2008, respectively.
Billings for patient accounts receivable are generally submitted to the payor within three
days of the patients discharge or completion of services. Interim billings may be utilized for
patients with extended lengths of stay. We verify within a reasonable period of time that claims
submitted to third-party payors have been received and are being processed by such payors.
Follow-up regarding the status of each claim is made on a periodic basis until payment on the claim
is received. Billing notices for self-pay accounts receivable are distributed on a periodic basis.
Self-pay accounts receivable are turned over to collection agencies once internal collection
efforts have been exhausted. Accounts receivable under our inpatient management contracts are
billed at least monthly. Follow-up collection efforts are made on a periodic basis until payment is
received. Our allowance for doubtful accounts for patient receivables primarily consists of
patient accounts that are greater than 180 days past the patients discharge date. Our allowance
for doubtful accounts for receivables due under our inpatient management contracts primarily
consists of amounts that are specifically identified as potential collection issues. Accounts
receivable are not written off until collection within a reasonable period of time is deemed
unlikely.
Cash used by continuing investing activities was $181.7 million in 2009 compared to
$244.4 million in 2008. Cash used in investing activities in 2009 primarily consisted of $130.7
million paid for purchases of fixed assets, $32.9 million paid for acquisitions and $19.3 million
paid for the acquisition of the real estate of previously leased facilities. Cash used for routine
and expansion capital expenditures was approximately $53.3 million and $77.4 million, respectively,
for the year ended December 31, 2009. We expect expansion expenditures to continue during 2010 as a
result of planned capital expansion projects and the construction of new facilities, which are
expected to add approximately 300 new beds to our inpatient facilities. We define expansion capital
expenditures as those that increase the capacity of our facilities or otherwise enhance revenue.
Routine or maintenance capital expenditures were 3.0% of our net revenue for 2009. Cash provided by
discontinued investing activities in 2009 primarily consisted of $68.5 million in proceeds from the
sale of our EAP business, net of fees and expenses. Cash used in continuing investing activities in
2008 consisted primarily of $121.2 million in cash paid for acquisitions and $121.9 million paid
for purchases of fixed assets. Acquisitions in 2008 consisted primarily of five inpatient
behavioral health care facilities acquired from UMC. Cash used in discontinued investing activities
in 2008 consisted primarily of cash paid for acquisitions of EAP businesses.
Cash used in financing activities was $136.8 million in 2009 compared to cash provided by
financing activities of $155.7 million in 2008. Cash used in financing activities for 2009
consisted primarily of $229.3 million of net payments on our revolving credit facility, $9.9
million paid for loan and issuance costs and $5.1 million principal payments on long-term debt,
offset by $106.5 million received from the issuance of $120 million of our
73/4% Notes at a discount of 11.25%. Cash provided by financing activities in
2008 primarily resulted from $149.3 million borrowed under our revolving credit facility used to
finance the acquisition of five inpatient behavioral health care facilities from UMC and certain
EAP acquisitions, capital expenditures and other general corporate purposes.
We have filed a universal shelf registration statement on Form S-3 and an acquisition shelf
registration statement on Form S-4. The universal shelf registration statement permits us to sell,
in one or more public offerings, an indeterminate amount of our common stock, common stock
warrants, preferred stock and debt securities, or any combination of such securities, at prices and
on terms satisfactory to us. The acquisition shelf registration statement enables us to issue up to
5 million shares of our common stock in one or more business combination transactions, including
acquisitions by us of other businesses, assets, properties or securities. To date, no securities
have been issued pursuant to either registration statement.
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Obligations and Commitments
Payments Due by Period (in thousands) | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Long-term debt (1): |
||||||||||||||||||||
Senior Credit Facility: |
||||||||||||||||||||
Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 2.0% at December 31, 2009 |
$ | 564,875 | $ | 3,750 | $ | 561,125 | $ | | $ | | ||||||||||
7 3/4% Senior Subordinated Notes due July 15, 2015 |
582,666 | | | | 582,666 | |||||||||||||||
Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6% |
32,850 | 450 | 988 | 1,118 | 30,294 | |||||||||||||||
1,180,391 | 4,200 | 562,113 | 1,118 | 612,960 | ||||||||||||||||
Lease and other obligations |
86,786 | 14,872 | 20,988 | 14,410 | 36,516 | |||||||||||||||
Total contractual obligations |
$ | 1,267,177 | $ | 19,072 | $ | 583,101 | $ | 15,528 | $ | 649,476 | ||||||||||
(1) | Excludes capital lease obligations and other obligations of $6.7 million, which are included in lease and other obligations. |
The fair value of our $470.0 million in principal amount of 73/4%
Notes was approximately $453.6 million and $343.7 million as of December 31, 2009 and 2008,
respectively. The fair value of our $120.0 million in principal amount of
73/4% Notes issued in May 2009 was approximately $111.6 million as of
December 31, 2009. The fair value of our senior secured term loan facility was approximately $536.6
million as of December 31, 2009. The fair values of our revolving credit facility and senior
secured term loan facility were approximately $195.5 million and $446.4 million, respectively, as
of December 31, 2008. The carrying value of our other long-term debt, including current maturities,
of $39.5 million and $40.6 million at December 31, 2009 and 2008, respectively, approximated fair
value. We had $564.9 million of variable rate debt outstanding under our senior secured term loan
facility as of December 31, 2009. At our December 31, 2009 borrowing level, a hypothetical 10%
increase in interest rates would decrease our annual net income and cash flows by approximately
$0.7 million.
Impact of Inflation and Economic Trends
Although inflation has not had a material impact on our results of operations, the health
care industry is very labor intensive and salaries and benefits are subject to inflationary
pressures as are supply costs, which tend to escalate as vendors pass on the rising costs through
price increases. Some of the freestanding owned, leased and managed inpatient behavioral health
care facilities we operate are experiencing the effects of the tight labor market, including a
shortage of nurses, which has caused and may continue to cause an increase in our SWB expense in
excess of the inflation rate. Although we cannot predict our ability to cover future cost
increases, management believes that through adherence to cost containment policies, labor
management and reasonable price increases, the effects of inflation on future operating margins
should be manageable. Our ability to pass on increased costs associated with providing health care
to Medicare and Medicaid patients is limited due to various federal, state and local laws which
have been enacted that, in certain cases, limit our ability to increase prices. In addition, as a
result of increasing regulatory and competitive pressures and a continuing industry wide shift of
patients into managed care plans, our ability to maintain margins through price increases to
non-Medicare patients is limited.
The behavioral health care industry is typically not directly impacted by periods of
recession, erosions of consumer confidence or other general economic trends as most health care
services are not considered a component of discretionary spending. However, our inpatient
facilities may be indirectly negatively impacted to the extent such economic conditions result in
decreased reimbursements by federal or state governments or managed care payors. Discussion
concerning the current economic downturn is included in Part I, Item 1A under the caption Risk
Factors. We are not aware of any economic trends that would prevent us from being able to remain
in compliance with all of our debt covenants and to meet all required obligations and commitments
in the near future.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with GAAP. In
preparing our financial statements, we are required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, and expenses included in the financial
statements. Estimates are based on historical experience and other information currently available,
the results of which form the basis of such estimates. While we believe our estimation processes
are reasonable, actual results could differ from our estimates. The following represent the
estimates considered most critical to our operating performance and involve the most subjective and
complex assumptions and assessments.
Allowance for Doubtful Accounts
Our ability to collect outstanding patient receivables from third-party payors is
critical to our operating performance and cash flows.
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The primary collection risk with regard to patient receivables lies with uninsured
patient accounts or patient accounts for which primary insurance has paid, but the portion owed by
the patient remains outstanding. We estimate the allowance for doubtful accounts primarily based
upon the age of the accounts since the patient discharge date. We continually monitor our accounts
receivable balances and utilize 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 primary collection risk with regard to receivables due under our inpatient management
contracts is attributable to contractual disputes. We estimate the allowance for doubtful accounts
for these receivables based primarily upon the specific identification of potential collection
issues. As with our patient receivables, we continually monitor our accounts receivable balances
and utilize cash collection data to support our estimates of the provision for doubtful accounts.
Allowances for Contractual Discounts
The Medicare and Medicaid regulations are complex and various managed care contracts may
include multiple reimbursement mechanisms for different types of services provided in our inpatient
facilities and cost settlement provisions requiring complex calculations and assumptions subject to
interpretation. We estimate the allowance for contractual discounts on a payor-specific basis by
comparing our established billing rates with the amount we determine to be reimbursable given our
interpretation of the applicable regulations or contract terms. Most payments are determined based
on negotiated per-diem rates. While the services authorized and provided and related reimbursement
are often subject to interpretation that could result in payments that differ from our estimates,
these differences are deemed immaterial. Additionally, updated regulations and contract
renegotiations occur frequently necessitating continual review and assessment of the estimation
process by our management. We periodically compare the contractual rates on our patient accounting
systems with the Medicare and Medicaid reimbursement rates or the third-party payor contract for
accuracy. We also monitor the adequacy of our contractual adjustments using financial measures such
as comparing cash receipts to net patient revenue adjusted for bad debt expense.
As of December 31, 2009, our patient accounts receivable balance for third-party payors was
$235.0 million. A theoretical 1% change in the amounts due from third-party payors at December 31,
2009 could have an after tax effect of approximately $1.5 million on our financial position and
results of operations.
The following table presents the percentage by payor of our net revenue for the years ended
December 31, 2009 and 2008 and related accounts receivable at year end:
For the Year Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Net Revenue | Accounts Receivable | Net Revenue | Accounts Receivable | |||||||||||||
Medicaid |
29 | % | 24 | % | 30 | % | 26 | % | ||||||||
Commercial/HMO/Private
Pay |
37 | % | 42 | % | 36 | % | 41 | % | ||||||||
Medicare |
14 | % | 12 | % | 13 | % | 10 | % | ||||||||
State agency |
15 | % | 16 | % | 15 | % | 17 | % | ||||||||
Other |
5 | % | 6 | % | 6 | % | 6 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
The following table presents the percentage by aging category of our accounts receivable at
December 31, 2009 and 2008:
At December 31, | ||||||||
2009 | 2008 | |||||||
0 - 30 days |
64 | % | 64 | % | ||||
31 - 60 days |
14 | % | 13 | % | ||||
61 - 90 days |
8 | % | 8 | % | ||||
91 - 120 days |
5 | % | 5 | % | ||||
121 - 150 days |
3 | % | 4 | % | ||||
151 - 180 days |
3 | % | 4 | % | ||||
> 180 days |
3 | % | 2 | % | ||||
Total |
100 | % | 100 | % | ||||
Our consolidated days sales outstanding were 49 and 52 for the years ended December 31, 2009
and 2008, respectively. Our consolidated collections as a percentage of net revenue less bad debt
expense was 101.5% and 99.9% for the years ended December 31, 2009 and 2008, respectively.
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Professional and General Liability
We are subject to medical malpractice and other lawsuits due to the nature of the
services we provide. Our operations have professional and general liability insurance in umbrella
form for claims in excess of $3.0 million with an insured excess limit of $75.0 million. The
self-insured reserves for professional and general liability risks are estimated based on
historical claims, demographic factors, industry trends, severity factors, and other actuarial
assumptions calculated by an independent third-party actuary. This estimated accrual for
professional and general liabilities could be significantly affected should current and future
occurrences differ from historical claim trends and expectations. We have utilized our captive
insurance company to manage the self-insured retention. While claims are monitored closely when
estimating professional and general liability accruals, the complexity of the claims and wide range
of potential outcomes often limits timely adjustments to the assumptions used in these estimates.
Income Taxes
As part of our process for preparing our consolidated financial statements, our
management is required to compute income taxes in each of the jurisdictions in which we operate.
This process involves estimating the current tax benefit or expense of future deductible and
taxable temporary differences. The tax effects of future deductible and taxable temporary
differences are recorded as deferred tax assets and liabilities which are components of our balance
sheet. Management then assesses our ability to realize the deferred tax assets based on reversals
of deferred tax liabilities and, if necessary, estimates of future taxable income. A valuation
allowance for deferred tax assets is established when we believe that it is more likely than not
that the deferred tax asset will not be realized. Management must also assess the impact of our
acquisitions on the realization of deferred tax assets subject to a valuation allowance to
determine if all or a portion of the valuation allowance will be offset by reversing taxable
differences or future taxable income of the acquired entity. To the extent the valuation allowance
can be reversed due to the estimated future taxable income of an acquired entity, then our
valuation allowance is reduced accordingly as an adjustment to purchase price.
In order to apply GAAP, we are required to make significant judgments regarding the
recognition and measurement of each tax position. Changes in these judgments may materially affect
the estimate of our effective tax rate and our operating results.
Share-Based Compensation
We record share-based compensation expense for the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of such awards. We
utilize the Black-Scholes option pricing model to estimate the grant-date fair value of our stock
options. The Black-Scholes model includes certain variables and assumptions that require judgment,
such as the expected volatility of our stock price and the expected term of our stock options.
Additionally, judgment is in the estimation of forfeitures over the vesting period of share-based
awards.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Our interest expense is sensitive to changes in the general level of interest rates. With
respect to our interest-bearing liabilities, approximately $615.5 million of our long-term debt
outstanding at December 31, 2009 was subject to a weighted-average fixed interest rate of 8.0%. Our
variable rate debt is comprised of our senior secured term loan facility, which had $564.9 million
outstanding at December 31, 2009 and on which interest is generally payable at LIBOR plus 1.75%.
A hypothetical 10% increase in interest rates would decrease our net income and cash flows by
approximately $0.7 million on an annual basis based upon our borrowing level at December 31, 2009.
In the event we draw on our revolving credit facility and/or interest rates change significantly,
we expect management would take actions intended to further mitigate our exposure to such change
by targeting a portion of our debt portfolio to be maintained at fixed rates and periodically
entering into interest rate swap agreements.
Information on quantitative and qualitative disclosure about market risk is included in Part II,
Item 7 of this Annual Report on Form 10-K under the caption Managements Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources.
Item 8. | Financial Statements and Supplementary Data. |
Information with respect to this Item is contained in our consolidated financial
statements indicated in the Index on Page F-1 of this Annual Report on Form 10-K.
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
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Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of the end
of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure
controls and procedures were effective in ensuring that information required to be disclosed by us
(including our consolidated subsidiaries) in reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely
basis.
Managements Report on Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of
managements assessment of the design and operating effectiveness of our internal controls as part
of this report. Our independent registered public accounting firm also reported on the
effectiveness of our internal control over financial reporting. Managements report and the
independent registered public accounting firms report are included in our 2009 consolidated
financial statements beginning with the index on page F-1 of this report under the captions
entitled Managements Report on Internal Control Over Financial Reporting and Report of
Independent Registered Public Accounting Firm.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the
fourth quarter ended December 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers and Corporate Governance.
Directors
The information relating to our directors set forth in the Companys Proxy Statement
relating to the 2009 Annual Meeting of Stockholders under the caption Proposal 1: Election of
Directors and Corporate Governance Committees of the Board of Directors Audit Committee is
incorporated herein by reference.
Executive Officers of the Registrant
The executive officers of the Company are:
Name | Age | Officer Since | Positions | |||||
Joey A. Jacobs
|
56 | April 1997 | President and Chief Executive Officer | |||||
Ronald M. Fincher
|
56 | October 2008 | Chief Operating Officer | |||||
Jack E. Polson
|
43 | August 2002 | Executive Vice President, Chief Accounting Officer | |||||
Brent Turner
|
44 | February 2003 | Executive Vice President, Finance and Administration | |||||
Christopher L. Howard
|
43 | September 2005 | Executive Vice President, General Counsel and Secretary |
Joey A. Jacobs, President and Chief Executive Officer. Mr. Jacobs serves as President and
Chief Executive Officer and was one of our co-founders in April 1997. Prior to our founding, Mr.
Jacobs served for 21 years in various capacities with HCA Inc. (HCA, also formerly known as
Hospital Corporation of America, Columbia and Columbia/HCA), most recently as President of the
Tennessee Division. Mr. Jacobs background at HCA also includes serving as President of HCAs
Central Group, Vice President of the Western Group, Assistant Vice President of the Central Group
and Assistant Vice President of the Salt Lake City Division.
Ronald M. Fincher, Chief Operating Officer. Mr. Fincher has served as Chief Operating Officer
since January 14, 2010, after being appointed Co-Chief Operating Officer on October 13, 2008. He had
served the company as a Division President since April 2003. As a Division President, Mr. Fincher
was responsible for managing the operations of several of our inpatient behavioral health care
facilities. Prior to joining us, Mr. Fincher served as a Regional Vice President of Universal
Health Services, Inc. from 2000 until 2003.
Jack E. Polson, Executive Vice President, Chief Accounting Officer. Mr. Polson has served
as an Executive Vice President since September 2006 and as Chief Accounting Officer since
August 2002. Prior to being appointed Chief Accounting Officer, Mr. Polson had served as Controller
since June 1997. From June 1995 until joining us, Mr. Polson served as Controller for Columbia
Healthcare Network, a risk-bearing physician health organization. From May 1992 until June 1995,
Mr. Polson served as an Internal Audit Supervisor for HCA.
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Brent Turner, Executive Vice President, Finance and Administration. Mr. Turner has served
as the Executive Vice President, Finance and Administration since August 2005 and previously had
served as the Vice President, Treasurer and Investor Relations since February 2003. From April 2002
until joining us, Mr. Turner served as Executive Vice President and Chief Financial Officer of a
privately-held owner and operator of schools for children with learning disabilities. From
November 2001 until March 2002, Mr. Turner served as Senior Vice President of Business Development
for The Brown Schools, Inc., a provider of educational and therapeutic services for at-risk youth.
From 1996 until January 2001, Mr. Turner was employed by Corrections Corporation of America, a
private prison operator, serving as Treasurer from 1998 to 2001.
Christopher L. Howard, Executive Vice President, General Counsel and Secretary. Mr. Howard has
served as the Executive Vice President, General Counsel and Secretary since September 2005. Prior
to joining us, Mr. Howard was a member of Waller Lansden Dortch & Davis, LLP, a law firm based in
Nashville, Tennessee.
Code of Ethics
We adopted a Code of Ethics that applies to all of our directors, officers and employees.
The Code of Ethics is available on our website at www.psysolutions.com. We will disclose
any amendment to, other than technical, administrative or non-substantive amendments, or waiver of
our Code of Ethics granted to a director or executive officer by filing a Current Report on Form
8-K disclosing the amendment or waiver within four business days. Upon the written request of any
person, we will furnish, without charge, a copy of our Code of Ethics. Requests should be directed
to Psychiatric Solutions, Inc., 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067,
Attention: Christopher L. Howard, Esq., Executive Vice President, General Counsel and Secretary.
Section 16(a) Compliance
The information relating to Section 16(a) beneficial ownership reporting compliance set
forth in our Proxy Statement relating to the 2010 Annual Meeting of Stockholders under the caption
Section 16(a) Beneficial Ownership Reporting Compliance is incorporated herein by reference.
Item 11. Executive Compensation.
The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of
Stockholders under the caption Compensation Discussion and Analysis and Executive Compensation
is incorporated herein by reference. The Compensation Committee Report also included in the Proxy
Statement is expressly not incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of
Stockholders under the caption Security Ownership of Certain Beneficial Owners and Management and
Executive Compensation Equity Compensation Plan Information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of
Stockholders under the caption Corporate Governance Standards of Independence for the Board of
Directors and Certain Relationships and Related Transactions is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services.
The information set forth in our Proxy Statement relating to the 2010 Annual Meeting of
Stockholders under the caption Proposal 3: Ratification of Appointment of Independent Registered
Public Accounting Firm is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements: The consolidated financial statements of
Psychiatric Solutions are included as follows:
Page | ||
Report of Independent Registered Public Accounting Firm
|
F-2 | |
Managements Report on Internal Control Over Financial Reporting
|
F-3 | |
Report of Independent Registered Public Accounting Firm
|
F-4 | |
Consolidated Balance Sheets
|
F-5 | |
Consolidated Statements of Income
|
F-6 | |
Consolidated Statements of Stockholders Equity
|
F-7 | |
Consolidated Statements of Cash Flows
|
F-8 | |
Notes to Consolidated Financial Statements
|
F-10 |
2. Financial Statement Schedules.
All schedules are omitted because they are not applicable or are not required, or because the
required information is included in the consolidated financial statements or notes in this
report.
3. Exhibits. The exhibits which are filed with this report or which are incorporated herein by
reference are set forth in the Exhibit Index on pages 34 through 37.
(b) Exhibits.
Exhibit | ||
Number | Description | |
3.1
|
Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 1998). | |
3.2
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended July 31, 2002). | |
3.3
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A of the Companys Definitive Proxy Statement, filed on January 22, 2003). | |
3.4
|
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric Solutions, Inc., filed with the Delaware Secretary of State on December 15, 2005 (incorporated by reference to Exhibit 3.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005). | |
3.5
|
By-Laws (incorporated by reference to Exhibit 3 to the Companys Current Report on Form 8-K filed on November 6, 2007). | |
4.1
|
Reference is made to Exhibits 3.1 through 3.5. | |
4.2
|
Common Stock Specimen Certificate (incorporated by reference to Exhibit 4.2 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2002). | |
4.3
|
Indenture, dated as of July 6, 2005, by and among Psychiatric Solutions, Inc., the Guarantors named therein and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K, filed on July 8, 2005). | |
4.4
|
Form of Notes (included in Exhibit 4.3). |
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Exhibit | ||
Number | Description | |
4.5
|
Seventeenth Supplemental Indenture, dated as of May 31, 2007, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K, filed on June 1, 2007). | |
4.6
|
Purchase Agreement, dated as of May 4, 2009, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, and Banc of America Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities Inc. and RBC Capital Markets Corporation. (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K, filed on May 8, 2009). | |
4.7
|
Indenture, dated as of May 7, 2009, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K, filed on May 8, 2009). | |
4.8
|
Form of Notes (included in Exhibit 4.8) (incorporated by reference to Exhibit 4.3 to the Companys Current Report on Form 8-K, filed on May 8, 2009). | |
4.9
|
Registration Rights Agreement, dated as of May 7, 2009, among Psychiatric Solutions, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, and Banc of America Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., J.P. Morgan Securities Inc. and RBC Capital Markets Corporation (incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form 8-K, filed on May 8, 2009). | |
10.1
|
Employment Agreement, dated as of May 10, 2007, between Joey A. Jacobs and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10 to the Companys Current Report on Form 8-K, filed on May 15, 2007). | |
10.2
|
Form of Indemnification Agreement executed by each director of Psychiatric Solutions, Inc. and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004). | |
10.3
|
ISDA Master Agreement, dated as of November 29, 2007, between Merrill Lynch Capital Services, Inc. and Psychiatric Solutions, Inc. (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q, filed on May 6, 2008). | |
10.4
|
Second Amended and Restated Credit Agreement, dated as of July 1, 2005, by and among Psychiatric Solutions, Inc., the subsidiaries named as guarantors thereto, Citicorp North America, Inc., as term loan facility administrative agent, co-syndication agent and documentation agent, Bank of America, N.A., as revolving loan facility administrative agent, collateral agent swing line lender and co-syndication agent, and the various other agents and lenders party thereto. (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, filed on July 8, 2005). | |
10.5
|
Amendment No. 1 to Psychiatric Solutions, Inc.s Second Amended and Restated Credit Agreement, dated as of December 1, 2006, by and between Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, Citicorp North America, Inc., as Term Loan Facility Administrative Agent, Bank of America, N.A., as Revolving Credit Facility Administrative Agent, Citigroup Global Markets Inc. and Banc of America Securities LLC, as the Arrangers (incorporated by reference to Exhibit 10 to the Companys Current Report on Form 8-K, filed on December 7, 2006). | |
10.6
|
Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of December 1, 2006, by and among Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., Horizon Health Corporation, ABS LINCS PR, Inc., First Hospital Panamericano, Inc., FHCHS of Puerto Rico, Inc., First Corrections Puerto-Rico, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, Citicorp North America, Inc., as term loan facility administrative agent, Bank of America, N.A., as revolving credit facility administrative agent, Citigroup Global Markets Inc. and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers and joint book-running managers (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, filed on June 1, 2007). |
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Exhibit | ||
Number | Description | |
10.7
|
Incremental Facility Amendment, dated as of February 25, 2009, to the Second Amended and Restated Credit Agreement, as amended, by and among Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., Horizon Health Corporation, Community Cornerstones, Inc., FHP Puerto Rico, Inc., First Hospital Panamericano, Inc., FHCHS of Puerto Rico, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, the incremental revolving credit lenders party thereto, Citicorp North America, Inc., as term loan facility administrative agent, Bank of America, N.A., as revolving credit facility administrative agent, Barclays Bank PLC, as syndication agent, and General Electric Capital Corporation, JPMorgan Chase Bank, N.A. and Fifth Third Bank, as documentation agents, (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2009). | |
10.8
|
Amendment No. 4 to Second Amended and Restated Credit Agreement, as amended, dated as of September 25, 2009, by and among Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier Behavioral Solutions, Inc., Alternative Behavioral Services, Inc., Horizon Health Corporation, Community Cornerstones, Inc., First Corrections Puerto Rico, Inc., First Hospital Panamericano, Inc., FHCHS of Puerto Rico, Inc., the subsidiaries of Psychiatric Solutions, Inc. party thereto as guarantors, the incremental revolving credit lenders party thereto, Citicorp North America, Inc. as term loan facility administrative agent, and Bank of America, N.A., as revolving credit facility administrative agent. (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.9
|
Amended and Restated Psychiatric Solutions, Inc. Equity Incentive Plan, as amended by an Amendment adopted on May 4, 2004 (incorporated by reference to Appendix A to the Companys Definitive Proxy Statement, filed on April 9, 2004). | |
10.10
|
Second Amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (incorporated by reference to Appendix A to the Companys Definitive Proxy Statement, filed on April 22, 2005). | |
10.11
|
Third Amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (incorporated by reference to Appendix B of the Companys Definitive Proxy Statement, filed on April 21, 2006). | |
10.12
|
Fourth Amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (incorporated by reference to Appendix A to the Companys Definitive Proxy Statement, filed on April 10, 2008). | |
10.13
|
Psychiatric Solutions, Inc. Executive Performance Incentive Plan (incorporated by reference to Appendix A of the Companys Definitive Proxy Statement, filed on April 21, 2006). | |
10.14
|
Form of Nonstatutory Stock Option Agreement under the 1997 Plan (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2007). | |
10.15
|
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2006). | |
10.16
|
Amended and Restated Psychiatric Solutions, Inc. Outside Directors Non-Qualified Stock Option Plan (incorporated by reference to Appendix C to the Companys Definitive Proxy Statement, filed on April 14, 2003). | |
10.17
|
Amendment to the Amended and Restated Psychiatric Solutions, Inc. Outside Directors Stock Option Plan (incorporated by reference to Appendix B to the Companys Definitive Proxy Statement, filed on April 22, 2005). | |
10.18
|
Form of Outside Directors Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.5 to the Companys Annual Report on Form 10-K for the year ended April 30, 1997). | |
10.19
|
Summary of Director Compensation (incorporated by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006). | |
10.20
|
Outside Director Retainer Increase (incorporated by reference to the Companys Current Report on Form 8-K, filed on October 20, 2008). | |
10.21
|
Psychiatric Solutions, Inc. Outside Directors Stock Incentive Plan (incorporated by reference to Appendix A to the Companys Definitive Proxy Statement, filed on April 9, 2009). |
36
Table of Contents
Exhibit | ||
Number | Description | |
10.22
|
Psychiatric Solutions, Inc. 2009 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, filed on March 6, 2009). | |
10.23
|
Psychiatric Solutions, Inc. Amended 2009 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, filed on December 24, 2009). | |
10.24
|
Psychiatric Solutions, Inc. 2009 Cash Bonus Plans (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K, filed on March 6, 2009). | |
10.25
|
Psychiatric Solutions, Inc. 2010 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, filed on December 24, 2009). | |
21.1*
|
List of Subsidiaries. | |
23.1*
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. | |
31.1*
|
Certification of the Chief Executive Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of the Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certifications of the Chief Executive Officer and Chief Accounting Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith | |
| Management contract or compensatory plan or arrangement |
37
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE | ||
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 | ||
F-7 | ||
F-8 | ||
F-10 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Psychiatric Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Psychiatric Solutions, Inc. as
of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2009. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Psychiatric Solutions, Inc. at December 31, 2009
and 2008, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Psychiatric Solutions, Inc.s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 25, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 25, 2010
February 25, 2010
F-2
Table of Contents
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under
the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2009 based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31, 2009.
Our accompanying consolidated financial statements have been audited by the independent
registered public accounting firm of Ernst & Young LLP. Reports of the independent registered
public accounting firm, including the independent registered public accounting firms report on our
internal control over financial reporting, are included in this document.
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Psychiatric Solutions, Inc.
We have audited Psychiatric Solutions, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Psychiatric Solutions, Inc.s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Psychiatric Solutions, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Psychiatric Solutions, Inc. as
of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2009 of
Psychiatric Solutions, Inc. and our report dated February 25, 2010 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 25, 2010
February 25, 2010
F-4
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,815 | $ | 51,271 | ||||
Accounts receivable, less allowance for doubtful accounts of
$51,894 and $48,383, respectively |
249,439 | 241,459 | ||||||
Other current assets |
105,166 | 174,780 | ||||||
Total current assets |
361,420 | 467,510 | ||||||
Property and equipment: |
||||||||
Land |
188,097 | 172,184 | ||||||
Buildings |
775,887 | 662,513 | ||||||
Equipment |
117,434 | 95,509 | ||||||
Less accumulated depreciation |
(149,688 | ) | (109,753 | ) | ||||
931,730 | 820,453 | |||||||
Cost in excess of net assets acquired |
1,153,111 | 1,139,242 | ||||||
Other assets |
60,979 | 78,785 | ||||||
Total assets |
$ | 2,507,240 | $ | 2,505,990 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 35,397 | $ | 34,609 | ||||
Salaries and benefits payable |
81,129 | 83,539 | ||||||
Other accrued liabilities |
62,036 | 81,065 | ||||||
Current portion of long-term debt |
4,940 | 34,391 | ||||||
Total current liabilities |
183,502 | 233,604 | ||||||
Long-term debt, less current portion |
1,182,139 | 1,280,006 | ||||||
Deferred tax liability |
81,137 | 69,471 | ||||||
Other liabilities |
25,790 | 28,067 | ||||||
Total liabilities |
1,472,568 | 1,611,148 | ||||||
Redeemable noncontrolling interests |
4,337 | 4,957 | ||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 125,000 shares authorized;
56,226 and 55,934 issued and outstanding, respectively |
562 | 559 | ||||||
Additional paid-in capital |
627,476 | 608,341 | ||||||
Accumulated other comprehensive loss |
| (3,695 | ) | |||||
Retained earnings |
402,297 | 284,680 | ||||||
Total stockholders equity |
1,030,335 | 889,885 | ||||||
Total liabilities and stockholders equity |
$ | 2,507,240 | $ | 2,505,990 | ||||
See accompanying notes.
F-5
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share amounts)
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share amounts)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue |
$ | 1,805,361 | $ | 1,696,116 | $ | 1,414,700 | ||||||
Salaries, wages and employee benefits (including share-based
compensation of $17,505, $19,913 and $16,104 for the years
ended December 31, 2009, 2008 and 2007, respectively) |
1,005,204 | 938,363 | 787,301 | |||||||||
Professional fees |
166,785 | 162,491 | 135,803 | |||||||||
Supplies |
92,572 | 92,393 | 77,738 | |||||||||
Rentals and leases |
20,131 | 20,635 | 18,939 | |||||||||
Other operating expenses |
172,868 | 162,980 | 132,778 | |||||||||
Provision for doubtful accounts |
36,414 | 34,334 | 27,343 | |||||||||
Depreciation and amortization |
44,778 | 38,843 | 30,113 | |||||||||
Interest expense |
71,549 | 75,982 | 73,887 | |||||||||
Loss on refinancing long-term debt |
| | 8,179 | |||||||||
1,610,301 | 1,526,021 | 1,292,081 | ||||||||||
Income from continuing operations before income taxes |
195,060 | 170,095 | 122,619 | |||||||||
Provision for income taxes |
74,889 | 64,457 | 46,200 | |||||||||
Income from continuing operations |
120,171 | 105,638 | 76,419 | |||||||||
(Loss) income from discontinued operations, net of (benefit from)
provision for income taxes of $(3,239), $1,528 and $707
for 2009,
2008 and 2007, respectively |
(2,461 | ) | (81 | ) | 74 | |||||||
Net income |
117,710 | 105,557 | 76,493 | |||||||||
Less: Net income attributable to noncontrolling interests |
(93 | ) | (604 | ) | (285 | ) | ||||||
Net income attributable to PSI stockholders |
$ | 117,617 | $ | 104,953 | $ | 76,208 | ||||||
Basic earnings per share: |
||||||||||||
Income from continuing operations attributable to PSI
stockholders |
$ | 2.16 | $ | 1.89 | $ | 1.40 | ||||||
(Loss) income from discontinued operations, net of taxes |
(0.04 | ) | | | ||||||||
Net income attributable to PSI stockholders |
$ | 2.12 | $ | 1.89 | $ | 1.40 | ||||||
Diluted earnings per share: |
||||||||||||
Income from continuing operations attributable to PSI
stockholders |
$ | 2.14 | $ | 1.87 | $ | 1.37 | ||||||
(Loss) income from discontinued operations, net of taxes |
(0.04 | ) | | | ||||||||
Net income attributable to PSI stockholders |
$ | 2.10 | $ | 1.87 | $ | 1.37 | ||||||
Shares used in computing per share amounts: |
||||||||||||
Basic |
55,564 | 55,408 | 54,258 | |||||||||
Diluted |
56,116 | 56,267 | 55,447 | |||||||||
Amounts attributable to PSI stockholders: |
||||||||||||
Income from continuing operations, net of taxes |
$ | 120,078 | $ | 105,034 | $ | 76,134 | ||||||
(Loss) income from discontinued operations, net of taxes |
(2,461 | ) | (81 | ) | 74 | |||||||
Net income attributable to PSI stockholders |
$ | 117,617 | $ | 104,953 | $ | 76,208 | ||||||
See accompanying notes.
F-6
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
Balance at December 31, 2006 |
53,421 | $ | 534 | $ | 523,193 | $ | | $ | 104,052 | $ | 627,779 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income attributable to PSI stockholders |
| | | | 76,208 | 76,208 | ||||||||||||||||||
Change in
fair value of interest rate swap, net of tax benefit of $308 |
| | | (479 | ) | | (479 | ) | ||||||||||||||||
Total comprehensive income |
75,729 | |||||||||||||||||||||||
Share-based compensation |
| | 16,104 | | | 16,104 | ||||||||||||||||||
Common stock issued in
acquisition |
243 | 2 | 8,998 | | | 9,000 | ||||||||||||||||||
Exercise of stock options and
grants of restricted stock, net
of issuance costs |
1,443 | 15 | 17,220 | | | 17,235 | ||||||||||||||||||
Cumulative adjustment for
adoption of FIN 48 |
| | | | (533 | ) | (533 | ) | ||||||||||||||||
Income tax benefit of stock option
exercises |
| | 9,428 | | | 9,428 | ||||||||||||||||||
Balance at December 31, 2007 |
55,107 | 551 | 574,943 | (479 | ) | 179,727 | 754,742 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income attributable to PSI stockholders |
| | | | 104,953 | 104,953 | ||||||||||||||||||
Change in fair value of interest rate
swap, net of tax benefit of $2,154 |
| | | (3,216 | ) | | (3,216 | ) | ||||||||||||||||
Total comprehensive income |
101,737 | |||||||||||||||||||||||
Share-based compensation |
| | 19,913 | | | 19,913 | ||||||||||||||||||
Common stock issued in acquisition of
discontinued operation |
27 | | 1,000 | | | 1,000 | ||||||||||||||||||
Exercise of stock options and
grants of restricted stock, net
of issuance costs |
800 | 8 | 9,433 | | | 9,441 | ||||||||||||||||||
Income tax benefit of stock option
exercises |
| | 3,052 | | | 3,052 | ||||||||||||||||||
Balance at December 31, 2008 |
55,934 | 559 | 608,341 | (3,695 | ) | 284,680 | 889,885 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income attributable to PSI stockholders |
| | | | 117,617 | 117,617 | ||||||||||||||||||
Change in fair value of interest rate
swap, net of tax provision of $2,466 |
| | | 3,695 | | 3,695 | ||||||||||||||||||
Total comprehensive income |
121,312 | |||||||||||||||||||||||
Share-based compensation |
| | 17,505 | | | 17,505 | ||||||||||||||||||
Exercise of stock options and
grants of restricted stock, net
of issuance costs |
292 | 3 | (48 | ) | | | (45 | ) | ||||||||||||||||
Income tax benefit of stock option
exercises |
| | 1,678 | | | 1,678 | ||||||||||||||||||
Balance at December 31, 2009 |
56,226 | $ | 562 | $ | 627,476 | $ | | $ | 402,297 | $ | 1,030,335 | |||||||||||||
See accompanying notes.
F-7
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 117,710 | $ | 105,557 | $ | 76,493 | ||||||
Adjustments to reconcile net income to
net cash provided by continuing
operating activities: |
||||||||||||
Depreciation and amortization |
44,778 | 38,843 | 30,113 | |||||||||
Amortization of loan costs and bond discount/premium |
5,300 | 2,213 | 2,151 | |||||||||
Share-based compensation |
17,505 | 19,913 | 16,104 | |||||||||
Loss on refinancing long-term debt |
| | 8,179 | |||||||||
Change in income tax assets and liabilities |
20,050 | (5,034 | ) | 8,639 | ||||||||
Loss (income) from discontinued operations, net of taxes |
2,461 | 81 | (74 | ) | ||||||||
Changes in operating assets and liabilities,
net of effect of acquisitions: |
||||||||||||
Accounts receivable |
(3,911 | ) | (17,755 | ) | (12,592 | ) | ||||||
Other current assets |
8,024 | (4,612 | ) | 6,298 | ||||||||
Accounts payable |
(1,391 | ) | 2,891 | (7,939 | ) | |||||||
Salaries and benefits payable |
(6,219 | ) | 1,731 | 1,876 | ||||||||
Accrued liabilities and other liabilities |
1,104 | (4,567 | ) | (5,676 | ) | |||||||
Net cash provided by continuing operating activities |
205,411 | 139,261 | 123,572 | |||||||||
Net cash provided by discontinued operating activities |
983 | 2,522 | 1,949 | |||||||||
Net cash provided by operating activities |
206,394 | 141,783 | 125,521 | |||||||||
Investing activities: |
||||||||||||
Cash paid for acquisitions, net of cash acquired |
(32,910 | ) | (121,156 | ) | (444,899 | ) | ||||||
Cash paid for real estate acquisitions |
(19,341 | ) | | | ||||||||
Capital purchases of leasehold improvements,
equipment and software |
(130,674 | ) | (121,930 | ) | (71,260 | ) | ||||||
Other assets |
1,229 | (1,318 | ) | (2,451 | ) | |||||||
Net cash used in continuing investing activities |
(181,696 | ) | (244,404 | ) | (518,610 | ) | ||||||
Net cash provided by (used in) discontinued investing activities |
67,692 | (41,811 | ) | (17,974 | ) | |||||||
Net cash used in investing activities |
(114,004 | ) | (286,215 | ) | (536,584 | ) | ||||||
(Continued)
F-8
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Financing activities: |
||||||||||||
Net (decrease) increase in revolving credit facility |
$ | (229,333 | ) | $ | 149,333 | $ | (21,000 | ) | ||||
Borrowings on long-term debt |
106,500 | | 481,875 | |||||||||
Principal payments on long-term debt |
(5,093 | ) | (6,067 | ) | (41,281 | ) | ||||||
Payment of loan and issuance costs |
(9,903 | ) | (59 | ) | (6,661 | ) | ||||||
Refinancing of long-term debt |
| | (7,127 | ) | ||||||||
Excess tax benefit from share-based payment arrangements |
1,678 | 3,052 | 9,428 | |||||||||
Distributions to noncontrolling interests |
(723 | ) | | | ||||||||
Repurchase of common stock upon restricted stock vesting |
(1,057 | ) | (271 | ) | (122 | ) | ||||||
Proceeds from exercises of common stock options |
1,085 | 9,745 | 17,401 | |||||||||
Net cash (used in) provided by financing activities |
(136,846 | ) | 155,733 | 432,513 | ||||||||
Net (decrease) increase in cash |
(44,456 | ) | 11,301 | 21,450 | ||||||||
Cash and cash equivalents at beginning of the year |
51,271 | 39,970 | 18,520 | |||||||||
Cash and cash equivalents at end of the year |
$ | 6,815 | $ | 51,271 | $ | 39,970 | ||||||
Supplemental Cash Flow Information: |
||||||||||||
Interest paid |
$ | 61,971 | $ | 79,824 | $ | 62,864 | ||||||
Income taxes paid |
$ | 49,934 | $ | 68,151 | $ | 29,924 | ||||||
Effect of Acquisitions: |
||||||||||||
Assets acquired, net of cash acquired |
$ | 39,147 | $ | 124,687 | $ | 497,354 | ||||||
Liabilities assumed |
(6,162 | ) | (3,531 | ) | (34,753 | ) | ||||||
Common stock issued |
| | (9,000 | ) | ||||||||
Long-term debt assumed |
(75 | ) | | (8,702 | ) | |||||||
Cash paid for acquisitions, net of cash acquired |
$ | 32,910 | $ | 121,156 | $ | 444,899 | ||||||
See accompanying notes.
F-9
Table of Contents
PSYCHIATRIC
SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
December 31, 2009
1. Summary of Significant Accounting Policies
Description of Business
Psychiatric Solutions, Inc. was incorporated in 1988 as a Delaware corporation and has its
corporate office in Franklin, Tennessee. Psychiatric Solutions, Inc. and its subsidiaries (we,
us or our) are a leading provider of inpatient behavioral health care services in the United
States. Through our owned and leased facilities, we operated 94 owned or leased inpatient
behavioral health care facilities with approximately 11,000 beds in 32 states, Puerto Rico and the
U.S. Virgin Islands at December 31, 2009. Our other behavioral health care business primarily
consists of our contract management and a managed care plan in Puerto Rico. Our contract management
business involves the development, organization and management of behavioral health care and
rehabilitation programs within medical/surgical hospitals.
Recent Developments
In January 2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin,
Tennessee.
In May 2009, we received $106.5 million upon the issuance of $120 million of our
73/4% Senior Subordinated Notes due 2015 (the 73/4%
Notes) and used the proceeds to repay a portion of the outstanding balance of our revolving credit
facility. During February 2009, our revolving credit facility was amended to extend the maturity of
$200 million capacity to December 31, 2011. During September 2009, the maturity of the remaining
$100 million capacity under our revolving credit facility was extended to mature on December 31,
2011. At December 31, 2009, we had no borrowings outstanding under our revolving credit facility.
On September 1, 2009, we completed the acquisition of a 131-bed inpatient behavioral health care
facility located in Fargo, North Dakota. On September 30, 2009, we completed the acquisition of a
90-bed inpatient behavioral health care facility located in Panama City, Florida.
On November 2, 2009, we completed the sale of our employee assistance program (EAP) business for
approximately $68.5 million in cash, net of fees and expenses.
Basis of Presentation
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. The majority of our expenses are cost of revenue items. Costs that
could be classified as general and administrative expenses at our corporate office, excluding
share-based compensation expense, were approximately 2.6% of net revenue for the year ended
December 31, 2009.
The consolidated financial statements include all wholly-owned subsidiaries and entities controlled
by Psychiatric Solutions, Inc. The consolidated financial statements include two inpatient
behavioral health care facilities in which we own a controlling interest and account for the
ownership interest of the non- controlling partner as redeemable noncontrolling interests. All
significant intercompany balances and transactions are eliminated in consolidation.
Cash and Cash Equivalents
Cash consists of demand deposits held at financial institutions. We place our cash in financial
institutions that are federally insured. At December 31, 2009, the majority of our cash is
deposited with two financial institutions. Cash equivalents are short-term investments with
original maturities of three months or less.
Accounts Receivable
Accounts receivable vary according to the type of service being provided. Accounts receivable for
our owned and leased facilities segment 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 12% and 10% of accounts receivable at December 31, 2009 and
2008, respectively. Medicaid comprised approximately 24% and 26% of accounts receivable at December 31, 2009 and 2008, respectively. Concentration of credit
risk from other payors is reduced by the large number of patients and payors.
Accounts receivable for our management contracts is comprised of contractually determined fees for
services rendered. Such amounts are recorded net of estimated allowances for doubtful accounts.
Concentration of credit risk is reduced by the large number of customers.
F-10
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Allowance for Doubtful Accounts
Our ability to collect outstanding patient receivables from third party payors is critical to our
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. We estimate the allowance for doubtful accounts primarily based upon
the age of the accounts since the patient discharge date. We continually monitor our accounts
receivable balances and utilize 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.
Allowances for Contractual Discounts
The Medicare and Medicaid regulations are complex and various managed care contracts may include
multiple reimbursement mechanisms for different types of services provided in our inpatient
facilities and cost settlement provisions requiring complex calculations and assumptions subject to
interpretation. We estimate 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 our estimates. Additionally, updated regulations and contract
renegotiations occur frequently necessitating continual review and assessment of the estimation
process by our management.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, deferred tax
assets and liabilities are determined based upon differences between the financial statement
carrying amounts and tax bases of assets and liabilities and are measured using the enacted tax
laws that will be in effect when the differences are expected to reverse. A valuation allowance for
deferred tax assets is established when we believe that it is more likely than not that the
deferred tax asset will not be realized. Significant judgments regarding the recognition and
measurement of each tax position are required. Our policy is to classify interest and penalties
related to income taxes as a component of our tax provision.
Long-Lived Assets
Property and Equipment
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 $41.4
million, $35.4 million and $28.3 million for the years ended December 31, 2009, 2008 and 2007,
respectively. Depreciation expense includes the amortization of assets recorded under capital
leases.
Cost in Excess of Net Assets Acquired (Goodwill)
We account for acquisitions using the acquisition method of accounting. Goodwill is generally
allocated to reporting units based on operating results. Goodwill is reviewed at least annually for
impairment. Potential impairment is noted for a reporting unit if its carrying value exceeds the
fair value of the reporting unit. For those reporting units that we have identified with potential
impairment of goodwill, we determine the implied fair value of goodwill. If the carrying value of
goodwill exceeds its implied fair value, an impairment loss is recorded. Our annual impairment
tests of goodwill in 2009, 2008 and 2007 resulted in no goodwill impairment.
The following table presents the changes in the carrying amount of goodwill for the years ended
December 31, 2009 and 2008 (in thousands):
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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Owned and | ||||||||||||
Leased | ||||||||||||
Facilities | Other | Total | ||||||||||
Balance at December 31, 2007 |
$ | 1,035,606 | $ | 16,176 | $ | 1,051,782 | ||||||
Acquisition of UMC facilities |
85,459 | | 85,459 | |||||||||
Other Acquisitions |
2,001 | | 2,001 | |||||||||
Balance at December 31, 2008 |
1,123,066 | 16,176 | 1,139,242 | |||||||||
Acquisitions |
13,869 | | 13,869 | |||||||||
Balance at December 31, 2009 |
$ | 1,136,935 | $ | 16,176 | $ | 1,153,111 | ||||||
Other Assets
Other assets include contracts that represent the fair value of inpatient management contracts and
service contracts purchased and are being amortized using the straight-line method over their
estimated life, which is between 4 years and 9 years. At December 31, 2009 and 2008, contracts
totaled $22.2 million and $25.5 million and are net of accumulated amortization of $10.7 million
and $7.4 million, respectively. Amortization expense related to contracts was $3.3 million, $3.2
million and $1.7 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Estimated amortization expense related to contracts for each of the five years ending December 31,
2014 is approximately $3.3 million.
When events, circumstances and operating results indicate that the carrying values of certain
long-lived assets and the related identifiable intangible assets might be impaired, we prepare
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 is estimated based
upon projections of discounted cash flows.
Other assets also include loan costs that are deferred and amortized over the term of the related
debt. Loan costs at December 31, 2009 and 2008 totaled $18.8 million and $14.0 million,
respectively, and are net of accumulated amortization of $9.6 million and $8.1 million,
respectively. Amortization expense related to loan costs, which is reported as interest expense,
was approximately $5.0 million, $2.9 million and $2.5 million for the years ended December 31,
2009, 2008 and 2007, respectively. Estimated amortization expense of loan costs for the years
ending December 31, 2010, 2011, 2012, 2013 and 2014 is $5.4 million, $5.5 million, $2.3 million,
$1.8 million and $1.9 million, respectively.
Other Accrued Liabilities
At December 31, 2009 and 2008, we had approximately $23.1 million and $18.3 million, respectively,
of accrued interest expense in other accrued liabilities.
Share-Based Compensation
We adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 718, Compensation Stock Compensation (ASC 718), under the modified-prospective
transition method on January 1, 2006. ASC 718 requires companies to measure and recognize the cost
of employee services received in exchange for an award of equity instruments based on the
grant-date fair value. Share-based compensation recognized under the modified-prospective
transition method of ASC 718 includes share-based compensation based on the grant-date fair value
determined in accordance with the original provisions, for all share-based payments granted prior
to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date
fair-value determined in accordance with ASC 718 for all share-based payments granted on or after
January 1, 2006. We use the Black-Scholes valuation model to determine grant-date fair value and
use straight-line amortization of share-based compensation expense over the requisite service
period of the grant.
Derivatives
We may periodically enter into interest rate swap agreements to manage our exposure to fluctuations
in interest rates. These interest rate swap agreements effectively exchange fixed or variable
interest payments between two parties. During 2007, we entered into an agreement to exchange the
interest payments associated with a notional amount of $225 million LIBOR indexed variable rate
debt related to our senior secured term loan for a fixed interest rate. This interest rate swap
agreement expired during the fourth quarter of 2009 and as of December 31, 2009, we were not a
party to an interest rate swap agreement.
F-12
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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Risk Management
We are subject to medical malpractice and other lawsuits due to the nature of the services we
provide. Our operations have professional and general liability insurance in umbrella form for
claims in excess of a $3.0 million self-insured retention with an insured excess limit of $75.0
million. The self-insured reserves for professional and general liability risks are estimated
based on historical claims, demographic factors, industry trends, severity factors, and other
actuarial assumptions calculated by an independent third-party actuary. This estimated accrual for
professional and general liabilities could be significantly affected should current and future
occurrences differ from historical claim trends and expectations. We have utilized our captive
insurance company to manage the self-insured retention. While claims are monitored closely when
estimating professional and general liability accruals, the complexity of the claims and wide range
of potential outcomes often hampers timely adjustments to the assumptions used in these estimates.
The reserve for professional and general liability was $19.0 million and $20.0 million as of
December 31, 2009 and 2008, respectively.
We carry statutory workers compensation insurance from an unrelated commercial insurance carrier.
Our statutory workers compensation program is fully insured with a $500,000 deductible per
accident. The reserve for workers compensation liability was $24.2 million and $20.9 million as of
December 31, 2009 and 2008, respectively. We believe that adequate provisions have been made for
workers compensation and professional and general liability risk exposures.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying Consolidated Balance Sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate their fair value given the
short-term maturity of these instruments. The fair value of our $470.0 million
73/4% Senior Subordinated Notes due 2015 (73/4%
Notes) was $453.6 million and $343.7 million at December 31, 2009 and 2008, respectively. The fair
value of our $120.0 million in principal amount of 73/4% Notes issued in May
2009 was $111.6 million as of December 31, 2009. The fair value of our senior secured term loan
facility was $536.6 million and $446.4 million as of December 31, 2009 and 2008, respectively. The
fair value of our revolving credit facility was $195.5 million as of December 31, 2008.
Reclassifications
Certain reclassifications have been made to the prior year to conform with current year
presentation.
Recent Accounting Pronouncements
In September 2009, we adopted the FASB ASC. The ASC was established as the source of authoritative
accounting principles to be applied to nongovernmental entities in the preparation of financial
statements in conformity with GAAP. The ASC did not change GAAP, but was intended to simplify user
access to all authoritative GAAP by providing the authoritative literature related to a particular
topic in one place. All previously existing accounting standard documents were superseded and all
other accounting literature not included in the ASC is considered non-authoritative. New accounting
standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting
Standards Updates (ASUs). The ASC did not have an impact on our consolidated results of operation
or financial condition. However, throughout the notes to the consolidated financial statements
references that were previously made to various former authoritative GAAP pronouncements have been
changed to coincide with the appropriate section of the ASC.
In May 2009, the FASB issued guidance codified in ASC 855, Subsequent Events, establishing
standards for accounting and disclosure of events that occur after the balance sheet date, but
before financial statements are issued. This guidance requires the disclosure of the date through
which an entity has evaluated subsequent events and whether that date represents the date the
financial statements were issued or were available to be issued. We adopted this guidance in the
quarter ended June 30, 2009.
In March 2008, the FASB issued guidance codified in ASC 805, Business Combinations, that requires
enhanced disclosures about derivative and hedging activities. We adopted this guidance on January
1, 2009.
In December 2007, the FASB issued guidance codified in ASC 810, Consolidation, requiring the use of
the acquisition method of accounting, defining the acquirer, establishing the acquisition date,
requiring acquisition-related costs to be expensed as incurred and broadening the scope of a
business combination to include transactions and other events in which one entity obtains control
over one or more other businesses. We adopted this guidance on January 1, 2009.
In December 2007, the FASB issued guidance establishing accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a
subsidiary is deconsolidated. We adopted this guidance on January 1, 2009.
Subsequent Events
We have evaluated subsequent events through February 25, 2010, the date of issuance of these financial
statements, and determined that: (i) no subsequent events have occurred that would require recognition in our financial statements for the year ended December 31, 2009;
and (ii) no other subsequent events have occurred that would require disclosure in the notes thereto.
F-13
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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
2. Revenue
Revenue consists of the following amounts (in thousands):
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Patient service revenue |
$ | 1,678,449 | $ | 1,571,141 | $ | 1,314,203 | ||||||
Other revenue |
126,912 | 124,975 | 100,497 | |||||||||
Total revenue |
$ | 1,805,361 | $ | 1,696,116 | $ | 1,414,700 | ||||||
Patient Service Revenue
Patient service revenue is generated by our inpatient facilities for services provided to patients
on an inpatient and outpatient basis within the inpatient behavioral health care facility setting.
Patient service revenue is recorded at our established billing rates less contractual adjustments.
Contractual adjustments are recorded to state our patient service revenue at the amount we expect
to collect 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. During the years ended December 31, 2009, 2008 and 2007,
approximately 29%, 30% and 32%, respectively, of our revenue was obtained from providing services
to patients participating in the Medicaid program. During the years ended December 31, 2009, 2008
and 2007, approximately 14%, 13% and 12%, respectively, of our revenue was obtained from providing
services to patients participating in the Medicare program.
Settlements under cost reimbursement agreements with third-party payors are estimated and recorded
in the period in which the related services are rendered and are adjusted in future periods as
final settlements are determined. Final determination of amounts earned under the Medicare and
Medicaid programs often occur in subsequent years because of audits by such programs, rights of
appeal and the application of numerous technical provisions.
We provide care without charge to patients who are financially unable to pay for the health care
services they receive. Because we do not pursue collection of amounts determined to qualify as
charity care, these amounts are not reported as revenue.
Other Revenue
Other revenue primarily derives from our contract management business and a managed care plan in
Puerto Rico. Our contract management business involves the development, organization and management
of behavioral health and rehabilitation programs within medical/surgical hospitals. Services
provided are recorded as revenue at contractually determined rates in the period the services are
rendered, provided that collectability of such amounts is reasonably assured.
3. Earnings Per Share
ASC 260, Earnings per Share, requires dual presentation of basic and diluted earnings per share by
entities with complex capital structures. Basic earnings per share includes no dilution and is
computed by dividing net income attributable to PSI stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share also includes the potential
dilution of securities that could share in the earnings of the entity. We have calculated earnings
per share in accordance with ASC 260 for all periods presented.
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share amounts):
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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Numerator: |
||||||||||||
Basic and diluted earnings per share: |
||||||||||||
Income from continuing operations attributable to PSI
stockholders |
$ | 120,078 | $ | 105,034 | $ | 76,134 | ||||||
(Loss) income from discontinued operations, net of taxes |
(2,461 | ) | (81 | ) | 74 | |||||||
Net income attributable to PSI stockholders |
$ | 117,617 | $ | 104,953 | $ | 76,208 | ||||||
Denominator: |
||||||||||||
Weighted average shares outstanding for basic earnings per share |
55,564 | 55,408 | 54,258 | |||||||||
Effects of dilutive stock options and restriced stock outstanding |
552 | 859 | 1,189 | |||||||||
Shares used in computing diluted earnings per common share |
56,116 | 56,267 | 55,447 | |||||||||
Basic earnings per share: |
||||||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 2.16 | $ | 1.89 | $ | 1.40 | ||||||
(Loss) income from discontinued operations, net of taxes |
(0.04 | ) | | | ||||||||
Net income attributable to PSI stockholders |
$ | 2.12 | $ | 1.89 | $ | 1.40 | ||||||
Diluted earnings per share: |
||||||||||||
Income from continuing operations attributable to PSI stockholders |
$ | 2.14 | $ | 1.87 | $ | 1.37 | ||||||
(Loss) income from discontinued operations, net of taxes |
(0.04 | ) | | | ||||||||
Net income attributable to PSI stockholders |
$ | 2.10 | $ | 1.87 | $ | 1.37 | ||||||
4. Discontinued Operations
GAAP requires that all components of an entity that have been disposed of (by sale, by abandonment
or in a distribution to owners) or are held for sale and whose cash flows can be clearly
distinguished from the rest of the entity be presented as discontinued operations. During 2009, we
sold our EAP business, elected to close and sell Nashville Rehabilitation Hospital, The Oaks
Treatment Center and Cumberland Hall of Chattanooga, and terminated one contract with a South
Carolina juvenile justice agency. During 2008, we elected to sell one facility and
terminated two contracts with a Puerto Rican juvenile justice agency to manage inpatient
facilities. During 2007, we elected to dispose of one facility. Prior to the decision to
discontinue these operations, with the exception of our EAP business that was reported in our other
segment, their results were reported in our owned and leased facilities segment.
The components of (loss) income from discontinued operations, net of taxes, are as follows (in
thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue |
$ | 61,775 | $ | 84,660 | $ | 69,469 | ||||||
Operating expenses |
65,273 | 81,296 | 67,921 | |||||||||
Loss on disposal |
2,202 | 1,917 | 767 | |||||||||
67,475 | 83,213 | 68,688 | ||||||||||
(Loss) income from discontinued
operations before income taxes |
(5,700 | ) | 1,447 | 781 | ||||||||
(Benefit from) provision for income taxes |
(3,239 | ) | 1,528 | 707 | ||||||||
(Loss) income from discontinued
operations, net of income taxes |
$ | (2,461 | ) | $ | (81 | ) | $ | 74 | ||||
The loss on disposal for the year ended December 31, 2009 is primarily the result of a $3.1 million
loss recorded to establish the assets held for sale of The Oaks Treatment Center at the expected
net sales price and a $1.3 million gain on the sale of our EAP business. Other current assets
include assets held for sale of $21.5 million and $79.1 million as of December 31, 2009 and 2008,
respectively. Assets held for sale at December 31, 2008 includes
goodwill of $60.9 million from the acquisitions of various EAP
businesses.
We have elected to allocate interest expense to discontinued operations based on the ratio of net
assets to be sold or discontinued less
F-15
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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
debt that is required to be paid as a result of the disposal
transaction to the sum of our total net assets plus consolidated debt. Interest allocated to
discontinued operations was $2.5 million, $2.8 million and $1.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
5. Acquisitions
Strategic acquisitions are an important part of our plan to continue to successfully grow our
business and increase our profitability.
2009 Acquisitions
In 2009, we acquired a 131-bed inpatient behavioral health care facility located in Fargo, North
Dakota and a 90-bed inpatient behavioral health care facility located in Panama City, Florida, in
separate transactions for an aggregate of $32.9 million. Each acquisition was accounted for by the
acquisition method and the aggregate purchase prices of these transactions were allocated to the
assets acquired and liabilities assumed based upon their respective fair values. The goodwill
arising from the acquisitions was allocated to the owned and leased facilities segment.
2008 Acquisition
On March 1, 2008, we acquired five inpatient behavioral health care facilities with approximately
400 beds from UMC for $120.0 million. The acquisition was accounted for by the purchase method.
During 2008, we acquired multiple EAP businesses in separate transactions for approximately $45.0
million, which were subsequently sold in 2009.
2007 Acquisitions
During 2007, we acquired 16 inpatient behavioral health care facilities with an aggregate of
approximately 1,600 beds, including the May 31, 2007 acquisition of Horizon Health, which operated
15 inpatient facilities. Each acquisition was accounted for by the purchase method and the
aggregate purchase prices of these transactions were allocated to the assets acquired and
liabilities assumed based upon their respective fair values. The consolidated financial statements
include the accounts and operations of the acquired entities for the period subsequent to the
acquisition date. As the acquisition of Horizon Health involved a merger, the goodwill associated
with this acquisition is not deductible for federal income tax purposes.
The following table summarizes the allocation of the aggregate purchase price of Horizon Health (in
thousands):
Horizon Health | ||||
Assets acquired: |
||||
Accounts receivable |
$ | 40,590 | ||
Other current assets |
15,102 | |||
Fixed assets |
96,664 | |||
Costs in excess of net assets acquired |
285,068 | |||
Other assets |
24,039 | |||
461,463 | ||||
Liabilities assumed |
35,446 | |||
Long-term debt assumed |
6,998 | |||
Cash paid, net of cash acquired and discontinued operations |
419,019 | |||
Assets and liabilities of discontinued operations |
10,124 | |||
Cash paid, net of cash acquired |
$ | 429,143 | ||
Acquisition-related direct costs paid subsequent to closing have been included as a part of the
acquisition.
F-16
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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
6. Long-term debt
Long-term debt consists of the following (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Senior credit facility: |
||||||||
Revolving line of credit facility, expiring on December 31, 2011
and bearing interest of 3.4% at December 31, 2008 |
$ | | $ | 229,333 | ||||
Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 2.0% and 3.1% at
December 31, 2009
and December 31, 2008, respectively |
564,875 | 568,625 | ||||||
7 3/4% Notes |
582,666 | 475,841 | ||||||
Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6% |
32,850 | 33,273 | ||||||
Other |
6,688 | 7,325 | ||||||
1,187,079 | 1,314,397 | |||||||
Less current portion |
4,940 | 34,391 | ||||||
Long-term debt |
$ | 1,182,139 | $ | 1,280,006 | ||||
Senior Credit Facility
Our Senior Credit Facility (the Credit Agreement) includes a $300 million revolving line of
credit facility administered by Bank of America, N.A. and a $575 million senior secured term loan
facility administered by Citicorp North America, Inc. During February 2009, our revolving credit
facility was amended to extend the maturity of $200 million capacity to December 31, 2011. During
September 2009, the maturity of the remaining $100 million capacity under our revolving credit
facility was extended to December 31, 2011. As a result of the February 2009 extension, $29.3
million of the $229.3 million balance outstanding on our revolving credit facility at December 31,
2008 was classified as current portion of long-term debt. Quarterly principal payments of $0.9
million are due on our senior secured term loan facility and the balance of our senior secured term
loan facility is payable in full on July 1, 2012.
Our Credit Agreement is secured by substantially all of the personal property owned by us or our
subsidiaries, substantially all real property owned by us or our subsidiaries that has a value in
excess of $5.0 million and the stock of substantially all of our operating subsidiaries. In
addition, the Credit Agreement is fully and unconditionally guaranteed by substantially all of our
operating subsidiaries. The revolving credit facility and senior secured term loan facility accrue
interest at our choice of the Base Rate or the Eurodollar Rate (as defined in the Credit
Agreement). The Base Rate and Eurodollar Rate fluctuate based upon market rates and certain
leverage ratios, as defined in the Credit Agreement. At December 31, 2009, we had no borrowings
outstanding and $295.7 million available for future borrowings under the revolving credit facility.
Until the maturity date, we may borrow, repay and re-borrow an amount not to exceed $300 million on
our revolving credit facility. All repayments made under the senior secured term loan facility are
a permanent reduction in the amount available for future borrowings. We pay a quarterly commitment
fee on the unused portion of our revolving credit facility that fluctuates, based upon certain
leverage ratios, between 0.75% and 1.0% per annum. Commitment fees were approximately $1.4 million
for the year ended December 31, 2009.
Our Credit Agreement contains customary covenants that include: (1) a limitation on capital
expenditures and investments, sales of assets, mergers, changes of ownership, new principal lines
of business, indebtedness, transactions with affiliates, dividends and redemptions; (2) various
financial covenants; and (3) cross-default covenants triggered by a default of any other
indebtedness of at least $5.0 million. As of December 31, 2009, we were in compliance with all debt
covenant requirements. If we violate one or more of these covenants, amounts outstanding under the
revolving credit facility, senior secured term loan facility and the majority of our other debt
arrangements could become immediately payable and additional borrowings could be restricted.
73/4% Notes
The 73/4% Notes mature on July 15, 2015 and are fully and unconditionally
guaranteed on a senior subordinated basis by substantially all of our existing operating
subsidiaries. In May 2009, we issued $120 million of the 73/4% Notes at a
discount of 11.25%. This discount is being amortized over the remaining life of the
73/4% Notes using the effective interest rate method, which results in an
effective interest rate of 10.2% per annum on the $120 million issuance. We received a premium of
2.75% plus accrued interest from the issuance of $250 million of 73/4% Notes
in 2007. This premium is being amortized over the remaining life of the 73/4%
Notes using the effective interest method, which results in an effective interest rate of 7.3% on
the $250 million issuance. We also issued $220 million of the 73/4% Notes in
2005. Interest on the 73/4% Notes accrues at the rate of
73/4% per annum and is payable semi-annually in arrears on January 15 and
July 15.
F-17
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Mortgage Loans
At December 31, 2009, we had $32.9 million debt outstanding under mortgage loan agreements insured
by the U.S. Department of Housing and Urban Development (HUD). The mortgage loans insured by HUD
are secured by real estate located at Holly Hill Hospital in Raleigh, North Carolina, West Oaks
Hospital in Houston, Texas, Riveredge Hospital near Chicago, Illinois, Canyon Ridge Hospital in
Chino, California and MeadowWood Behavioral Health in New Castle, Delaware. Interest accrues on the
Holly Hill, West Oaks, Riveredge, Canyon Ridge and MeadowWood HUD loans at 6.0%, 5.9%, 5.7%, 7.6%
and 7.0% and principal and interest are payable in 420 monthly installments through December 2037,
September 2038, December 2038, January 2036 and October 2036, respectively. The carrying amount of
assets held as collateral approximated $59.5 million at December 31, 2009.
Interest Rate Swap Agreements
We periodically enter into interest rate swap agreements to manage our exposure to fluctuations in
interest rates. During 2007, we entered into an agreement with Merrill Lynch Capital Services, Inc.
to exchange the interest payments associated with a notional amount of $225 million of LIBOR
indexed variable rate debt related to our senior secured term loan for a fixed interest rate of
3.8%. The agreement matured on November 30, 2009. The fair value
of our interest rate swap of $6.2 million at December 31,
2008 is included in other accrued liabilities.
Other
The aggregate maturities of long-term debt, including capital lease obligations, are as follows (in
thousands):
2010 |
$ | 4,940 | ||
2011 |
4,915 | |||
2012 |
558,494 | |||
2013 |
1,106 | |||
2014 |
1,148 | |||
Thereafter |
616,476 | |||
Total |
$ | 1,187,079 | ||
7. Leases
Our operating leases consist primarily of the leases of seven inpatient behavioral health care
facilities, our corporate office and the office for our contract management business. At December
31, 2009, future minimum lease payments under operating leases having an initial or remaining
non-cancelable lease term in excess of one year are as follows (in thousands):
2010 |
$ | 14,089 | ||
2011 |
11,410 | |||
2012 |
8,223 | |||
2013 |
6,949 | |||
2014 |
6,323 | |||
Thereafter |
33,001 | |||
Total |
$ | 79,995 | ||
8. Income Taxes
Total provision for income taxes for the years ended December 31, 2009, 2008 and 2007 was allocated
as follows (in thousands):
2009 | 2008 | 2007 | ||||||||||
Provision for income taxes attributable
to income from continuing operations |
$ | 74,889 | $ | 64,457 | $ | 46,200 | ||||||
(Benefit from) provision for income taxes attributable
to (loss) income from discontinued
operations |
(3,239 | ) | 1,528 | 707 | ||||||||
Total provision for income taxes |
$ | 71,650 | $ | 65,985 | $ | 46,907 | ||||||
F-18
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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
The provision for income taxes attributable to income from continuing operations consists of
the following (in thousands):
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 54,580 | $ | 45,202 | $ | 31,153 | ||||||
State |
6,388 | 5,568 | 4,838 | |||||||||
Foreign |
2,547 | 2,338 | 3,505 | |||||||||
63,515 | 53,108 | 39,496 | ||||||||||
Deferred: |
||||||||||||
Federal |
11,200 | 9,819 | 8,086 | |||||||||
State |
638 | 1,487 | (457 | ) | ||||||||
Foreign |
(464 | ) | 43 | (925 | ) | |||||||
11,374 | 11,349 | 6,704 | ||||||||||
Provision for income taxes |
$ | 74,889 | $ | 64,457 | $ | 46,200 | ||||||
The tax benefits associated with exercises of nonqualified stock options decreased the current tax
liability by $0.1 million, $3.1 million and $9.4 million in 2009, 2008 and 2007, respectively. Such
benefits were recorded as increases to stockholders equity.
The reconciliation of income tax computed by applying the U.S. federal statutory rate to the actual
income tax expense attributable to income from continuing operations is as follows (in thousands):
2009 | 2008 | 2007 | ||||||||||
Federal tax |
$ | 68,239 | $ | 59,322 | $ | 42,817 | ||||||
State income taxes (net of federal) |
4,567 | 4,586 | 2,848 | |||||||||
Other |
2,083 | 549 | 535 | |||||||||
Provision for income taxes |
$ | 74,889 | $ | 64,457 | $ | 46,200 | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The tax effects of significant items comprising temporary differences at December 31,
2009 and 2008 are as follows (in thousands):
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 9,038 | $ | 9,146 | ||||
Allowance for doubtful accounts |
18,474 | 13,488 | ||||||
Alternative minimum tax credit carryovers |
| 794 | ||||||
Accrued liabilities |
42,349 | 39,293 | ||||||
Total gross deferred tax assets |
69,861 | 62,721 | ||||||
Less: Valuation allowance |
(4,272 | ) | (4,748 | ) | ||||
Total deferred tax assets |
65,589 | 57,973 | ||||||
Deferred tax liabilities: |
||||||||
Intangible assets |
(52,938 | ) | (37,567 | ) | ||||
Property and equipment |
(66,537 | ) | (57,415 | ) | ||||
Other |
(1,985 | ) | (2,658 | ) | ||||
Net deferred tax liability |
$ | (55,871 | ) | $ | (39,667 | ) | ||
Deferred income taxes of $25.3 million and $29.8 million at December 31, 2009 and 2008,
respectively, are included in other current assets. Noncurrent deferred income tax liabilities
totaled $81.1 million and $69.5 million at December 31, 2009 and 2008, respectively.
GAAP requires that deferred income taxes reflect the tax consequences of differences between the
tax basis of assets and liabilities and their carrying values for GAAP. Future tax benefits are
recognized to the extent that realization of such benefits is more likely than not. A valuation
allowance is established for those benefits that do not meet the more likely than not criteria. We
have evaluated the need for a valuation allowance against deferred tax assets and have recorded
valuation allowances of $4.3 million, $4.7 million and $5.6 million at December 31, 2009, 2008 and
2007, respectively. The net change in valuation allowance was a decrease of $0.4
F-19
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
million and $0.9 million for the years ended December 31, 2009 and December 31, 2008, respectively.
Changes to the valuation allowance affect income tax expense.
As of December 31, 2009, we had an unrecognized deferred tax liability for temporary differences of
$3.4 million related to investments in our Puerto Rico subsidiaries that are essentially permanent
in duration.
As of December 31, 2009, we had federal net operating loss carryforwards of $4.0 million expiring
in the year 2021, state net operating loss carryforwards of $80.9 million expiring in various years
through 2029 and foreign net operating loss carryforwards of $11.2 million expiring through 2016.
Our policy is to classify interest and penalties related to income taxes as a component of our tax
provision. We had gross unrecognized tax benefits of $1.7 million as of December 31, 2009 and 2008.
The total amount of interest and penalties recognized in our consolidated balance sheet was $0.1
million and $0.2 million as of December 31, 2009 and 2008, respectively. The net impact on
provision for income tax of unrecognized tax benefits, if recognized, would have been $0.5 million
for each of the years ended December 31, 2009 and 2008.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as
follows (in thousands):
Balance as of January 1, 2009 |
$ | 1,724 | ||
Increases for tax positions taken in the current year |
408 | |||
Reductions due to lapse of statute of limitations |
(383 | ) | ||
Balance as of December 31, 2009 |
$ | 1,749 | ||
Our tax years 2006 through 2009 remain open to examination by federal and state taxing authorities.
In addition, our 2005 tax year remains open to examination in certain states.
In addition, ABS, an entity acquired in 2006, has pre-acquisition federal income tax returns which
remain open to examination back to the year 2006. Certain pre-acquisition state income tax returns
of acquired ABS subsidiaries also remain open to examination for the years 2002 through 2006. We
are fully indemnified under the ABS stock purchase agreement for any liabilities resulting from
examinations of pre-acquisition tax returns.
Horizon Health has federal and state tax years which remain open to examination going back to 2006
and in certain states going back to 2005. We have no indemnification for any pre-acquisition
liabilities that may result from examinations of Horizon Health income tax returns for
pre-acquisition periods.
In the next twelve months we anticipate increases in unrecognized tax benefits of approximately
$0.4 million related to certain state tax issues, and we anticipate potential reductions in
unrecognized tax benefits of approximately $0.5 million related to certain state tax expired
statutes of limitation.
9. Stock Option Plans
A maximum of 13,116,666 shares of our common stock are authorized for grant as stock options,
restricted stock or other share-based compensation under the Psychiatric Solutions, Inc. Equity
Incentive Plan (the Equity Incentive Plan). Under the Equity Incentive Plan, stock options may be
granted for terms of up to ten years. Grants to employees generally vest in annual increments of
25% each year, commencing one year after the date of grant. The exercise prices of stock options
are equal to the closing sales prices of our common stock on the date of grant or the trading day
immediately preceding the date of grant.
A maximum of 683,334 shares of our common stock are authorized for grant as stock options or
restricted stock under the Psychiatric Solutions, Inc. Outside Directors Stock Incentive Plan (the
Directors Plan). The Directors Plan provides for a grant of 3,200 shares of restricted stock at
each annual meeting of stockholders to each outside director. The Directors Plan also provides for
an initial grant of 4,800 shares of restricted stock to each new outside director on the date of
the directors initial election or appointment to the board of directors. The grants of restricted stock vest in annual increments of 25% each
year, commencing one year after the date of grant and generally have terms of ten years.
F-20
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Stock option activity during 2009 is as follows (number of options and aggregate intrinsic value in
thousands):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Term (in years) | Value | |||||||||||||
Outstanding at December 31, 2008 |
6,512 | $ | 28.98 | 7.5 | $ | 24,448 | ||||||||||
Granted |
396 | $ | 18.65 | n/a | n/a | |||||||||||
Canceled |
(823 | ) | $ | 33.17 | n/a | n/a | ||||||||||
Exercised |
(86 | ) | $ | 12.66 | n/a | n/a | ||||||||||
Outstanding at December 31, 2009 |
5,999 | $ | 27.84 | 6.6 | $ | 12,667 | ||||||||||
Exercisable at December 31, 2009 |
4,095 | $ | 26.17 | 5.9 | $ | 11,586 | ||||||||||
Restricted stock activity is as follows (number of restricted shares in thousands):
Weighted | ||||||||
Average | ||||||||
Number of | Grant- | |||||||
Restricted | Date Fair | |||||||
Shares | Value | |||||||
Unvested at December 31, 2008 |
498 | $ | 33.23 | |||||
Granted |
327 | $ | 17.14 | |||||
Canceled |
(82 | ) | $ | 24.64 | ||||
Vested |
(142 | ) | $ | 33.97 | ||||
Unvested at December 31, 2009 |
601 | $ | 25.47 | |||||
We recognized $17.5 million, $19.9 million and $16.1 million in share-based compensation expense
and approximately $6.7 million, $7.6 million and $6.1 million of related income tax benefit for the
years ended December 31, 2009, 2008 and 2007, respectively. The impact of share-based compensation
expense, net of tax, on our basic and diluted earnings per share was approximately $0.19, $0.22 and
$0.18 per share for the years ended December 31, 2009, 2008 and 2007, respectively. We classified
$1.7 million, $3.1 million and $9.4 million in income tax benefits in excess of share-based
compensation expense on stock options exercised and restricted stock vested as a cash flow from
financing activities in our Condensed Consolidated Statement of Cash Flows for the years ended
December 31, 2009, 2008 and 2007, respectively. The fair value of our stock options was estimated
using the Black-Scholes option pricing model. We recognize expense on all share-based awards on a
straight-line basis over the requisite service period of the entire award.
The following table summarizes the weighted average grant-date fair values of options and the
weighted average assumptions we used to develop the fair value estimates under each of the option
valuation models for options granted in the years ended December 31, 2009, 2008 and 2007:
2009 | 2008 | 2007 | ||||||||||
Weighted average grant-date fair value of options |
$ | 6.20 | $ | 11.02 | $ | 14.25 | ||||||
Risk-free interest rate |
2 | % | 3 | % | 5 | % | ||||||
Expected volatility |
36 | % | 34 | % | 35 | % | ||||||
Expected life (in years) |
5 | 5 | 5 | |||||||||
Dividend yield |
0 | % | 0 | % | 0 | % |
Our estimate of expected volatility for stock options granted in 2009, 2008 and 2007 is based upon
the historical volatility of our common stock. Our estimate of expected term is based upon our
historical stock option exercise experience.
Based on our stock option and restricted stock grants outstanding at December 31, 2009, we estimate
remaining unrecognized share-based compensation expense to be approximately $31.3 million with a
weighted average remaining amortization period of 2.1 years.
The total intrinsic value, which represents the difference between the underlying stocks market
price and the options exercise price, of options exercised during the years ended December 31,
2009, 2008 and 2007 was $5.0 million, $10.9 million and $31.2 million, respectively.
F-21
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
10. Employee Benefit Plan
We sponsor the Psychiatric Solutions, Inc. Retirement Savings Plan (the Plan). The Plan is a
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 us to make discretionary contributions into each
participants account that fully vest over a four year period based upon years of service.
11. Contingencies and Health Care Regulation
Contingencies
We are subject to various claims and legal actions which arise in the ordinary course of business.
We have professional and general liability insurance in umbrella form for claims in excess of a
$3.0 million self-insured retention with an insured excess limit of $75.0 million.
A stockholder lawsuit alleging violation of federal securities law was filed in 2009. We believe
the lawsuit is without merit and intend to defend it vigorously.
In the opinion of management, we are not currently a party to any legal proceeding, the negative
outcome of which would have a material adverse effect on our financial condition or results of
operations.
Employment Agreement
We entered into an employment agreement with Joey A. Jacobs, our Chairman, President and Chief
Executive Officer, on May 10, 2007. The initial term of
employment was through December 31, 2008. After the initial
term, the agreement renews automatically for successive terms of 12
months each unless either party provides written notice to the other
of its intent not to
renew the employment agreement. On December 31, 2009, the employment agreement was automatically
renewed through December 31, 2010. Pursuant to the employment agreement, Mr. Jacobs base salary,
cash bonuses and incentive compensation are subject to adjustment from time to time at the
discretion of the Compensation Committee.
If we terminate Mr. Jacobs employment without cause or if Mr. Jacobs resigns as a result of a
constructive discharge, as those terms are defined in the employment agreement: (a) Mr. Jacobs
will receive a lump sum severance payment equal to two times the sum of his base salary on the
date of termination and the most recent annual bonus paid to Mr. Jacobs during the immediately
previous 12-month period; (b) Mr. Jacobs will receive any earned but unpaid base salary, which
shall be paid in accordance with our normal payroll practices; (c) Mr. Jacobs will receive bonus
compensation payable on a prorated basis for the year of termination, which shall be paid at the
same time our executive officers receive their bonuses for the year in which the termination
occurred; (d) to the extent that Mr. Jacobs is eligible for and has elected continuation coverage
under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), we agree to waive all
premiums for elected continuation coverage during such COBRA period but not to exceed 18 months;
(e) to the extent that Mr. Jacobs is covered by an individual health policy, we will pay all
reasonable premiums under such policy for 24 months following the termination date; and (f) all
shares of restricted stock and unvested stock options held by Mr. Jacobs and scheduled to vest
during the succeeding 24-month period will immediately vest and any such options will remain
exercisable for 12 months from the date of termination. Termination, whether voluntary or
involuntary, of Mr. Jacobs employment within 12 months following a change in control, as defined
in the employment agreement, shall be treated as a termination without cause.
If Mr. Jacobs employment terminates as a result of his disability or death, Mr. Jacobs or his
beneficiaries will be entitled to receive any earned but unpaid base salary, which shall be paid in
accordance with the normal payroll practices of the Company. In addition, Mr. Jacobs or his
beneficiaries will also receive any bonus compensation, which is payable on a prorated basis for
the year of termination, and which shall be paid at the same time our executive officers receive their bonuses
for the year in which the termination occurred. Finally, all shares of restricted stock and
unvested stock options held by Mr. Jacobs will immediately vest upon his death or termination for
disability.
If Mr. Jacobs employment is terminated for cause, as defined in the employment agreement, or he
resigns other than pursuant to a triggering event described above, any earned but unpaid base
salary shall be paid in accordance with our normal payroll practices, but we will not make any
other payments or provide any benefits to Mr. Jacobs.
Current Operations
Final determination of amounts earned under prospective payment and cost-reimbursement arrangements
is subject to review by appropriate governmental authorities or their agents. We believe adequate
provision has been made for any adjustments that may result from such reviews.
F-22
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. We believe that we are in substantial compliance with all applicable laws and
regulations and are 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.
We have acquired and may continue to acquire corporations and other entities with prior operating
histories. Acquired entities may have unknown or contingent liabilities for failure to comply with
health care laws and regulations, such as billing and reimbursement regulations,
fraud and abuse or similar
laws. Although we exercise reasonable diligence to assure ourselves that no such liabilities exist and
obtain indemnification rights for such matters from prospective sellers, there can be no assurance
that we will be indemnified for any such liabilities or, if we are indemnified, that the liability
sustained will not exceed contractual limits or the financial capacity of the indemnifying party.
12. Related Party Transactions
William M.
Petrie, M.D., a member of our Board of Directors owns a partnership
interest in and serves as President of Psychiatric
Consultants, P.C. (PCPC), a physician practice group that leases office space from and is
managed by
Rolling Hills Hospital, our facility in Franklin, TN.
The
initial term of
Rolling Hills Management Services Agreement with PCPC expires
on December 31, 2011 and automatically renews for successive
terms of one year each unless either party provides notice of its
intent not to renew at least 60 days prior to any expiration
date.
Rolling Hills management fee and rental income for PCPC is less than $0.3 million annually.
Dr. Petrie is also the Medical Director of Rolling Hills
Hospital. The initial term of Dr. Petries Medical Director
Services Agreement with Rolling Hills Hospital expires
December 31, 2011 and automatically renews for successive terms
of one year each unless either party provides prior written notice of
its intent not to renew.
13. Disclosures About Reportable Segments
In accordance with GAAP, our owned and leased behavioral health care facilities segment is our only
reportable segment. Our chief operating decision maker regularly reviews the operating results of
our inpatient facilities on a combined basis, which represent more than 90% of our consolidated
revenue. As of December 31, 2009, the owned and leased facilities segment provides mental health
and behavioral health services to patients in its 86 owned and 8 leased inpatient facilities in 32
states, Puerto Rico and the U.S. Virgin Islands. The column entitled Other in the schedules below
includes management contracts to provide inpatient psychiatric management and development services
to inpatient behavioral health units in hospitals and clinics and a managed care plan in Puerto
Rico. The operations included in the Other column do not qualify as reportable segments.
Activities classified as Corporate in the following schedules relate primarily to unallocated
home office expenses and discontinued operations.
Adjusted EBITDA is a non-GAAP financial measure and is defined as income from
continuing operations before interest expense (net of interest income), income taxes, depreciation,
amortization, stock compensation and other items included in the caption labeled Other expenses.
These other expenses may occur in future periods, but the amounts recognized can vary significantly
from period to period and do not directly relate to ongoing operations of our health care
facilities. Our management relies on adjusted EBITDA as the primary measure to review and assess
the operating performance of our inpatient facilities and their management teams. We believe it is
useful to investors to provide disclosures of our operating results on the same basis as that used
by management. Management and investors also review adjusted EBITDA to evaluate our overall
performance and to compare our current operating results with corresponding periods and with other
companies in the health care industry. You should not consider adjusted EBITDA in isolation or as a
substitute for net income, operating cash flows or other cash flow statement data determined in
accordance with U. S. generally accepted accounting principles. Because adjusted EBITDA is not a
measure of financial performance under U. S. generally accepted accounting principles and is
susceptible to varying calculations, it may not be comparable to similarly titled measures of other
companies. The following is a financial summary by reportable segment for the periods indicated
(dollars in thousands):
F-23
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Year Ended December 31, 2009
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 1,678,449 | $ | 126,912 | $ | | $ | 1,805,361 | ||||||||
Adjusted EBITDA |
$ | 361,078 | $ | 14,945 | $ | (47,131 | ) | $ | 328,892 | |||||||
Interest expense, net |
28,494 | (788 | ) | 43,843 | 71,549 | |||||||||||
Provision for income taxes |
| | 74,889 | 74,889 | ||||||||||||
Depreciation and amortization |
38,894 | 4,288 | 1,596 | 44,778 | ||||||||||||
Inter-segment expenses |
57,538 | 5,117 | (62,655 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 17,505 | 17,505 | ||||||||||||
Total other expenses |
| | 17,505 | 17,505 | ||||||||||||
Income (loss) from continuing operations |
236,152 | 6,328 | (122,309 | ) | 120,171 | |||||||||||
Less: Income attributable to noncontrolling interest |
(93 | ) | | | (93 | ) | ||||||||||
Income (loss) from continuing operations attributable to
PSI stockholders |
$ | 236,059 | $ | 6,328 | $ | (122,309 | ) | $ | 120,078 | |||||||
Total assets |
$ | 2,341,778 | $ | 58,438 | $ | 107,024 | $ | 2,507,240 | ||||||||
Capital expenditures |
$ | 127,285 | $ | 339 | $ | 3,050 | $ | 130,674 | ||||||||
Cost in excess of net assets acquired |
$ | 1,136,935 | $ | 16,176 | $ | | $ | 1,153,111 | ||||||||
Year Ended December 31, 2008
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 1,571,141 | $ | 124,975 | $ | | $ | 1,696,116 | ||||||||
Adjusted EBITDA |
$ | 327,124 | $ | 22,866 | $ | (45,157 | ) | $ | 304,833 | |||||||
Interest expense, net |
27,920 | (1,391 | ) | 49,453 | 75,982 | |||||||||||
Provision for income taxes |
| | 64,457 | 64,457 | ||||||||||||
Depreciation and amortization |
32,668 | 4,633 | 1,542 | 38,843 | ||||||||||||
Inter-segment expenses |
63,054 | 5,840 | (68,894 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 19,913 | 19,913 | ||||||||||||
Total other expenses |
| | 19,913 | 19,913 | ||||||||||||
Income (loss) from continuing operations |
203,482 | 13,784 | (111,628 | ) | 105,638 | |||||||||||
Less: Income attributable to noncontrolling interest |
(604 | ) | | | (604 | ) | ||||||||||
Income (loss) from continuing operations attributable to
PSI stockholders |
$ | 202,878 | $ | 13,784 | $ | (111,628 | ) | $ | 105,034 | |||||||
Total assets |
$ | 2,213,462 | $ | 62,965 | $ | 229,563 | $ | 2,505,990 | ||||||||
Capital expenditures |
$ | 116,719 | $ | 876 | $ | 4,335 | $ | 121,930 | ||||||||
Cost in excess of net assets acquired |
$ | 1,123,066 | $ | 16,176 | $ | | $ | 1,139,242 | ||||||||
F-24
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Year Ended December 31, 2007
Owned and | ||||||||||||||||
Leased | ||||||||||||||||
Facilities | Other | Corporate | Consolidated | |||||||||||||
Revenue |
$ | 1,314,203 | $ | 100,497 | $ | | $ | 1,414,700 | ||||||||
Adjusted EBITDA |
$ | 272,672 | $ | 16,862 | $ | (38,632 | ) | $ | 250,902 | |||||||
Interest expense, net |
29,670 | 100 | 44,117 | 73,887 | ||||||||||||
Provision for income taxes |
| | 46,200 | 46,200 | ||||||||||||
Depreciation and amortization |
26,240 | 2,413 | 1,460 | 30,113 | ||||||||||||
Inter-segment expenses |
54,578 | 4,503 | (59,081 | ) | | |||||||||||
Other expenses: |
||||||||||||||||
Share-based compensation |
| | 16,104 | 16,104 | ||||||||||||
Loss on refinancing long-term debt |
| | 8,179 | 8,179 | ||||||||||||
Total other expenses |
| | 24,283 | 24,283 | ||||||||||||
Income (loss) from continuing operations |
162,184 | 9,846 | (95,611 | ) | 76,419 | |||||||||||
Less: Income attributable to
noncontrolling interest |
(285 | ) | | | (285 | ) | ||||||||||
Income (loss) from continuing operations attributable to
PSI stockholders |
$ | 161,899 | $ | 9,846 | $ | (95,611 | ) | $ | 76,134 | |||||||
Total assets |
$ | 1,950,999 | $ | 69,333 | $ | 159,173 | $ | 2,179,505 | ||||||||
Capital expenditures |
$ | 66,828 | $ | 354 | $ | 4,078 | $ | 71,260 | ||||||||
Cost in excess of net assets acquired |
$ | 1,035,606 | $ | 16,176 | $ | | $ | 1,051,782 | ||||||||
14. Other Information
A summary of activity in allowance for doubtful accounts follows (in thousands):
Balances | Additions | Additions | Accounts written | Balances | ||||||||||||||||
at beginning | charged to costs | charged to | off, net of | at end | ||||||||||||||||
of period | and expenses | other accounts (1) | recoveries | of period | ||||||||||||||||
Allowance for
doubtful accounts: |
||||||||||||||||||||
Year ended December
31, 2007 |
$ | 18,468 | 27,343 | 12,982 | 23,827 | $ | 34,966 | |||||||||||||
Year ended December
31, 2008 |
$ | 34,966 | 34,334 | | 20,917 | $ | 48,383 | |||||||||||||
Year ended December
31, 2009 |
$ | 48,383 | 36,414 | | 32,903 | $ | 51,894 |
(1) | Allowances as a result of acquisitions. |
F-25
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
15. Quarterly Information (Unaudited)
Summarized results for each quarter in the years ended December 31, 2009 and 2008 are as follows
(in thousands, except per share data):
1st | 2nd | 3rd | 4th | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Total Year | ||||||||||||||||
2009 |
||||||||||||||||||||
Revenue |
$ | 433,930 | $ | 455,287 | $ | 453,187 | $ | 462,957 | $ | 1,805,361 | ||||||||||
Income from continuing operations
attributable to PSI stockholders |
$ | 27,521 | $ | 34,580 | $ | 28,305 | $ | 29,672 | $ | 120,078 | ||||||||||
Net income attributable to PSI stockholders |
$ | 27,382 | $ | 34,408 | $ | 28,152 | $ | 27,675 | $ | 117,617 | ||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | 0.49 | $ | 0.62 | $ | 0.51 | $ | 0.50 | $ | 2.12 | ||||||||||
Diluted |
$ | 0.49 | $ | 0.62 | $ | 0.50 | $ | 0.49 | $ | 2.10 | ||||||||||
2008 |
||||||||||||||||||||
Revenue |
$ | 408,602 | $ | 429,200 | $ | 429,878 | $ | 428,436 | $ | 1,696,116 | ||||||||||
Income from continuing operations
attributable to PSI stockholders |
$ | 24,566 | $ | 28,338 | $ | 27,977 | $ | 24,153 | $ | 105,034 | ||||||||||
Net income attributable to PSI stockholders |
$ | 25,496 | $ | 29,059 | $ | 26,377 | $ | 24,021 | $ | 104,953 | ||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | 0.46 | $ | 0.53 | $ | 0.48 | $ | 0.43 | $ | 1.89 | ||||||||||
Diluted |
$ | 0.46 | $ | 0.52 | $ | 0.47 | $ | 0.43 | $ | 1.87 |
As discussed in Note 4, we sold our EAP business, closed and elected to make Nashville
Rehabilitation Hospital, The Oaks Treatment Center and Cumberland Hall of Chattanooga available for
sale and terminated one contract with a South Carolina juvenile justice agency during 2009. During
2008, we elected to sell one inpatient behavioral health care facility and two contracts with a
Puerto Rican juvenile justice agency to manage inpatient facilities were terminated. Accordingly,
these operations, net of income taxes, have been presented as discontinued operations and all prior
quarterly data has been reclassified.
16. Financial Information for the Company and Its Subsidiaries
We conduct substantially all of our business through our subsidiaries. Presented below is
consolidated financial information for Psychiatric Solutions, Inc. and its subsidiaries as of
December 31, 2009 and 2008, and for the years ended December 31, 2009, 2008 and 2007. The
information segregates the parent company (Psychiatric Solutions, Inc.), the combined wholly-owned
subsidiary guarantors, the combined non-guarantors, and eliminations. All of the subsidiary
guarantees are both full and unconditional and joint and several.
F-26
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Condensed Consolidating Balance Sheet
As of December 31, 2009
(in thousands)
As of December 31, 2009
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 2,111 | $ | 4,704 | $ | | $ | 6,815 | ||||||||||
Accounts receivable, net |
| 241,211 | 8,296 | (68 | ) | 249,439 | ||||||||||||||
Other Current Assets |
| 90,259 | 16,284 | (1,377 | ) | 105,166 | ||||||||||||||
Total current assets |
| 333,581 | 29,284 | (1,445 | ) | 361,420 | ||||||||||||||
Property and equipment, net of accumulated depreciation |
| 879,453 | 61,491 | (9,214 | ) | 931,730 | ||||||||||||||
Cost in excess of net assets acquired |
| 1,153,111 | | | 1,153,111 | |||||||||||||||
Investment in subsidiaries |
1,486,852 | (368,332 | ) | (16,964 | ) | (1,101,556 | ) | | ||||||||||||
Other assets |
17,536 | 37,420 | 25,372 | (19,349 | ) | 60,979 | ||||||||||||||
Total assets |
$ | 1,504,388 | $ | 2,035,233 | $ | 99,183 | $ | (1,131,564 | ) | $ | 2,507,240 | |||||||||
Current Liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 34,467 | $ | 998 | $ | (68 | ) | $ | 35,397 | |||||||||
Salaries and benefits payable |
| 80,255 | 874 | | 81,129 | |||||||||||||||
Other accrued liabilities |
28,901 | 32,783 | 1,610 | (1,258 | ) | 62,036 | ||||||||||||||
Current portion of long-term debt |
4,490 | | 450 | | 4,940 | |||||||||||||||
Total current liabilities |
33,391 | 147,505 | 3,932 | (1,326 | ) | 183,502 | ||||||||||||||
Long-term debt, less current portion |
1,149,738 | | 32,401 | | 1,182,139 | |||||||||||||||
Deferred tax liability |
| 81,137 | | | 81,137 | |||||||||||||||
Other liabilities |
127 | (6,324 | ) | 36,069 | (4,082 | ) | 25,790 | |||||||||||||
Total liabilities |
1,183,256 | 222,318 | 72,402 | (5,408 | ) | 1,472,568 | ||||||||||||||
Redeemable noncontrolling interest |
| | | 4,337 | 4,337 | |||||||||||||||
Total stockholders equity (deficit) |
321,132 | 1,812,915 | 26,781 | (1,130,493 | ) | 1,030,335 | ||||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 1,504,388 | $ | 2,035,233 | $ | 99,183 | $ | (1,131,564 | ) | $ | 2,507,240 | |||||||||
Condensed Consolidating Balance Sheet
As of December 31, 2008
(in thousands)
As of December 31, 2008
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 39,881 | $ | 11,390 | $ | | $ | 51,271 | ||||||||||
Accounts receivable, net |
| 234,197 | 7,331 | (69 | ) | 241,459 | ||||||||||||||
Other Current Assets |
| 158,305 | 16,910 | (435 | ) | 174,780 | ||||||||||||||
Total current assets |
| 432,383 | 35,631 | (504 | ) | 467,510 | ||||||||||||||
Property and equipment, net of accumulated depreciation |
| 772,377 | 57,600 | (9,524 | ) | 820,453 | ||||||||||||||
Cost in excess of net assets acquired |
| 1,139,242 | | | 1,139,242 | |||||||||||||||
Investment in subsidiaries |
1,668,515 | (547,165 | ) | (23,521 | ) | (1,097,829 | ) | | ||||||||||||
Other assets |
12,633 | 15,923 | 27,164 | 23,065 | 78,785 | |||||||||||||||
Total assets |
$ | 1,681,148 | $ | 1,812,760 | $ | 96,874 | $ | (1,084,792 | ) | $ | 2,505,990 | |||||||||
Current Liabilities: |
||||||||||||||||||||
Accounts payable |
$ | | $ | 33,853 | $ | 825 | $ | (69 | ) | $ | 34,609 | |||||||||
Salaries and benefits payable |
| 81,970 | 1,569 | | 83,539 | |||||||||||||||
Other accrued liabilities |
28,786 | 51,475 | 4,335 | (3,531 | ) | 81,065 | ||||||||||||||
Current portion of long-term debt |
33,968 | | 423 | | 34,391 | |||||||||||||||
Total current liabilities |
62,754 | 167,298 | 7,152 | (3,600 | ) | 233,604 | ||||||||||||||
Long-term debt, less current portion |
1,247,156 | | 32,850 | | 1,280,006 | |||||||||||||||
Deferred tax liability |
| 69,471 | | | 69,471 | |||||||||||||||
Other liabilities |
12,433 | (61,717 | ) | 31,349 | 46,002 | 28,067 | ||||||||||||||
Total liabilities |
1,322,343 | 175,052 | 71,351 | 42,402 | 1,611,148 | |||||||||||||||
Redeemable noncontrolling interest |
| | | 4,957 | 4,957 | |||||||||||||||
Total stockholders equity (deficit) |
358,805 | 1,637,708 | 25,523 | (1,132,151 | ) | 889,885 | ||||||||||||||
Total liabilities and stockholders equity (deficit) |
$ | 1,681,148 | $ | 1,812,760 | $ | 96,874 | $ | (1,084,792 | ) | $ | 2,505,990 | |||||||||
F-27
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Condensed Consolidating Statement of Income
For the Twelve Months Ended December 31, 2009
(in thousands)
For the Twelve Months Ended December 31, 2009
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 1,764,827 | $ | 56,180 | $ | (15,646 | ) | $ | 1,805,361 | |||||||||
Salaries, wages and employee benefits |
| 979,106 | 26,098 | | 1,005,204 | |||||||||||||||
Professional fees |
| 162,862 | 6,840 | (2,917 | ) | 166,785 | ||||||||||||||
Supplies |
| 90,222 | 2,350 | | 92,572 | |||||||||||||||
Rentals and leases |
| 24,234 | 257 | (4,360 | ) | 20,131 | ||||||||||||||
Other operating expenses |
| 168,965 | 14,804 | (10,901 | ) | 172,868 | ||||||||||||||
Provision for doubtful accounts |
| 35,303 | 1,111 | | 36,414 | |||||||||||||||
Depreciation and amortization |
| 42,831 | 2,257 | (310 | ) | 44,778 | ||||||||||||||
Interest expense |
69,799 | | 1,750 | | 71,549 | |||||||||||||||
69,799 | 1,503,523 | 55,467 | (18,488 | ) | 1,610,301 | |||||||||||||||
(Loss) income from continuing operations before
income taxes |
(69,799 | ) | 261,304 | 713 | 2,842 | 195,060 | ||||||||||||||
(Benefit from) provision for income taxes |
(26,798 | ) | 100,322 | 274 | 1,091 | 74,889 | ||||||||||||||
(Loss) income from continuing operations |
(43,001 | ) | 160,982 | 439 | 1,751 | 120,171 | ||||||||||||||
(Loss) income from discontinued operations, net of tax |
| (3,280 | ) | 819 | | (2,461 | ) | |||||||||||||
Net (loss) income |
(43,001 | ) | 157,702 | 1,258 | 1,751 | 117,710 | ||||||||||||||
Less: Net income attributable to noncontrolling
interest |
| | | (93 | ) | (93 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (43,001 | ) | $ | 157,702 | $ | 1,258 | $ | 1,658 | $ | 117,617 | |||||||||
Condensed Consolidating Statement of Income
For the Twelve Months Ended December 31, 2008
(in thousands)
For the Twelve Months Ended December 31, 2008
(in thousands)
Combined Subsidiary | Combined | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Non-Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 1,651,496 | $ | 56,499 | $ | (11,879 | ) | $ | 1,696,116 | |||||||||
Salaries, wages and employee benefits |
| 911,145 | 27,238 | (20 | ) | 938,363 | ||||||||||||||
Professional fees |
| 158,005 | 4,586 | (100 | ) | 162,491 | ||||||||||||||
Supplies |
| 90,069 | 2,324 | | 92,393 | |||||||||||||||
Rentals and leases |
| 24,768 | 97 | (4,230 | ) | 20,635 | ||||||||||||||
Other operating expenses |
| 158,046 | 13,116 | (8,182 | ) | 162,980 | ||||||||||||||
Provision for doubtful accounts |
| 33,496 | 838 | | 34,334 | |||||||||||||||
Depreciation and amortization |
| 36,898 | 2,252 | (307 | ) | 38,843 | ||||||||||||||
Interest expense |
74,663 | | 1,319 | | 75,982 | |||||||||||||||
74,663 | 1,412,427 | 51,770 | (12,839 | ) | 1,526,021 | |||||||||||||||
(Loss) income from continuing operations before
income taxes |
(74,663 | ) | 239,069 | 4,729 | 960 | 170,095 | ||||||||||||||
(Benefit from) provision for income taxes |
(28,293 | ) | 90,635 | 1,751 | 364 | 64,457 | ||||||||||||||
(Loss) income from continuing operations |
(46,370 | ) | 148,434 | 2,978 | 596 | 105,638 | ||||||||||||||
(Loss) income from discontinued operations, net of tax |
| (992 | ) | 911 | | (81 | ) | |||||||||||||
Net (loss) income |
(46,370 | ) | 147,442 | 3,889 | 596 | 105,557 | ||||||||||||||
Less: Net income attributable to noncontrolling
interest |
| | | (604 | ) | (604 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (46,370 | ) | $ | 147,442 | $ | 3,889 | $ | (8 | ) | $ | 104,953 | ||||||||
F-28
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Condensed Consolidating Statement of Income
For the Twelve Months Ended December 31, 2007
(in thousands)
For the Twelve Months Ended December 31, 2007
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Revenue |
$ | | $ | 1,390,521 | $ | 37,257 | $ | (13,078 | ) | $ | 1,414,700 | |||||||||
Salaries, wages and employee benefits |
| 772,765 | 14,533 | 3 | 787,301 | |||||||||||||||
Professional fees |
| 132,757 | 4,178 | (1,132 | ) | 135,803 | ||||||||||||||
Supplies |
| 76,563 | 1,192 | (17 | ) | 77,738 | ||||||||||||||
Rentals and leases |
| 22,890 | 55 | (4,006 | ) | 18,939 | ||||||||||||||
Other operating expenses |
| 130,185 | 12,292 | (9,699 | ) | 132,778 | ||||||||||||||
Provision for doubtful accounts |
| 26,633 | 710 | | 27,343 | |||||||||||||||
Depreciation and amortization |
| 28,517 | 1,872 | (276 | ) | 30,113 | ||||||||||||||
Interest expense |
72,642 | | 1,245 | | 73,887 | |||||||||||||||
Loss on refinancing long-term debt |
8,179 | | | | 8,179 | |||||||||||||||
80,821 | 1,190,310 | 36,077 | (15,127 | ) | 1,292,081 | |||||||||||||||
(Loss) income from continuing operations before
income taxes |
(80,821 | ) | 200,211 | 1,180 | 2,049 | 122,619 | ||||||||||||||
(Benefit from) provision for income taxes |
(30,451 | ) | 75,432 | 446 | 773 | 46,200 | ||||||||||||||
(Loss) income from continuing operations |
(50,370 | ) | 124,779 | 734 | 1,276 | 76,419 | ||||||||||||||
(Loss) income from discontinued operations, net
of taxes |
| (222 | ) | 296 | | 74 | ||||||||||||||
Net (loss) income |
(50,370 | ) | 124,557 | 1,030 | 1,276 | 76,493 | ||||||||||||||
Less: Net income attributable to noncontrolling
interest |
| | | (285 | ) | (285 | ) | |||||||||||||
Net (loss) income attributable to PSI stockholders |
$ | (50,370 | ) | $ | 124,557 | $ | 1,030 | $ | 991 | $ | 76,208 | |||||||||
F-29
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Condensed Consolidating Statement of Cash Flows
For the Twelve Months Ended December 31, 2009
(in thousands)
For the Twelve Months Ended December 31, 2009
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (43,001 | ) | $ | 157,702 | $ | 1,258 | $ | 1,751 | $ | 117,710 | |||||||||
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 42,831 | 2,257 | (310 | ) | 44,778 | ||||||||||||||
Amortization of loan costs and bond premium |
5,255 | | 45 | | 5,300 | |||||||||||||||
Share-based compensation |
| 17,505 | | | 17,505 | |||||||||||||||
Change in income tax assets and liabilities |
| 20,050 | | | 20,050 | |||||||||||||||
Loss (income) from discontinued operations, net of taxes |
| 3,280 | (819 | ) | | 2,461 | ||||||||||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (2,946 | ) | (965 | ) | | (3,911 | ) | ||||||||||||
Other current assets |
| 7,398 | 626 | | 8,024 | |||||||||||||||
Accounts payable |
| (1,564 | ) | 173 | | (1,391 | ) | |||||||||||||
Salaries and benefits payable |
| (5,524 | ) | (695 | ) | | (6,219 | ) | ||||||||||||
Accrued liabilities and other liabilities |
4,773 | 4,008 | (7,677 | ) | | 1,104 | ||||||||||||||
Net cash (used in) provided by continuing operating activities |
(32,973 | ) | 242,740 | (5,797 | ) | 1,441 | 205,411 | |||||||||||||
Net cash (used in) provided by discontinued operating activities |
| (602 | ) | 1,585 | | 983 | ||||||||||||||
Net cash (used in) provided by operating activities |
(32,973 | ) | 242,138 | (4,212 | ) | 1,441 | 206,394 | |||||||||||||
Investing activities: |
||||||||||||||||||||
Cash paid for acquisitions, net of cash acquired |
(32,910 | ) | | | | (32,910 | ) | |||||||||||||
Cash paid for real estate acquisitions |
| (19,341 | ) | | | (19,341 | ) | |||||||||||||
Capital purchases of leasehold improvements,
equipment and software |
| (130,167 | ) | (507 | ) | | (130,674 | ) | ||||||||||||
Other assets |
| 2,008 | (779 | ) | | 1,229 | ||||||||||||||
Net cash (used in) provided by continuing investing activities |
(32,910 | ) | (147,500 | ) | (1,286 | ) | | (181,696 | ) | |||||||||||
Net cash provided by discontinued investing activities |
| 67,692 | | | 67,692 | |||||||||||||||
Net cash (used in) provided by investing activities |
(32,910 | ) | (79,808 | ) | (1,286 | ) | | (114,004 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Net increase in revolving credit facility, less acquisitions |
(229,333 | ) | | | | (229,333 | ) | |||||||||||||
Borrowings on long-term debt |
106,500 | | | | 106,500 | |||||||||||||||
Principal payments on long-term debt |
(4,671 | ) | | (422 | ) | | (5,093 | ) | ||||||||||||
Payment of loan and issuance costs |
(9,903 | ) | | | | (9,903 | ) | |||||||||||||
Excess tax benefits from share-based payment arrangements |
1,678 | | | | 1,678 | |||||||||||||||
Distributions to noncontrolling interests |
(723 | ) | | | | (723 | ) | |||||||||||||
Repurchase of common stock upon restricted stock vesting |
(1,057 | ) | | | | (1,057 | ) | |||||||||||||
Net transfers to and from members |
202,307 | (200,100 | ) | (766 | ) | (1,441 | ) | | ||||||||||||
Proceeds from exercises of common stock options |
1,085 | | | | 1,085 | |||||||||||||||
Net cash provided by (used in) financing activities |
65,883 | (200,100 | ) | (1,188 | ) | (1,441 | ) | (136,846 | ) | |||||||||||
Net decrease in cash |
| (37,770 | ) | (6,686 | ) | | (44,456 | ) | ||||||||||||
Cash and cash equivalents at beginning of the year |
| 39,881 | 11,390 | | 51,271 | |||||||||||||||
Cash and cash equivalents at end of the year |
$ | | $ | 2,111 | $ | 4,704 | $ | | $ | 6,815 | ||||||||||
F-30
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Condensed Consolidating Statement of Cash Flows
For the Twelve Months Ended December 31, 2008
(in thousands)
For the Twelve Months Ended December 31, 2008
(in thousands)
Combined | Combined | |||||||||||||||||||
Subsidiary | Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (46,370 | ) | $ | 147,442 | $ | 3,889 | $ | 596 | $ | 105,557 | |||||||||
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 36,898 | 2,252 | (307 | ) | 38,843 | ||||||||||||||
Amortization of loan costs and bond premium |
2,168 | | 45 | | 2,213 | |||||||||||||||
Share-based compensation |
| 19,913 | | | 19,913 | |||||||||||||||
Change in income tax assets and liabilities |
| (5,034 | ) | | | (5,034 | ) | |||||||||||||
Loss from discontinued operations, net of taxes |
| 992 | (911 | ) | | 81 | ||||||||||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (17,649 | ) | (106 | ) | | (17,755 | ) | ||||||||||||
Other current assets |
| 10,523 | (15,135 | ) | | (4,612 | ) | |||||||||||||
Accounts payable |
| 3,098 | (207 | ) | | 2,891 | ||||||||||||||
Salaries and benefits payable |
| 1,679 | 52 | | 1,731 | |||||||||||||||
Accrued liabilities and other liabilities |
(3,599 | ) | 861 | (1,829 | ) | | (4,567 | ) | ||||||||||||
Net cash (used in) provided by continuing operating activities |
(47,801 | ) | 198,723 | (11,950 | ) | 289 | 139,261 | |||||||||||||
Net cash provided by discontinued operating activities |
| 739 | 1,783 | | 2,522 | |||||||||||||||
Net cash (used in) provided by operating activities |
(47,801 | ) | 199,462 | (10,167 | ) | 289 | 141,783 | |||||||||||||
Investing activities: |
||||||||||||||||||||
Cash paid for acquisitions, net of cash acquired |
(121,156 | ) | | | | (121,156 | ) | |||||||||||||
Capital purchases of leasehold improvements,
equipment and software |
| (119,540 | ) | (2,390 | ) | | (121,930 | ) | ||||||||||||
Other assets |
| (1,668 | ) | 350 | | (1,318 | ) | |||||||||||||
Net cash used in continuing investing activities |
(121,156 | ) | (121,208 | ) | (2,040 | ) | | (244,404 | ) | |||||||||||
Net cash (used in) provided by discontinued investing activities |
(45,000 | ) | 3,189 | | | (41,811 | ) | |||||||||||||
Net cash used in investing activities |
(166,156 | ) | (118,019 | ) | (2,040 | ) | | (286,215 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Net increase in revolving credit facility, less acquisitions |
149,333 | | | | 149,333 | |||||||||||||||
Principal payments on long-term debt |
(5,669 | ) | | (398 | ) | | (6,067 | ) | ||||||||||||
Payment of loan and issuance costs |
(59 | ) | | | | (59 | ) | |||||||||||||
Excess tax benefits from share-based payment arrangements |
3,052 | | | | 3,052 | |||||||||||||||
Repurchase of common stock upon restricted stock vesting |
(271 | ) | | | | (271 | ) | |||||||||||||
Net transfers to and from members |
57,826 | (60,716 | ) | 3,179 | (289 | ) | | |||||||||||||
Proceeds from exercises of common stock options |
9,745 | | | | 9,745 | |||||||||||||||
Net cash provided by (used in) financing activities |
213,957 | (60,716 | ) | 2,781 | (289 | ) | 155,733 | |||||||||||||
Net increase (decrease) in cash |
| 20,727 | (9,426 | ) | | 11,301 | ||||||||||||||
Cash and cash equivalents at beginning of the year |
| 19,154 | 20,816 | | 39,970 | |||||||||||||||
Cash and cash equivalents at end of the year |
$ | | $ | 39,881 | $ | 11,390 | $ | | $ | 51,271 | ||||||||||
F-31
Table of Contents
PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009
Condensed Consolidating Statement of Cash Flows
For the Twelve Months Ended December 31, 2007
(in thousands)
For the Twelve Months Ended December 31, 2007
(in thousands)
Combined | ||||||||||||||||||||
Subsidiary | Combined Non- | Consolidating | Total Consolidated | |||||||||||||||||
Parent | Guarantors | Guarantors | Adjustments | Amounts | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (50,370 | ) | $ | 124,557 | $ | 1,030 | $ | 1,276 | $ | 76,493 | |||||||||
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization |
| 28,517 | 1,872 | (276 | ) | 30,113 | ||||||||||||||
Amortization of loan costs and bond premium |
2,106 | | 45 | | 2,151 | |||||||||||||||
Share-based compensation |
| 16,104 | | | 16,104 | |||||||||||||||
Loss on refinancing long-term debt |
8,179 | | | | 8,179 | |||||||||||||||
Change in income tax assets and liabilities |
| 8,193 | 446 | | 8,639 | |||||||||||||||
Loss from discontinued operations, net of taxes |
| 222 | (296 | ) | | (74 | ) | |||||||||||||
Changes in operating assets and liabilities, net of
effect of acquisitions: |
||||||||||||||||||||
Accounts receivable |
| (13,158 | ) | 566 | | (12,592 | ) | |||||||||||||
Other current assets |
| 6,626 | (328 | ) | | 6,298 | ||||||||||||||
Accounts payable |
| (7,499 | ) | (440 | ) | | (7,939 | ) | ||||||||||||
Salaries and benefits payable |
| 1,633 | 243 | | 1,876 | |||||||||||||||
Accrued liabilities and other liabilities |
10,965 | (20,307 | ) | 3,666 | | (5,676 | ) | |||||||||||||
Net cash (used in) provided by continuing operating activities |
(29,120 | ) | 144,888 | 6,804 | 1,000 | 123,572 | ||||||||||||||
Net cash provided by discontinued operating activities |
| 3,185 | (1,236 | ) | | 1,949 | ||||||||||||||
Net cash (used in) provided by operating activities |
(29,120 | ) | 148,073 | 5,568 | 1,000 | 125,521 | ||||||||||||||
Investing activities: |
||||||||||||||||||||
Cash paid for acquisitions, net of cash acquired |
(444,899 | ) | | | | (444,899 | ) | |||||||||||||
Capital purchases of leasehold improvements,
equipment and software |
| (70,693 | ) | (567 | ) | | (71,260 | ) | ||||||||||||
Other assets |
| (2,866 | ) | 415 | | (2,451 | ) | |||||||||||||
Net cash used in continuing investing activites |
(444,899 | ) | (73,559 | ) | (152 | ) | | (518,610 | ) | |||||||||||
Net cash used in discontinued investing activities |
(17,921 | ) | (53 | ) | | | (17,974 | ) | ||||||||||||
Net cash used in investing activities |
(462,820 | ) | (73,612 | ) | (152 | ) | | (536,584 | ) | |||||||||||
Financing activities: |
||||||||||||||||||||
Net decrease in revolving credit facility, less acquisitions |
(21,000 | ) | | | | (21,000 | ) | |||||||||||||
Borrowings on long-term debt |
481,875 | | | | 481,875 | |||||||||||||||
Principal payments on long-term debt |
(40,936 | ) | | (345 | ) | | (41,281 | ) | ||||||||||||
Payment of loan and issuance costs |
(6,661 | ) | | | | (6,661 | ) | |||||||||||||
Refinancing of long-term debt |
(7,127 | ) | | | | (7,127 | ) | |||||||||||||
Excess tax benefits from share-based payment arrangements |
9,428 | | | | 9,428 | |||||||||||||||
Repurchase of common stock upon restricted stock vesting |
(122 | ) | | | | (122 | ) | |||||||||||||
Net transfers to and from members |
59,082 | (58,471 | ) | 389 | (1,000 | ) | | |||||||||||||
Proceeds from exercises of common stock options |
17,401 | | | | 17,401 | |||||||||||||||
Net cash provided by (used in) financing activities |
491,940 | (58,471 | ) | 44 | (1,000 | ) | 432,513 | |||||||||||||
Net increase in cash |
| 15,990 | 5,460 | | 21,450 | |||||||||||||||
Cash and cash equivalents at beginning of the year |
| 3,164 | 15,356 | | 18,520 | |||||||||||||||
Cash and cash equivalents at end of the year |
$ | | $ | 19,154 | $ | 20,816 | $ | | $ | 39,970 | ||||||||||
F-32
Table of Contents
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Psychiatric Solutions, Inc. |
||||
By: | /s/ Joey A. Jacobs | |||
Joey A. Jacobs | ||||
Chief Executive Officer | ||||
Dated: February 25, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature | Title | Date | ||
/s/ Joey A. Jacobs
|
Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | February 25, 2010 | ||
/s/ Jack E. Polson
|
Executive Vice President, Chief Accounting Officer (Principal Financial and Accounting Officer) | February 25, 2010 | ||
/s/ Mark P. Clein
|
Director | February 25, 2010 | ||
Mark P. Clein |
||||
/s/ David M. Dill
|
Director | February 25, 2010 | ||
David M. Dill |
||||
/s/ Richard D. Gore
|
Director | February 25, 2010 | ||
Richard D. Gore |
||||
/s/ Christopher Grant, Jr.
|
Director | February 25, 2010 | ||
Christopher Grant, Jr. |
||||
/s/ William M. Petrie, M.D.
|
Director | February 25, 2010 | ||
William M. Petrie, M.D. |
||||
/s/ Edward K. Wissing
|
Director | February 25, 2010 | ||
Edward K. Wissing |