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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)x
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period
ended June 30, 2004 oro
    
    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.  DELAWARE
    
    23-2491707(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 840 Crescent Centre Drive, Suite 460
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code) (615) 312-5700
(Registrants Telephone Number, Including Area Code) 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. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x As of August 6, 2004, 14,648,484 shares of the registrants common stock
were outstanding.




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PSYCHIATRIC SOLUTIONS, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 2004 and 2003 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2004 and 2003 (Unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    31EX-10.2 FIRST AMENDMENT TO CREDIT AGREEMENTEX-10.3 SECOND AMENDMENT TO CREDIT AGREEMENTEX-10.4 THIRD AMENDMENT TO CREDIT AGREEMENTEX-10.5 INTEREST RATE SWAP AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CAOEX-32.1 SECTION 302 CERTIFICATION OF THE CEO & CAO




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS PSYCHIATRIC SOLUTIONS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share amounts)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash
    
    $
    12,133
    
    
    $
    44,832Accounts receivable, less allowance for doubtful accounts
of $11,796 (unaudited) and $7,491, respectively
    
    
    82,183
    
    
    
    60,055Prepaids and other
    
    
    7,360
    
    
    
    8,529Total current assets
    
    
    101,676
    
    
    
    113,416Property and equipment, net of accumulated depreciation
    
    
    191,133
    
    
    
    149,757Cost in excess of net assets acquired, net
    
    
    130,129
    
    
    
    68,970Contracts, net
    
    
    2,626
    
    
    
    2,850Other assets
    
    
    17,678
    
    
    
    13,642Total assets
    
    $
    443,242
    
    
    $
    348,635LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,998
    
    
    $
    11,637Salaries and benefits payable
    
    
    20,697
    
    
    
    13,642Other accrued liabilities
    
    
    21,816
    
    
    
    20,168Current portion of long-term debt
    
    
    1,022
    
    
    
    1,023Total current liabilities
    
    
    57,533
    
    
    
    46,470Long-term debt, less current portion
    
    
    248,569
    
    
    
    173,980Deferred tax liability
    
    
    9,727
    
    
    
    6,762Other liabilities
    
    
    4,454
    
    
    
    4,779Total liabilities
    
    
    320,283
    
    
    
    231,991Series A convertible preferred stock, $0.01 par value,
6,000 shares authorized; 2,273 and 4,545 shares outstanding
at June 30, 2004 and December 31, 2003, respectively
    
    
    12,619
    
    
    
    25,316Stockholders equity:Common stock, $0.01 par value, 48,000 shares authorized;
14,547 and 11,937 issued and outstanding at June 30, 2004
and December 31, 2003, respectively
    
    
    145
    
    
    
    119Additional paid-in capital
    
    
    105,859
    
    
    
    91,423Notes receivable from stockholders
    
    
    (338
    )
    
    
    (338
    )Accumulated unrealized gains (losses)
    
    
    (17
    )
    
    
    (4
    )Accumulated earnings
    
    
    4,691
    
    
    
    128Total stockholders equity
    
    
    110,340
    
    
    
    91,328Total liabilities and stockholders equity
    
    $
    443,242
    
    
    $
    348,635
 See notes to condensed consolidated financial statements 1




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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited, in thousands except for per share amounts)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    120,509
    
    
    $
    57,438
    
    
    $
    228,094
    
    
    $
    94,532Salaries, wages and employee benefits
    
    
    66,152
    
    
    
    28,736
    
    
    
    125,147
    
    
    
    46,522Professional fees
    
    
    13,358
    
    
    
    6,876
    
    
    
    25,414
    
    
    
    11,328Supplies
    
    
    7,684
    
    
    
    2,993
    
    
    
    14,625
    
    
    
    4,683Rentals and leases
    
    
    2,155
    
    
    
    534
    
    
    
    3,938
    
    
    
    782Other operating expenses
    
    
    13,405
    
    
    
    9,965
    
    
    
    26,267
    
    
    
    17,124Provision for bad debts
    
    
    2,636
    
    
    
    1,336
    
    
    
    4,663
    
    
    
    2,657Depreciation and amortization
    
    
    2,365
    
    
    
    1,068
    
    
    
    4,482
    
    
    
    1,735Interest expense, net
    
    
    4,514
    
    
    
    2,386
    
    
    
    8,971
    
    
    
    3,797Loss on refinancing long-term debt
    
    
    
    
    
    
    4,586
    
    
    
    6,407
    
    
    
    4,586Change in valuation of put warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Change in reserve on stockholder notes
    
    
    
    
    
    
    (84
    )
    
    
    
    
    
    
    (545
    )112,269
    
    
    
    58,396
    
    
    
    219,914
    
    
    
    93,629Income (loss) before income taxes
    
    
    8,240
    
    
    
    (958
    )
    
    
    8,180
    
    
    
    903Provision for (benefit from)
income taxes
    
    
    3,132
    
    
    
    (364
    )
    
    
    3,109
    
    
    
    708Net income (loss)
    
    
    5,108
    
    
    
    (594
    )
    
    
    5,071
    
    
    
    195Accrued preferred stock dividends
    
    
    185
    
    
    
    177
    
    
    
    508
    
    
    
    177Net income (loss) available to common
stockholders
    
    $
    4,923
    
    
    $
    (771
    )
    
    $
    4,563
    
    
    $
    18Earnings (loss) per common share:Basic
    
    $
    0.35
    
    
    $
    (0.09
    )
    
    $
    0.35
    
    
    $
    0.00Diluted
    
    $
    0.29
    
    
    $
    (0.09
    )
    
    $
    0.29
    
    
    $
    0.00Shares used in computing per share
amounts:Basic
    
    
    14,120
    
    
    
    8,154
    
    
    
    13,039
    
    
    
    7,947Diluted
    
    
    17,376
    
    
    
    8,154
    
    
    
    17,301
    
    
    
    8,420
 See notes to condensed consolidated financial statements 2




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PSYCHIATRIC SOLUTIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Six Months Ended June 30,2004
    
    2003Operating ActivitiesNet income
    
    $
    5,071
    
    
    $
    195Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,482
    
    
    
    1,735Provision for doubtful accounts
    
    
    4,663
    
    
    
    2,657Accretion of detachable warrants
    
    
    
    
    
    
    149Non-cash stock compensation expense
    
    
    
    
    
    
    9Amortization of loan costs
    
    
    419
    
    
    
    328Loss on refinancing long-term debt
    
    
    6,407
    
    
    
    4,586Change in deferred tax liability
    
    
    2,965
    
    
    
    500Change in valuation of put warrants
    
    
    
    
    
    
    960Change in reserve on stockholder notes
    
    
    
    
    
    
    (545
    )Long-term interest accrued
    
    
    
    
    
    
    124Changes in operating assets and liabilities:Accounts receivable
    
    
    (9,265
    )
    
    
    (10,299
    )Prepaids and other assets
    
    
    2,192
    
    
    
    730Accounts payable
    
    
    (1,891
    )
    
    
    1,511Salaries and benefits payable
    
    
    3,541
    
    
    
    (500
    )Accrued liabilities and other liabilities
    
    
    (477
    )
    
    
    2,016Net cash provided by operating activities
    
    
    18,107
    
    
    
    4,156Investing Activities:Cash paid for acquisitions, net of cash acquired
    
    
    (112,194
    )
    
    
    (93,874
    )Capital purchases of property and equipment
    
    
    (6,806
    )
    
    
    (1,196
    )Other assets
    
    
    (2,368
    )
    
    
    24Net cash used in investing activities
    
    
    (121,368
    )
    
    
    (95,046
    )Financing Activities:Net principal borrowings on long-term debt
    
    
    74,445
    
    
    
    77,888Refinancing of long-term debt
    
    
    (3,844
    )
    
    
    Payment of loan and issuance costs
    
    
    (1,603
    )
    
    
    (4,481
    )Proceeds from issuance of series A convertible preferred stock
    
    
    
    
    
    
    25,000Proceeds from issuance of common stock
    
    
    1,564
    
    
    
    3Net cash provided by financing activities
    
    
    70,562
    
    
    
    98,410Net (decrease) increase in cash
    
    
    (32,699
    )
    
    
    7,520Cash at beginning of the period
    
    
    44,832
    
    
    
    2,392Cash at end of the period
    
    $
    12,133
    
    
    $
    9,912Significant Non-cash Transactions:Issuance of common stock upon conversion of convertible debt
    
    $
    
    
    
    $
    4,588Issuance of common stock upon exercise of warrants
    
    $
    
    
    
    $
    2,979Effect of Acquisitions:Assets acquired, net of cash acquired
    
    $
    119,657
    
    
    $
    176,202Liabilities assumed
    
    
    (7,463
    )
    
    
    (27,032
    )Long-term debt issued
    
    
    
    
    
    
    (55,296
    )Cash paid for acquisitions, net of cash acquired
    
    $
    112,194
    
    
    $
    93,874
 See notes to condensed consolidated financial statements 3




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PSYCHIATRIC SOLUTIONS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 JUNE 30, 2004
 1. Recent Developments On June 30, 2004, we completed the acquisition of substantially all the assets
of Alliance Behavioral Health Group (Alliance Behavioral), a system of
inpatient behavioral health care facilities with 144 beds located in Santa
Teresa, New Mexico, for $13.0 million. Because the acquisition of Alliance
Behavioral was completed at the close of business on June 30, 2004, it had no
impact on our results of operations for the three and six months ended June 30,
2004. On June 11, 2004, we completed the acquisition of substantially all the assets
of Piedmont Behavioral Health Center LLC (Piedmont), a 78 bed inpatient
behavioral health care facility located in Leesburg, Virginia, for $10.0
million. On June 4, 2004, we amended and increased our revolving credit facility with
Bank of America, N.A. (Bank of America) to $125 million from its previous
level of $50 million. In addition to several of our current lenders increasing
their commitment under our revolving credit facility, several new lenders
agreed to provide lending commitments. On June 1, 2004, we completed the acquisition of four inpatient behavioral
health care facilities from Heartland Healthcare (Heartland) for $47.0
million. The four facilities, located in Summit, New Jersey; Ft. Lauderdale;
Florida; Arlington, Texas; and Eden Prairie, Minnesota, have a total of 360
beds. On May 1, 2004, we completed the acquisition of all of the membership interests
of Palmetto Behavioral Health System, LLC (Palmetto), an operator of two
inpatient behavioral health care facilities, for approximately $6.0 million.
The two inpatient facilities, located in Charleston and Florence, South
Carolina, have 161 beds. On April 23, 2004, we entered into an interest rate swap agreement to manage
our exposure to fluctuations in interest rates. The swap agreement effectively
converts $30.0 million of fixed-rate long-term debt to a LIBOR indexed variable
rate instrument plus an agreed upon interest rate spread of 5.51%. 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for audited financial statements. The
condensed consolidated balance sheet at December 31, 2003 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of our financial position have
been included. The majority of our expenses are cost of revenue items.
General and administrative expenses were approximately 2% of net revenue for
the six months ended June 30, 2004. Operating results for the three and six
months ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the full year of 2004. For further information, refer to
the financial statements and footnotes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2003 filed on March 25, 2004. 4




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 3. Earnings Per Share Statement of Financial Accounting Standards (SFAS) No. 128, 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 available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution of
outstanding securities that, upon exercise or conversion, could share in our
earnings. We have calculated our earnings per share in accordance with SFAS No.
128 for all periods presented. The following table sets forth the computation of basic and diluted earnings
per share (dollars in thousands, except per share amounts): Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Numerator:Net income (loss) available to common stockholders
    
    $
    4,923
    
    
    $
    (771
    )
    
    $
    4,563
    
    
    $
    18Add: Accrued dividends on series A convertible preferred stock
    
    
    185
    
    
    
    
    
    
    
    508
    
    
    
    Earnings (loss) used in computing diluted earnings per common share
    
    $
    5,108
    
    
    $
    (771
    )
    
    $
    5,071
    
    
    $
    18Denominator:Weighted average shares outstanding for basic earnings per share
    
    
    14,120
    
    
    
    8,154
    
    
    
    13,039
    
    
    
    7,947Effect of dilutive series A convertible preferred stock outstanding
    
    
    2,700
    
    
    
    
    
    
    
    3,714
    
    
    
    Effects of dilutive stock options and warrants outstanding
    
    
    556
    
    
    
    
    
    
    
    548
    
    
    
    473Shares used in computing diluted earnings per common share
    
    
    17,376
    
    
    
    8,154
    
    
    
    17,301
    
    
    
    8,420Earnings (loss) per common share, basic
    
    $
    0.35
    
    
    $
    (0.09
    )
    
    $
    0.35
    
    
    $
    0.00Earnings (loss) per common share, diluted
    
    $
    0.29
    
    
    $
    (0.09
    )
    
    $
    0.29
    
    
    $
    0.00
 The computation of diluted loss per share for the three months ended June 30,
2003 does not include accrued dividends on series A convertible preferred stock
of $177,000, interest on convertible notes of $43,000, approximately 475,000
shares representing potentially dilutive increments of stock options and
warrants outstanding, approximately 225,000 shares representing the weighted
average of convertible debt outstanding during the period and approximately
2,572,000 shares representing the weighted average of series A convertible
preferred stock outstanding during the period as the effects would have been
anti-dilutive. The computation of diluted earnings per share for the six months
ended June 30, 2003 does not include accrued dividends on series A convertible
preferred stock of $177,000, interest on convertible notes of $124,000,
approximately 323,000 shares representing the weighted average of convertible
debt outstanding during the period and approximately 1,286,000 shares
representing the weighted average of series A convertible preferred stock
outstanding during the period as the effects would have been anti-dilutive. 4. Stock-Based Compensation We account for our stock option plans using the intrinsic value method in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Pursuant to APB Opinion No. 25, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. We plan to adopt the fair-value
method of accounting for stock options when required by accounting principles
generally accepted in the United States. Pro forma information regarding interim net income and earnings per share is
required by SFAS No. 148, and has been determined as if we had accounted for
our employee stock options under the fair value 5




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 method. The fair value of options we have granted was estimated using the
Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions.
Because our employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options. For purposes of pro forma disclosure, the estimated fair value of the options
at grant date is amortized to expense over the options vesting period. The pro
forma information follows (in thousands, except per share amounts): For the three months ended June 30,
    
    For the six months ended June 30,2004
    
    2003
    
    2004
    
    2003Net income available to common stockholders
    
    $
    4,923
    
    
    $
    (771
    )
    
    $
    4,563
    
    
    $
    18Pro forma compensation expense from stock options
    
    
    345
    
    
    
    143
    
    
    
    626
    
    
    
    236Pro forma net income available to common stockholders
    
    $
    4,578
    
    
    $
    (914
    )
    
    $
    3,937
    
    
    $
    (218
    )Basic earnings (loss) per share, as reported
    
    $
    0.35
    
    
    $
    (0.09
    )
    
    $
    0.35
    
    
    $
    0.00Diluted earnings (loss) per share, as reported
    
    $
    0.29
    
    
    $
    (0.09
    )
    
    $
    0.29
    
    
    $
    0.00Basic pro forma earnings (loss) per share
    
    $
    0.32
    
    
    $
    (0.11
    )
    
    $
    0.30
    
    
    $
    (0.03
    )Diluted pro forma earnings (loss) per share
    
    $
    0.27
    
    
    $
    (0.11
    )
    
    $
    0.26
    
    
    $
    (0.03
    )
 5. Mergers and Acquisitions Acquiring free-standing inpatient psychiatric facilities is a key part of our
business strategy. Because we have grown through mergers and acquisitions
accounted for as purchases, it is difficult to make meaningful comparisons
between our financial statements for the fiscal periods presented. On June 30, 2004, we completed the acquisition of substantially all the assets
of Alliance Behavioral, a system of inpatient behavioral health care facilities
with 144 beds located in Santa Teresa, New Mexico, for $13.0 million. We paid
for the acquisition of Alliance Behavioral with borrowings under our revolving
credit facility. On June 11, 2004, we completed the acquisition of Piedmont, a 78 bed inpatient
behavioral health care facility located in Leesburg, Virginia, for $10.0
million. We paid for the acquisition of Piedmont with borrowings under our
revolving credit facility. On June 1, 2004, we completed the acquisition of four inpatient behavioral
health care facilities from Heartland for $47.0 million. The four facilities,
located in Summit, New Jersey; Ft. Lauderdale, Florida; Arlington, Texas; and
Eden Prairie, Minnesota, have a total of 360 beds. We drew down $28.0 million
on our revolving credit facility and paid for the remainder of the acquisition
with cash on hand. On May 1, 2004, we completed the acquisition of all of the membership interests
of Palmetto, an operator of two inpatient behavioral health care facilities,
for approximately $6.0 million. The two inpatient facilities, located in
Charleston and Florence, South Carolina, have 161 beds. We paid for the
acquisition of Palmetto with cash on hand. On March 1, 2004, we acquired two inpatient psychiatric facilities from
Brentwood Behavioral Health (Brentwood) for $29.8 million cash with an
arn-out of up to $5.0 million contingent upon future financial results. We
drew down $17.0 million on our revolving line of credit and paid for the
remainder of 6




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 the acquisition price with cash on hand. The inpatient facilities, which have
an aggregate of 311 licensed beds, are located in Shreveport, Louisiana and
Jackson, Mississippi. On December 16, 2003, we acquired the 50-bed Calvary Center located in Phoenix,
Arizona for approximately $4.0 million. We paid $650,000 of the purchase price
on the acquisition date with the balance paid in January 2004 with cash on
hand. On November 1, 2003, we acquired the 109-bed Alliance Health Center located in
Meridian, Mississippi for approximately $13.0 million. The acquisition was
entirely financed through our then-existing line of credit. Alliance Health
Center is a licensed acute care hospital that provides psychiatric care for
children, adolescents and adults. In addition, we recently completed the
construction of a 60-bed residential treatment center which opened in May 2004. On June 30, 2003, we consummated the acquisition of Ramsay Youth Services, Inc.
(Ramsay), a public company that traded on the Nasdaq SmallCap Market under
the symbol RYOU, for approximately $81.3 million, consisting of $56.2 million
in cash, or $5.00 per share, $22.3 million in net assumed debt that was repaid
in connection with the acquisition and $2.8 million in fees and expenses. We
financed the acquisition of Ramsay with proceeds from the issuance of $150
million in 10 5/8% senior subordinated notes and the private placement of $12.5
million of our series A convertible preferred stock. The 11 owned or leased
inpatient behavioral health care facilities we acquired from Ramsay, which have
an aggregate of 1,292 beds, are located primarily in the Southeastern region of
the United States with locations also in Michigan, Missouri and Utah. In the
acquisition, we also assumed 10 contracts to manage behavioral health care
facilities for government agencies in Florida, Georgia and Puerto Rico. In April 2003, we consummated the acquisition of six inpatient behavioral
health care facilities from The Brown Schools, Inc. (The Brown Schools) for
$63.0 million in cash. The six facilities, which have an aggregate of 895
licensed beds, are located in Austin, San Antonio and San Marcos, Texas;
Charlottesville, Virginia; Colorado Springs, Colorado; and Tulsa, Oklahoma. The
Brown Schools offer a full continuum of care for troubled adolescents and
adults. We financed the acquisition of The Brown Schools with proceeds from the
private placement of $12.5 million of our series A convertible preferred stock
and an increase in funding under our then-existing senior credit facility. The purchase price allocations for Brentwood, Palmetto, Heartland, Piedmont and
Alliance Behavioral are preliminary as of June 30, 2004, pending receipt of
asset appraisals. The following represents the unaudited pro forma results of consolidated
operations as if the acquisitions of Brentwood, Palmetto, Heartland, Piedmont
and Alliance Behavioral had occurred at the beginning of the periods presented,
after giving effect to certain adjustments, including the depreciation and
amortization of the assets acquired based upon their estimated fair values and
changes in interest expense resulting from changes in consolidated debt
(dollars in thousands, except per share data): Three months ended June 30,
    
    Six months ended June 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    134,341
    
    
    $
    84,074
    
    
    $
    272,722
    
    
    $
    147,512Net income available to
common stockholders
    
    $
    4,608
    
    
    $
    5
    
    
    $
    7,111
    
    
    $
    2,323Earnings per share, basic
    
    $
    0.33
    
    
    $
    0.00
    
    
    $
    0.55
    
    
    $
    0.29Earnings per share, dilutive
    
    $
    0.28
    
    
    $
    0.00
    
    
    $
    0.44
    
    
    $
    0.26
 7




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 The pro forma information given does not purport to be indicative of what our
results of operations would have been if the acquisitions had in fact occurred
at the beginning of the periods presented, and is not intended to be a
projection of the impact on our future results or trends. The pro forma
information given includes a $6.4 million loss from refinancing long-term debt
for the six months ended June 30, 2004, expense of $960,000 to revalue put
warrants for the six months ended June 30, 2003 and income of $84,000 and
$545,000 to release reserves on stockholder notes for the three and six months
ended June 30, 2003. 6. Long-term debt Long-term debt consists of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Senior credit facility:Revolving line of credit, entered into on January 6, 2004,
expiring on January 6, 2007 and bearing weighted average
interest of 3.8% at June 30, 2004
    
    $
    75,000
    
    
    $
    10 5/8% senior subordinated notes
    
    
    150,000
    
    
    
    150,000Mortgage loans on facilities, maturing in 2037 and 2038
bearing fixed interest rates from 5.65% to 5.95%
    
    
    23,724
    
    
    
    23,833Subordinated seller notes with varying maturities
    
    
    657
    
    
    
    1,170Other
    
    
    210
    
    
    
    249,591
    
    
    
    175,003Less current portion
    
    
    1,022
    
    
    
    1,023Long-term debt
    
    $
    248,569
    
    
    $
    173,980
 Senior Credit Facility On January 6, 2004, we terminated our senior credit facility with CapitalSource
Finance LLC (CapSource) and entered into a new credit agreement (the Credit
Agreement) with Bank of America that provides for a revolving credit facility
of up to $50.0 million. As a result of the termination of our senior credit
facility with CapSource, we recorded a loss on refinancing long-term debt of
$6.4 million for the quarter ended March 31, 2004, including approximately $3.8
million paid as a termination fee to CapSource. On June 4, 2004, our credit
agreement with Bank of America was amended and expanded to provide for a
revolving credit facility of up to $125.0 million. Our credit facility with
Bank of America 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 $2.5 million and the stock of our
operating subsidiaries. In addition, the credit facility is fully and
unconditionally guaranteed by substantially all of our operating subsidiaries.
The revolving line of credit accrues interest at our choice of the Base Rate
or the Eurodollar Rate (as defined in the Credit Agreement) and is due in
January 2007. The Base Rate and Eurodollar Rate fluctuate based upon market
rates and certain leverage ratios, as defined in the Credit Agreement. At June
30, 2004, the weighted average interest rate under the revolving line of credit
was 3.8%. Until the maturity date, we may borrow, repay and re-borrow an amount
not to exceed the lesser of $125.0 million or the borrowing base (as defined in
the Credit Agreement). As of June 30, 2004, we had $75.0 million of borrowings
outstanding and $42.3 million immediately available under the revolving line of
credit. We must pay on a quarterly basis a commitment fee in the amount of 0.5%
per annum on the unused portion of our revolving credit facility and a
utilization fee in the amount of 0.25% per annum on the unused portion of the
revolving credit facility when borrowings under the revolving 8




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 credit facility are less than $41.3 million. Such fees were approximately
$50,000 and $115,000 for the three and six months ended June 30, 2004,
respectively. Our revolving credit facility contains customary covenants which include: (1) a
limitation on capital expenditures and investments, sales of assets, mergers,
changes of ownership, new principal lines of business, indebtedness, dividends
and redemptions; (2) various financial covenants; and (3) cross-default
covenants triggered by a default of any other indebtedness of at least $3.0
million. As of June 30, 2004, 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 could become immediately payable and
additional borrowings could be restricted. 10 5/8% Senior Subordinated Notes On June 30, 2003, we issued $150 million in 10 5/8% senior subordinated notes,
which are fully and unconditionally guaranteed on a senior subordinated basis
by substantially all of our operating subsidiaries. Proceeds from the issuance
of the senior subordinated notes and the private placement of $12.5 million in
series A convertible preferred stock were used to finance the acquisition of
Ramsay and pay down substantially all of our long-term debt. Interest on the
senior subordinated notes accrues at the rate of 10.625% per annum and is
payable semi-annually in arrears on June 15 and December 15, which commenced on
December 15, 2003. The senior subordinated notes will mature on June 15, 2013. Mortgage Loans During 2002 and 2003, we borrowed approximately $23.8 million under mortgage
loan agreements insured by the U.S. Department of Housing and Urban Development
(HUD). These mortgage loans are secured by real estate located at Holly Hill
Hospital in Raleigh, North Carolina, West Oaks Hospital in Houston, Texas, and
Riveredge Hospital near Chicago, Illinois. Interest accrues on the Holly Hill,
West Oaks and Riveredge HUD loans at 5.95%, 5.85% and 5.65%, respectively, and
principal and interest are payable in 420 monthly installments through December
2037, September 2038 and December 2038, respectively. We used the proceeds from
the mortgage loans to repay approximately $4.4 million in 2002 and $17.0
million in 2003 of our term debt under our former senior credit facility with
CapSource, pay certain financing costs, and fund required escrow amounts for
future improvements to the property. The carrying amount of assets held as
collateral approximated $23.8 million as of June 30, 2004. Subordinated Seller Notes In connection with an acquisition in 2000, we issued a promissory note payable
in the amount of $400,000 bearing interest at 9%. The principal amount we owe
on this note is $80,000 at June 30, 2004, which is due on April 1, 2005.
Accrued interest is due and payable on the first day of each calendar quarter. We issued two promissory notes totaling $4.5 million in connection with our
acquisitions of three facilities in 2001. At June 30, 2004, one note with a
current principal balance of $577,000 remained outstanding. This note accrues
interest at 9% per annum and is due June 30, 2005. Among other customary
covenants, the note contains cross-default covenants triggered by a default of
any other indebtedness of at least $1.0 million. We were in compliance with
these covenants as of June 30, 2004. 7. Mezzanine Equity and Stockholders Equity We issued 4,545,454 shares of our series A convertible preferred stock during
the quarter ended June 30, 2003. Each share of series A convertible preferred
stock is convertible into one share of our common stock. Holders of our series
A convertible preferred stock are entitled to receive pay-in-kind dividends, 9




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 compounded quarterly, equal to 5% per share of the original share price through
March 31, 2005. Thereafter, pay-in-kind dividends will compound quarterly at 7%
per share of the original share price. Because we may be required to redeem the
series A convertible preferred stock upon certain change of control events that
may not be within our control, the series A convertible preferred stock has
been classified outside of our permanent stockholders equity. During the
quarter ended June 30, 2004, certain holders of our series A convertible
preferred stock converted 2,272,727 shares of series A convertible preferred
stock and related accrued dividends into 2,389,428 shares of our common stock. As a part of the merger with PMR Corporation (PMR), we became the holder of
promissory notes with certain stockholders of PMR. A certain provision of the
stockholder notes allowed the stockholders to repay those notes with our common
stock at the higher of a stated price or the market value of our common stock.
As the stated price was higher than the market value at December 31, 2002, we
recorded a reserve on the promissory notes equal to the difference between the
stated price and market value. Due to the increase in the market price of our
common stock during the three and six months ended June 30, 2003, we released
$84,000 and $545,000, respectively, of the reserve on the stockholder notes. At
December 31, 2003, we did not maintain a reserve balance on our stockholder
notes because the market value exceeded the stated price. The right to repay
the stockholder notes with our common stock expired on December 31, 2003. The
current outstanding balance of these notes is $338,000. 8. Income Taxes The provision recorded for the three and six months ended June 30, 2004
reflects an effective tax rate of approximately 38%. The benefit/provision
recorded for the three and six months ended June 30, 2003 reflects an effective
tax rate of approximately 38% and 78%, respectively, due to the non-deductible
nature of the change in valuation of the put warrants during 2003. 9. Disclosures About Reportable Segments In accordance with the criteria of SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, we operate two reportable segments: (1)
owned and leased facilities and (2) management contracts. Each of our inpatient
facilities and inpatient management contracts qualifies as an operating segment
under SFAS No. 131; however, none is individually material. We have aggregated
our operations into two reportable segments based on characteristics of the
services provided. As of June 30, 2004, the owned and leased facilities segment
provides inpatient mental and behavioral health services in its 25 owned and 9
leased facilities in 19 states. As of June 30, 2004, the management contracts
segment provides inpatient psychiatric management and development services to
41 behavioral health units in third party medical/surgical hospitals and
clinics in 15 states and provides mental and behavioral health services to 10
inpatient facilities for state government agencies. Activities classified as
Corporate and Other in the following schedule relate primarily to unallocated
home office items. Adjusted EBITDA is a non-GAAP financial measure and is defined as net income
(loss) before interest expense (net of interest income), income taxes,
depreciation, amortization, stock compensation, inter-segment
expenses 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 the
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
accounting principles generally accepted in the United 10




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 States. Because adjusted EBITDA is not a measure of financial performance under
accounting principles generally accepted in the United States 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
business segment for the periods indicated (dollars in thousands): Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedThree months ended June 30, 2004Revenue
    
    $
    100,072
    
    
    $
    20,437
    
    
    $
    
    
    
    $
    120,509Adjusted EBITDA
    
    $
    16,092
    
    
    $
    2,479
    
    
    $
    (3,452
    )
    
    $
    15,119Interest expense
    
    
    4,567
    
    
    
    (5
    )
    
    
    (48
    )
    
    
    4,514Provision for income taxes
    
    
    691
    
    
    
    
    
    
    
    2,441
    
    
    
    3,132Depreciation and amortization
    
    
    1,982
    
    
    
    306
    
    
    
    77
    
    
    
    2,365Inter-segment expenses
    
    
    3,173
    
    
    
    237
    
    
    
    (3,410
    )
    
    
    Net income (loss)
    
    $
    5,679
    
    
    $
    1,941
    
    
    $
    (2,512
    )
    
    $
    5,108Segment assets
    
    $
    379,309
    
    
    $
    38,670
    
    
    $
    25,263
    
    
    $
    443,242
 Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedThree months ended June 30, 2003Revenue
    
    $
    44,972
    
    
    $
    12,466
    
    
    $
    
    
    
    $
    57,438Adjusted EBITDA
    
    $
    6,466
    
    
    $
    2,119
    
    
    $
    (1,582
    )
    
    $
    7,003Interest expense
    
    
    1,364
    
    
    
    22
    
    
    
    1,000
    
    
    
    2,386Benefit from income taxes
    
    
    
    
    
    
    
    
    
    
    (364
    )
    
    
    (364
    )Depreciation and amortization
    
    
    788
    
    
    
    265
    
    
    
    15
    
    
    
    1,068Inter-segment expenses
    
    
    1,906
    
    
    
    122
    
    
    
    (2,028
    )
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Other expenses:Loss on refinance of long-term debt
    
    
    
    
    
    
    
    
    
    
    4,586
    
    
    
    4,586Change in reserve on stockholder notes
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    (84
    )Total other expenses
    
    
    
    
    
    
    
    
    
    
    4,502
    
    
    
    4,502Net income (loss)
    
    $
    2,408
    
    
    $
    1,710
    
    
    $
    (4,712
    )
    
    $
    (594
    )Segment assets
    
    $
    231,181
    
    
    $
    34,390
    
    
    $
    16,965
    
    
    $
    282,536
 11




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedSix months ended June 30, 2004Revenue
    
    $
    186,515
    
    
    $
    41,579
    
    
    $
    
    
    
    $
    228,094Adjusted EBITDA
    
    $
    29,567
    
    
    $
    4,850
    
    
    $
    (6,377
    )
    
    $
    28,040Interest expense
    
    
    8,125
    
    
    
    (10
    )
    
    
    856
    
    
    
    8,971Provision for income taxes
    
    
    1,353
    
    
    
    
    
    
    
    1,756
    
    
    
    3,109Depreciation and amortization
    
    
    3,726
    
    
    
    620
    
    
    
    136
    
    
    
    4,482Inter-segment expenses
    
    
    5,360
    
    
    
    1,038
    
    
    
    (6,398
    )
    
    
    Other expenses:Loss on refinance of long-term debt
    
    
    
    
    
    
    
    
    
    
    6,407
    
    
    
    6,407Net income (loss)
    
    $
    11,003
    
    
    $
    3,202
    
    
    $
    (9,134
    )
    
    $
    5,071Segment assets
    
    $
    379,309
    
    
    $
    38,670
    
    
    $
    25,263
    
    
    $
    443,242
 Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedSix months ended June 30, 2003Revenue
    
    $
    71,050
    
    
    $
    23,482
    
    
    $
    
    
    
    $
    94,532Adjusted EBITDA
    
    $
    10,546
    
    
    $
    3,958
    
    
    $
    (3,059
    )
    
    $
    11,445Interest expense
    
    
    2,270
    
    
    
    103
    
    
    
    1,424
    
    
    
    3,797Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    708
    
    
    
    708Depreciation and amortization
    
    
    1,173
    
    
    
    530
    
    
    
    32
    
    
    
    1,735Inter-segment expenses
    
    
    2,846
    
    
    
    796
    
    
    
    (3,642
    )
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Other expenses:Loss on refinance of long-term debt
    
    
    
    
    
    
    
    
    
    
    4,586
    
    
    
    4,586Change in valuation of put warrants
    
    
    
    
    
    
    
    
    
    
    960
    
    
    
    960Change in reserve on stockholder notes
    
    
    
    
    
    
    
    
    
    
    (545
    )
    
    
    (545
    )Total other expenses
    
    
    
    
    
    
    
    
    
    
    5,001
    
    
    
    5,001Net income (loss)
    
    $
    4,257
    
    
    $
    2,529
    
    
    $
    (6,591
    )
    
    $
    195Segment assets
    
    $
    231,181
    
    
    $
    34,390
    
    
    $
    16,965
    
    
    $
    282,536
 Assets totaling approximately $85.1 million representing the unallocated
purchase price of Ramsay at June 30, 2003 have been reclassified to our owned
and leased facilities segment from corporate and other for the three and six
months ended June 30, 2003. 10. Recent Pronouncements In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51(FIN 46). FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after 12




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after December 15, 2003. The adoption of FIN
46 has not had a material effect on our results of operations or financial
position. 11. Financial Information for Psychiatric Solutions and Its Subsidiaries We conduct substantially all of our business through our subsidiaries.
Presented below is condensed consolidated financial information for us and our
subsidiaries as of June 30, 2004 and December 31, 2003, and for the three and
six months ended June 30, 2004 and 2003. 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. Psychiatric Solutions, Inc.Condensed Consolidating Balance Sheet
As of June 30, 2004
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsCurrent Assets:Cash
    
    $
    
    
    
    $
    10,444
    
    
    $
    1,689
    
    
    $
    
    
    
    $
    12,133Accounts receivable, net
    
    
    
    
    
    
    82,183
    
    
    
    
    
    
    
    
    
    
    
    82,183Prepaids and other
    
    
    
    
    
    
    6,746
    
    
    
    614
    
    
    
    
    
    
    
    7,360Total current assets
    
    
    
    
    
    
    99,373
    
    
    
    2,303
    
    
    
    
    
    
    
    101,676Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    168,686
    
    
    
    30,645
    
    
    
    (8,198
    )
    
    
    191,133Cost in excess of net assets acquired
    
    
    
    
    
    
    130,129
    
    
    
    
    
    
    
    
    
    
    
    130,129Contracts, net
    
    
    
    
    
    
    2,626
    
    
    
    
    
    
    
    
    
    
    
    2,626Investment in subsidiaries
    
    
    80,485
    
    
    
    
    
    
    
    
    
    
    
    (80,485
    )
    
    
    Other assets
    
    
    6,099
    
    
    
    7,270
    
    
    
    4,309
    
    
    
    
    
    
    
    17,678Total assets
    
    $
    86,584
    
    
    $
    408,084
    
    
    $
    37,257
    
    
    $
    (88,683
    )
    
    $
    443,242Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    13,998
    
    
    $
    
    
    
    $
    
    
    
    $
    13,998Salaries and benefits payable
    
    
    
    
    
    
    20,697
    
    
    
    
    
    
    
    
    
    
    
    20,697Other accrued liabilities
    
    
    2,426
    
    
    
    19,266
    
    
    
    1,090
    
    
    
    (966
    )
    
    
    21,816Current portion of long-term debt
    
    
    
    
    
    
    794
    
    
    
    228
    
    
    
    
    
    
    
    1,022Total current liabilities
    
    
    2,426
    
    
    
    54,755
    
    
    
    1,318
    
    
    
    (966
    )
    
    
    57,533Long-term debt, less current portion
    
    
    
    
    
    
    225,073
    
    
    
    23,496
    
    
    
    
    
    
    
    248,569Deferred tax liability
    
    
    
    
    
    
    9,727
    
    
    
    
    
    
    
    
    
    
    
    9,727Other liabilities
    
    
    3,474
    
    
    
    14
    
    
    
    
    
    
    
    966
    
    
    
    4,454Total liabilities
    
    
    5,900
    
    
    
    289,570
    
    
    
    24,813
    
    
    
    
    
    
    
    320,283Series A convertible preferred stock
    
    
    12,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,619Stockholders equity:Total stockholders equity
    
    
    68,065
    
    
    
    118,514
    
    
    
    12,444
    
    
    
    (88,683
    )
    
    
    110,340Total liabilities and stockholders equity
    
    $
    86,584
    
    
    $
    408,084
    
    
    $
    37,257
    
    
    $
    (88,683
    )
    
    $
    443,242
 13




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004

Psychiatric Solutions, Inc.
Condensed Consolidating Balance Sheet
As of December 31, 2003
(Dollars in thousands)

Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsCurrent Assets:Cash
    
    $
    
    
    
    $
    43,334
    
    
    $
    1,498
    
    
    $
    
    
    
    $
    44,832Accounts receivable, net
    
    
    
    
    
    
    60,055
    
    
    
    
    
    
    
    
    
    
    
    60,055Prepaids and other
    
    
    
    
    
    
    8,510
    
    
    
    19
    
    
    
    
    
    
    
    8,529Total current assets
    
    
    
    
    
    
    111,899
    
    
    
    1,517
    
    
    
    
    
    
    
    113,416Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    127,047
    
    
    
    31,029
    
    
    
    (8,319
    )
    
    
    149,757Cost in excess of net assets acquired
    
    
    
    
    
    
    68,970
    
    
    
    
    
    
    
    
    
    
    
    68,970Contracts, net
    
    
    
    
    
    
    2,850
    
    
    
    
    
    
    
    
    
    
    
    2,850Investment in subsidiaries
    
    
    199,154
    
    
    
    
    
    
    
    
    
    
    
    (199,154
    )
    
    
    Other assets
    
    
    7,731
    
    
    
    1,958
    
    
    
    3,953
    
    
    
    
    
    
    
    13,642Total assets
    
    $
    206,885
    
    
    $
    312,724
    
    
    $
    36,499
    
    
    $
    (207,473
    )
    
    $
    348,635Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    11,637
    
    
    $
    
    
    
    $
    
    
    
    $
    11,637Salaries and benefits payable
    
    
    
    
    
    
    13,642
    
    
    
    
    
    
    
    
    
    
    
    13,642Other accrued liabilities
    
    
    871
    
    
    
    19,176
    
    
    
    1,090
    
    
    
    (969
    )
    
    
    20,168Current portion of long-term debt
    
    
    
    
    
    
    801
    
    
    
    222
    
    
    
    
    
    
    
    1,023Total current liabilities
    
    
    871
    
    
    
    45,256
    
    
    
    1,312
    
    
    
    (969
    )
    
    
    46,470Long-term debt, less current portion
    
    
    150,369
    
    
    
    
    
    
    
    23,611
    
    
    
    
    
    
    
    173,980Deferred tax liability
    
    
    
    
    
    
    6,762
    
    
    
    
    
    
    
    
    
    
    
    6,762Other liabilities
    
    
    3,218
    
    
    
    592
    
    
    
    
    
    
    
    969
    
    
    
    4,779Total liabilities
    
    
    154,458
    
    
    
    52,610
    
    
    
    24,923
    
    
    
    
    
    
    
    231,991Series A convertible preferred stock
    
    
    25,316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,316Stockholders equity:Total stockholders equity
    
    
    27,111
    
    
    
    260,114
    
    
    
    11,576
    
    
    
    (207,473
    )
    
    
    91,328Total liabilities and stockholders equity
    
    $
    206,885
    
    
    $
    312,724
    
    
    $
    36,499
    
    
    $
    (207,473
    )
    
    $
    348,635


Psychiatric Solutions, Inc.Condensed Consolidating Statement of IncomeFor the Three Months Ended June 30, 2004(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    120,509
    
    
    $
    969
    
    
    $
    (969
    )
    
    $
    120,509Salaries, wages and employee benefits
    
    
    
    
    
    
    66,152
    
    
    
    
    
    
    
    
    
    
    
    66,152Professional fees
    
    
    
    
    
    
    13,324
    
    
    
    34
    
    
    
    
    
    
    
    13,358Supplies
    
    
    
    
    
    
    7,684
    
    
    
    
    
    
    
    
    
    
    
    7,684Rentals and leases
    
    
    
    
    
    
    2,155
    
    
    
    
    
    
    
    
    
    
    
    2,155Other operating expenses
    
    
    444
    
    
    
    13,932
    
    
    
    (2
    )
    
    
    (969
    )
    
    
    13,405Provision for bad debts
    
    
    
    
    
    
    2,636
    
    
    
    
    
    
    
    
    
    
    
    2,636Depreciation and amortization
    
    
    
    
    
    
    2,121
    
    
    
    244
    
    
    
    
    
    
    
    2,365Interest expense
    
    
    4,136
    
    
    
    
    
    
    
    378
    
    
    
    
    
    
    
    4,5144,580
    
    
    
    108,004
    
    
    
    654
    
    
    
    (969
    )
    
    
    112,269(Loss) income before income taxes
    
    
    (4,580
    )
    
    
    12,505
    
    
    
    315
    
    
    
    
    
    
    
    8,240Benefit from income taxes
    
    
    (1,740
    )
    
    
    4,872
    
    
    
    
    
    
    
    
    
    
    
    3,132Net (loss) income
    
    
    (2,840
    )
    
    
    7,633
    
    
    
    315
    
    
    
    
    
    
    
    5,108Accrued preferred stock dividends
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185Net (loss) income available to common shareholders
    
    $
    3,025
    )
    
    $
    7,633
    
    
    $
    315
    
    
    $
    
    
    
    $
    4,923
 14




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2003
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    56,893
    
    
    $
    545
    
    
    $
    
    
    
    $
    57,438Salaries, wages and employee benefits
    
    
    
    
    
    
    28,736
    
    
    
    
    
    
    
    
    
    
    
    28,736Professional fees
    
    
    
    
    
    
    6,840
    
    
    
    36
    
    
    
    
    
    
    
    6,876Supplies
    
    
    
    
    
    
    2,993
    
    
    
    
    
    
    
    
    
    
    
    2,993Rentals and leases
    
    
    
    
    
    
    534
    
    
    
    
    
    
    
    
    
    
    
    534Other operating expenses
    
    
    504
    
    
    
    9,201
    
    
    
    260
    
    
    
    
    
    
    
    9,965Provision for bad debts
    
    
    
    
    
    
    1,336
    
    
    
    
    
    
    
    
    
    
    
    1,336Depreciation and amortization
    
    
    
    
    
    
    952
    
    
    
    116
    
    
    
    
    
    
    
    1,068Interest expense
    
    
    2,197
    
    
    
    43
    
    
    
    146
    
    
    
    
    
    
    
    2,386Loss on refinancing long-term debt
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,586Change in reserve of stockholder notes
    
    
    (84
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )7,203
    
    
    
    50,635
    
    
    
    558
    
    
    
    
    
    
    
    58,396(Loss) income before income taxes
    
    
    (7,203
    )
    
    
    6,258
    
    
    
    (13
    )
    
    
    
    
    
    
    (958
    )(Benefit from) provision for income taxes
    
    
    (2,737
    )
    
    
    2,378
    
    
    
    (5
    )
    
    
    
    
    
    
    (364
    )Net (loss) income
    
    
    (4,466
    )
    
    
    3,880
    
    
    
    (8
    )
    
    
    
    
    
    
    (594
    )Accrued preferred stock dividends
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177Net income available to common shareholders
    
    $
    (4,643
    )
    
    $
    3,880
    
    
    $
    (8
    )
    
    $
    
    
    
    $
    (771
    )
 Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2004
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    228,094
    
    
    $
    1,860
    
    
    $
    (1,860
    )
    
    $
    228,094Salaries, wages and employee benefits
    
    
    
    
    
    
    125,147
    
    
    
    
    
    
    
    
    
    
    
    125,147Professional fees
    
    
    
    
    
    
    25,379
    
    
    
    35
    
    
    
    
    
    
    
    25,414Supplies
    
    
    
    
    
    
    14,625
    
    
    
    
    
    
    
    
    
    
    
    14,625Rentals and leases
    
    
    
    
    
    
    3,938
    
    
    
    
    
    
    
    
    
    
    
    3,938Other operating expenses
    
    
    2,913
    
    
    
    25,216
    
    
    
    (2
    )
    
    
    (1,860
    )
    
    
    26,267Provision for bad debts
    
    
    
    
    
    
    4,663
    
    
    
    
    
    
    
    
    
    
    
    4,663Depreciation and amortization
    
    
    
    
    
    
    3,997
    
    
    
    485
    
    
    
    
    
    
    
    4,482Interest expense
    
    
    8,222
    
    
    
    
    
    
    
    749
    
    
    
    
    
    
    
    8,971Loss on refinancing of long-term debt
    
    
    6,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,40717,542
    
    
    
    202,965
    
    
    
    1,267
    
    
    
    (1,860
    )
    
    
    219,914(Loss) income before income taxes
    
    
    (17,542
    )
    
    
    25,129
    
    
    
    593
    
    
    
    
    
    
    
    8,180Benefit from income taxes
    
    
    (6,666
    )
    
    
    9,550
    
    
    
    225
    
    
    
    
    
    
    
    3,109Net (loss) income
    
    
    (10,876
    )
    
    
    15,579
    
    
    
    368
    
    
    
    
    
    
    
    5,071Accrued preferred stock dividends
    
    
    508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    508Net (loss) income available to common shareholders
    
    $
    (11,384
    )
    
    $
    15,579
    
    
    $
    368
    
    
    $
    
    
    
    $
    4,563
 15




---



##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2003
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    93,587
    
    
    $
    945
    
    
    $
    
    
    
    $
    94,532Salaries, wages and employee benefits
    
    
    
    
    
    
    46,522
    
    
    
    
    
    
    
    
    
    
    
    46,522Professional fees
    
    
    
    
    
    
    11,292
    
    
    
    36
    
    
    
    
    
    
    
    11,328Supplies
    
    
    
    
    
    
    4,683
    
    
    
    
    
    
    
    
    
    
    
    4,683Rentals and leases
    
    
    
    
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    782Other operating expenses
    
    
    571
    
    
    
    16,049
    
    
    
    504
    
    
    
    
    
    
    
    17,124Provision for bad debts
    
    
    
    
    
    
    2,657
    
    
    
    
    
    
    
    
    
    
    
    2,657Equity in earnings of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    1,560
    
    
    
    175
    
    
    
    
    
    
    
    1,735Interest expense
    
    
    3,453
    
    
    
    124
    
    
    
    220
    
    
    
    
    
    
    
    3,797Loss on refinancing of long-term debt
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,586Change in valuation of put warrants
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Change in reserve of stockholder notes
    
    
    (545
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (545
    )9,025
    
    
    
    83,669
    
    
    
    935
    
    
    
    
    
    
    
    93,629(Loss) income before income taxes
    
    
    (9,025
    )
    
    
    9,918
    
    
    
    10
    
    
    
    
    
    
    
    903(Benefit from) provision for income taxes
    
    
    (3,064
    )
    
    
    3,768
    
    
    
    4
    
    
    
    
    
    
    
    708Net (loss) income
    
    
    (5,961
    )
    
    
    6,150
    
    
    
    6
    
    
    
    
    
    
    
    195Accrued preferred stock dividends
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177Net (loss) income available to common shareholders
    
    $
    (6,138
    )
    
    $
    6,150
    
    
    $
    6
    
    
    $
    
    
    
    $
    18
 Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2004
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsOperating ActivitiesNet (loss) income
    
    $
    (10,876
    )
    
    $
    15,579
    
    
    $
    368
    
    
    $
    
    
    
    $
    5,071Adjustments to reconcile net (loss) income to netcash provided by (used in) operating activities:Depreciation and amortization
    
    
    
    
    
    
    3,997
    
    
    
    485
    
    
    
    
    
    
    
    4,482Provision for doubtful accounts
    
    
    
    
    
    
    4,663
    
    
    
    
    
    
    
    
    
    
    
    4,663Amortization of loan costs
    
    
    410
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    419Loss on refinancing long-term debt
    
    
    6,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,407Change in deferred tax liability
    
    
    
    
    
    
    2,965
    
    
    
    
    
    
    
    
    
    
    
    2,965Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (9,265
    )
    
    
    
    
    
    
    
    
    
    
    (9,265
    )Prepaids and other current assets
    
    
    
    
    
    
    1,597
    
    
    
    595
    
    
    
    
    
    
    
    2,192Accounts payable
    
    
    
    
    
    
    (1,891
    )
    
    
    
    
    
    
    
    
    
    
    (1,891
    )Accrued liabilities and other liabilities
    
    
    47
    
    
    
    3,018
    
    
    
    (1
    )
    
    
    
    
    
    
    3,064Net cash (used in) provided by operating activities
    
    
    (4,012
    )
    
    
    20,663
    
    
    
    1,456
    
    
    
    
    
    
    
    18,107Investing Activities:Cash paid for acquisitions, net of cash acquired
    
    
    (112,194
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (112,194
    )Capital purchases of property and equipment
    
    
    
    
    
    
    (6,806
    )
    
    
    
    
    
    
    
    
    
    
    (6,806
    )Other assets
    
    
    
    
    
    
    (2,724
    )
    
    
    356
    
    
    
    
    
    
    
    (2,368
    )Net used in investing activities
    
    
    (112,194
    )
    
    
    (9,530
    )
    
    
    356
    
    
    
    
    
    
    
    (121,368
    )Financing Activities:Net principal borrowings on long-term debt
    
    
    74,554
    
    
    
    
    
    
    
    (109
    )
    
    
    
    
    
    
    74,445Net transfers to and from members
    
    
    45,535
    
    
    
    (44,023
    )
    
    
    (1,512
    )
    
    
    
    
    
    
    Refinancing of long-term debt
    
    
    (3,844
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,844
    )Payment of loan and issuance costs
    
    
    (1,603
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,603
    )Proceeds from issuance of common stock
    
    
    1,564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,564Net cash provided by (used in) financing activities
    
    
    116,206
    
    
    
    (44,023
    )
    
    
    (1,621
    )
    
    
    
    
    
    
    70,562Net (decrease) increase in cash
    
    
    
    
    
    
    (32,890
    )
    
    
    191
    
    
    
    
    
    
    
    (32,699
    )Cash at beginning of year
    
    
    
    
    
    
    43,334
    
    
    
    1,498
    
    
    
    
    
    
    
    44,832Cash at end of year
    
    $
    
    
    
    $
    10,444
    
    
    $
    1,689
    
    
    $
    
    
    
    $
    12,133
 16




---



##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004 Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2003
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsOperating ActivitiesNet (loss) income
    
    $
    (5,961
    )
    
    $
    6,150
    
    
    $
    6
    
    
    $
    
    
    
    $
    195Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    
    
    
    
    1,560
    
    
    
    175
    
    
    
    
    
    
    
    1,735Provision for doubtful accounts
    
    
    
    
    
    
    2,657
    
    
    
    
    
    
    
    
    
    
    
    2,657Accretion of detachable warrants
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Non-cash stock compensation expense
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9Amortization of loan costs
    
    
    328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    328Loss on refinancing long-term debt
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,586Change in deferred tax liability
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    500Change in valuation of put warrants
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Change in reserve on stockholder notes
    
    
    (545
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (545
    )Long-term interest accrued
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    124Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (10,299
    )
    
    
    
    
    
    
    
    
    
    
    (10,299
    )Prepaids and other current assets
    
    
    
    
    
    
    1,244
    
    
    
    (514
    )
    
    
    
    
    
    
    730Accounts payable
    
    
    
    
    
    
    1,511
    
    
    
    
    
    
    
    
    
    
    
    1,511Accrued liabilities and other liabilities
    
    
    (4,074
    )
    
    
    5,230
    
    
    
    360
    
    
    
    
    
    
    
    1,516Net cash (used in) provided by continuing operating activities
    
    
    (4,557
    )
    
    
    8,686
    
    
    
    27
    
    
    
    
    
    
    
    4,156Investing Activities:Cash paid for acquisitions, net of cash acquired
    
    
    (93,874
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93,874
    )Capital purchases of property and equipment
    
    
    
    
    
    
    (1,196
    )
    
    
    
    
    
    
    
    
    
    
    (1,196
    )Other assets
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    24Net used in investing activities
    
    
    (93,874
    )
    
    
    (1,172
    )
    
    
    
    
    
    
    
    
    
    
    (95,046
    )Financing Activities:Net principal borrowings on long-term debt
    
    
    77,909
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    77,888Payment of loan and issuance costs
    
    
    (4,481
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,481
    )Proceeds from issuance of series A convertible preferred stock
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Proceeds from issuance of common stock
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Net cash provided by (used in) financing activities
    
    
    98,431
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    98,410Net increase in cash
    
    
    
    
    
    
    7,514
    
    
    
    6
    
    
    
    
    
    
    
    7,520Cash at beginning of year
    
    
    
    
    
    
    1,175
    
    
    
    1,217
    
    
    
    
    
    
    
    2,392Cash at end of year
    
    $
    
    
    
    $
    8,689
    
    
    $
    1,223
    
    
    $
    
    
    
    $
    9,912
 12. Subsequent Event On July 16, 2004, The 1818 Mezzanine Fund II, L.P. converted 90,909 shares
of our series A convertible preferred stock plus related accrued pay-in-kind
dividends into 95,912 shares of our common stock. 17




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. This Quarterly Report onForm 10-Qcontains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements include statements regarding the intent, belief or
current expectations of Psychiatric Solutions and its management. Such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties that may cause our actual results to differ materially
from the results discussed in the forward-looking statements. Risks and
uncertainties that might cause such differences include, but are not limited
to: (1) potential competition that alters or impedes our acquisition strategy
by decreasing our ability to acquire additional facilities on favorable terms;
(2) our ability to improve the operations of acquired facilities; (3) our
ability to maintain favorable and continuing relationships with physicians who
use our facilities; (4) our limited operating history as a public company; (5)
our ability to receive timely additional financing on terms acceptable to us to
fund our acquisition strategy and capital expenditure needs; (6) risks inherent
to the health care industry, including the impact of unforeseen changes in
regulation, reimbursement rates from federal and state health care programs or
managed care companies and exposure to claims and legal actions by patients and
others; and (7) potential difficulties in integrating our operations with
recently acquired operations. The forward-looking statements herein are
qualified in their entirety by the risk factors set forth in our filings with
the Securities and Exchange Commission, including the factors listed in our
Annual Report onForm 10-Kfiled on March 25, 2004 under the caption Risk
Factors. A copy of our filings may be obtained from the Public Reference Room
of the Securities and Exchange Commission at 450 Fifth Street NW, Washington,
D.C. at prescribed rates. Overview During the quarter ended June 30, 2004, we continued with our goals of
making accretive acquisitions, expanding revenues and reducing expenses in our
existing inpatient behavioral health care operations. On June 30, 2004, we
completed the acquisition of substantially all the assets of Alliance
Behavioral Health Group (Alliance Behavioral), a system of inpatient
behavioral health care facilities with 144 beds located near El Paso, Texas,
for $13.0 million. On June 11, 2004, we completed the acquisition of
substantially all the assets of Piedmont Behavioral Health Center LLC
(Piedmont), a 78 bed inpatient behavioral health care facility located in
Leesburg, Virginia, for $10.0 million. On June 1, 2004, we completed the
acquisition of four inpatient behavioral health care facilities from Heartland
Healthcare (Heartland) for $47.0 million. The four facilities, located in
Summit, New Jersey, Ft. Lauderdale, Florida, Arlington, Texas; and Eden
Prairie, Minnesota, have a total of 360 beds. On May 1, 2004, we completed the
acquisition of all of the membership interests of Palmetto Behavioral Health
System, LLC, (Palmetto) an operator of two inpatient behavioral health care
facilities, for approximately $6.0 million. The two inpatient facilities,
located in Charleston and Florence, South Carolina, have 161 beds. Through the
acquisitions of Palmetto, Heartland, Piedmont and Alliance Behavioral, we
increased our inpatient facility operations to 34 facilities and approximately
4,000 beds at June 30, 2004. On April 23, 2004, we entered into an interest rate swap agreement to take
advantage of lower effective interest rates. The swap agreement effectively
converts $30.0 million of fixed-rate long-term debt to a LIBOR indexed variable
rate instrument plus an agreed upon interest rate spread of 5.51%. On June 4,
2004, we amended and increased our revolving credit facility with Bank of
America, N.A. (Bank of America) to $125 million from its previous level of
$50 million. We strive to improve the operating results of new and existing inpatient
behavioral health care operations by providing the highest quality service,
expanding referral networks and marketing initiatives and meeting increased
demand for our services by expanding our services and developing new services.
We also attempt to improve operating results by optimizing staffing ratios,
controlling contract labor costs 18




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##### Table of Contents



and reducing supply and other costs through group purchasing. During the
quarter ended June 30, 2004, we increased same-facility revenue from owned and
leased inpatient facilities by approximately 9.6%. Same-facility growth also
produced gains in owned and leased inpatient facility admissions and patient
days of approximately 3.2% and 3.1%, respectively, for the quarter ended June
30, 2004 as compared to the quarter ended June 30, 2003. We owned 11 inpatient
facilities throughout the quarter ended June 30, 2003. During the six months
ended June 30, 2004, we increased revenue from owned and leased inpatient
facilities by approximately 8.7% through same-facility growth. Same-facility
growth also produced gains in owned and leased inpatient facility admissions
and patient days of approximately 4.5% and 3.6%, respectively, for the six
months ended June 30, 2004 as compared to the six months ended June 30, 2003.
We owned 5 inpatient facilities throughout the quarter ended March 30, 2003,
and increased this number to 11 with the purchase of 6 inpatient facilities
from The Brown Schools, Inc. (The Brown Schools) in April 2003. Recent Acquisitions On June 30, 2004, we completed the acquisition of substantially all the
assets of Alliance Behavioral, a system of inpatient behavioral health care
facilities with 144 beds located near El Paso, Texas, for $13.0 million. On June 11, 2004 we completed the acquisition of substantially all the
assets of Piedmont, a 78 bed inpatient behavioral health care facility located
in Leesburg, Virginia, for $10.0 million. On June 1, 2004, we completed the acquisition of four inpatient behavioral
health care facilities from Heartland for $47.0 million. The four facilities,
located in Summit, New Jersey, Ft. Lauderdale, Florida, Arlington, Texas and
Eden Prairie, Minnesota, have a total of 360 beds. On May 1, 2004, we completed the acquisition of all of the membership
interests of Palmetto, an operator of two inpatient behavioral health care
facilities, for approximately $6.0 million. The two facilities, located in
Charleston and Florence, South Carolina, have 161 beds. On March 1, 2004, we acquired two inpatient psychiatric facilities from
Brentwood Behavioral Health for $29.8 million cash with an earn-out of up to
$5.0 million contingent upon future financial results. The facilities, which
have an aggregate of 311 licensed beds, are located in Shreveport, Louisiana
and Jackson, Mississippi. On December 16, 2003, we acquired the 50-bed Calvary Center located in
Phoenix, Arizona for approximately $4.0 million. We paid $650,000 of the
purchase price on the acquisition date with the balance paid in January 2004. On November 1, 2003, we acquired the 109-bed Alliance Health Center
located in Meridian, Mississippi, for approximately $13.0 million. Alliance
Health Center is a licensed acute care hospital that provides psychiatric care
for children, adolescents and adults. In addition, we recently completed the
construction of a 60-bed residential treatment center which opened in May 2004. On June 30, 2003, we consummated the acquisition of Ramsay Youth Services,
Inc. (Ramsay), a public company that traded on the Nasdaq SmallCap Market
under the symbol RYOU, for approximately $81.3 million, consisting of $56.2
million in cash, or $5.00 per share, $22.3 million in net assumed debt that was
repaid in connection with the acquisition and $2.8 million in fees and
expenses. The 11 owned or leased inpatient behavioral health care facilities we
acquired from Ramsay, which have an aggregate of 1,292 beds, are located
primarily in the Southeastern region of the United States with locations also
in Michigan, Missouri and Utah. In the acquisition, we also assumed 10
contracts to manage inpatient behavioral health care facilities for government
agencies in Florida, Georgia and Puerto Rico. In April 2003, we consummated the acquisition of six inpatient behavioral
health care facilities from The Brown Schoolsfor $63.0 million in cash. The six
facilities, which have an aggregate of 895 19




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##### Table of Contents



licensed beds, are located in Austin, San Antonio and San Marcos, Texas;
Charlottesville, Virginia; Colorado Springs, Colorado; and Tulsa, Oklahoma. The
Brown Schools offer a full continuum of care for troubled adolescents and
adults. Acquiring inpatient behavioral health care facilities is a key part of our
business strategy. Because we have grown through acquisitions accounted for as
purchases, it is difficult to make meaningful comparisons between our financial
statements for the fiscal periods presented. Sources of Revenue Patient Service Revenue Patient service revenue is generated by our inpatient facilities as a
result of services provided to patients within the inpatient behavioral health
care facility setting. Patient service revenue is reported on an accrual basis
in the period in which services are rendered, at established rates, regardless
of whether collection in full is expected. Patient service revenue includes
amounts estimated by management to be reimbursable by Medicare and Medicaid
under provisions of cost or prospective reimbursement formulas in effect.
Amounts received are generally less than the established billing rates of the
inpatient facilities and the differences are reported as deductions from
patient service revenue at the time the service is rendered. For the six months
ended June 30, 2004, patient service revenue comprised approximately 81.8% of
our total revenue. Management Fee Revenue Management contract revenue is earned by our inpatient management contract
division. The inpatient management contract division receives contractually
determined management fees from third party medical/surgical hospitals and
clinics for providing psychiatric unit management and development services as
well as management fees for managing inpatient behavioral health care
facilities for government agencies. For the six months ended June 30, 2004,
management contract revenue comprised approximately 18.2% of our total revenue. Seasonality of Services Our inpatient behavioral health care facilities typically experience lower
patient volumes and revenue during the beginning of the first quarter, the end
of the second quarter, the beginning of the third quarter and the end of the
fourth quarter. Because a high proportion of patients served by our inpatient
behavioral health care facilities are children and adolescents, this
seasonality corresponds to periods that school is out of session. We believe
that, for a variety of reasons, children and adolescent patients are less
likely to be admitted during the summer months and the year-end holidays. 20




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##### Table of Contents



Results of Operations The following table sets forth, for the periods indicated, our operating
results (dollars in thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Revenue
    
    $
    120,509
    
    
    
    100.0
    %
    
    $
    57,438
    
    
    
    100.0
    %
    
    $
    228,094
    
    
    
    100.0
    %
    
    $
    94,532
    
    
    
    100.0
    %Salaries, wages, and employee benefits
    
    
    66,152
    
    
    
    54.9
    %
    
    
    28,736
    
    
    
    50.0
    %
    
    
    125,147
    
    
    
    54.9
    %
    
    
    46,522
    
    
    
    49.2
    %Professional fees
    
    
    13,358
    
    
    
    11.1
    %
    
    
    6,876
    
    
    
    12.0
    %
    
    
    25,414
    
    
    
    11.1
    %
    
    
    11,328
    
    
    
    12.0
    %Supplies
    
    
    7,684
    
    
    
    6.4
    %
    
    
    2,993
    
    
    
    5.2
    %
    
    
    14,625
    
    
    
    6.4
    %
    
    
    4,683
    
    
    
    5.0
    %Provision for bad debts
    
    
    2,636
    
    
    
    2.2
    %
    
    
    1,336
    
    
    
    2.3
    %
    
    
    4,663
    
    
    
    2.1
    %
    
    
    2,657
    
    
    
    2.8
    %Other operating expenses
    
    
    15,560
    
    
    
    12.9
    %
    
    
    10,499
    
    
    
    18.3
    %
    
    
    30,205
    
    
    
    13.2
    %
    
    
    17,906
    
    
    
    18.9
    %Depreciation and amortization
    
    
    2,365
    
    
    
    2.0
    %
    
    
    1,068
    
    
    
    1.9
    %
    
    
    4,482
    
    
    
    2.0
    %
    
    
    1,735
    
    
    
    1.8
    %Interest expense, net
    
    
    4,514
    
    
    
    3.7
    %
    
    
    2,386
    
    
    
    4.1
    %
    
    
    8,971
    
    
    
    3.9
    %
    
    
    3,797
    
    
    
    4.0
    %Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    0.0
    %
    
    
    4,586
    
    
    
    8.0
    %
    
    
    6,407
    
    
    
    2.8
    %
    
    
    4,586
    
    
    
    4.9
    %Change in valuation of put warrants
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    960
    
    
    
    1.0
    %Change in reserve on stockholder notes
    
    
    
    
    
    
    0.0
    %
    
    
    (84
    )
    
    
    -0.1
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (545
    )
    
    
    -0.6
    %Total other expenses
    
    
    
    
    
    
    0.0
    %
    
    
    4,502
    
    
    
    7.9
    %
    
    
    6,407
    
    
    
    2.8
    %
    
    
    5,001
    
    
    
    5.3
    %Income (loss) before income taxes
    
    
    8,240
    
    
    
    6.8
    %
    
    
    (958
    )
    
    
    -1.7
    %
    
    
    8,180
    
    
    
    3.6
    %
    
    
    903
    
    
    
    1.0
    %Provision (benefit from) for income taxes
    
    
    3,132
    
    
    
    2.6
    %
    
    
    (364
    )
    
    
    0.7
    %
    
    
    3,109
    
    
    
    1.4
    %
    
    
    708
    
    
    
    0.8
    %Net income (loss)
    
    $
    5,108
    
    
    
    4.2
    %
    
    $
    (594
    )
    
    
    -1.0
    %
    
    $
    5,071
    
    
    
    2.2
    %
    
    $
    195
    
    
    
    0.2
    %
 Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeConsolidated:Revenue
    
    
    120,509
    
    
    
    57,438
    
    
    
    109.8
    %
    
    
    228,094
    
    
    
    94,532
    
    
    
    141.3
    %Number of facilities at period end
    
    
    34
    
    
    
    11
    
    
    
    209.1
    %
    
    
    34
    
    
    
    11
    
    
    
    209.1
    %Admissions
    
    
    11,819
    
    
    
    5,755
    
    
    
    105.4
    %
    
    
    22,050
    
    
    
    10,099
    
    
    
    118.3
    %Patient days
    
    
    241,121
    
    
    
    98,504
    
    
    
    144.8
    %
    
    
    452,684
    
    
    
    144,289
    
    
    
    213.7
    %Same-facility (1):Revenue
    
    
    49,273
    
    
    
    44,972
    
    
    
    9.6
    %
    
    
    77,243
    
    
    
    71,049
    
    
    
    8.7
    %Number of facilities at period end
    
    
    11
    
    
    
    11
    
    
    
    0.0
    %
    
    
    11
    
    
    
    11
    
    
    
    0.0
    %Admissions
    
    
    5,938
    
    
    
    5,755
    
    
    
    3.2
    %
    
    
    10,557
    
    
    
    10,099
    
    
    
    4.5
    %Patient days
    
    
    101,558
    
    
    
    98,504
    
    
    
    3.1
    %
    
    
    149,420
    
    
    

    144,289
    
    
    
    3.6
    %
   (1)
    
    Includes revenue and statistics from owned and leased inpatient
facility segment. For the three and six months ended June 30, 2004,
excludes revenue and statistics for Ramsay purchased in June 2003,
Alliance Health Center purchased in November 2003, Calvary Center
purchased in December 2003, the facilities purchased from Brentwood in
March 2004, Palmetto purchased in May 2004, facilities purchased from
Heartland in June 2004, Piedmont purchased in June 2004 and Alliance
Behavioral purchased in June 2004. Also for the six months ended June
30, 2004, excludes revenue and statistics during the first quarter of
2004 for the facilities purchased from The Brown Schools in April
2003. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Revenue.Revenue from operations was $120.5 million for the quarter ended
June 30, 2004 compared to $57.4 million for the quarter ended June 30, 2003, an
increase of $63.1 million or 109.8%. Revenue from owned and leased inpatient
facilities accounted for $100.1 million of the second quarter 2004 results
compared to $45.0 million of the second quarter 2003 results, an increase of
$55.1 million or 122.4%. The increase in revenues from owned and leased
inpatient facilities relates primarily to revenues of $30.7 million in the
second quarter of 2004 for the owned and leased inpatient facilities acquired
from Ramsay on June 30, 2003 and $20.1 million for other acquisitions that
occurred during 2003 and 2004. The remaining $4.3 million of the increase in revenues from owned and leased
inpatient facilities is primarily 21




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##### Table of Contents



attributable to growth in admissions and
patient days of 3.2% and 3.1%, respectively, on a same-facility basis. Revenue
from inpatient management contracts accounted for $20.4 million of the second
quarter 2004 results compared to $12.5 million of the second quarter 2003
results, an increase of $7.9 million or 63.2%. The increase in revenues from
inpatient management contracts relates primarily to revenues of $10.4 million
in the second quarter of 2004 from inpatient management contracts acquired from
Ramsay in June 2003. Salaries, wages, and employee benefits.Salaries, wages and benefits
expense was $66.2 million, or 54.9% of revenue, for the
quarter ended June 30, 2004 compared to $28.7 million, or 50.0% of revenue, for the quarter ended June 30, 2003. Salaries, wages and
benefits expense from owned and leased inpatient facilities was $54.0 million
in the second quarter of 2004, or 53.9% of second quarter 2004 revenue from
owned and leased inpatient facilities, compared to $24.8 million in the second
quarter of 2003, or 55.1% of second quarter 2003 revenue from owned and leased
inpatient facilities. On a same-facility basis, salaries, wages and benefits
expense from owned and leased inpatient facilities was $25.4 million in the
second quarter of 2004, or 51.6% of second quarter 2004 same-facility revenue
from owned and leased inpatient facilities. This decrease in salaries, wages
and benefits expense from owned and leased inpatient facilities as a percentage
of revenue from owned and leased inpatient facilities, on a same-facility
basis, relates to efforts within our owned and leased inpatient facilities to
maintain staffing levels on higher volumes. Salaries, wages and benefits
expense from inpatient management contracts was $10.2 million in the second
quarter of 2004, or 50.0% of second quarter 2004 revenue from inpatient
management contracts, compared to $3.2 million in the second quarter of 2003,
or 25.6% of second quarter 2003 revenue from inpatient management contracts.
The overall increase in salaries, wages and benefits expense from inpatient
management contracts as a percent of inpatient revenue from inpatient
management contracts is the result of the assumption of 10 inpatient managed
facilities from Ramsay. On a same-facility basis, salaries, wages and benefits
expense from inpatient management contracts was $2.8 million in the second
quarter of 2004, or 28.3% of second quarter 2004 same-facility revenue from
inpatient management contracts. This increase in salaries, wages and benefits
expense from inpatient management contracts as a percentage of revenue from
inpatient management contracts, on a same-facility basis, is the result of the
reclassification in 2004 of certain other operating expenses to offset certain
revenues from our contract to provide case management services in and around
Nashville, Tennessee. Salaries, wages and benefits expense for our corporate
office was $2.0 million for the second quarter of 2004 compared to $766,000 for
the second quarter of 2003 as the result of the addition of staff necessary to
manage the inpatient facilities and inpatient management contracts acquired
during 2003 and 2004. Professional
fees.Professional fees were $13.4 million, or 11.1% of revenue, for the quarter ended June 30, 2004 compared to
$6.9 million, or 12.0% of revenue, for the quarter ended
June 30, 2003. Professional fees from owned and leased inpatient facilities
were $11.2 million in the second quarter of 2004, or 11.2% of second quarter
2004 revenue from owned and leased inpatient facilities, compared to $5.5
million in the second quarter of 2003, or 12.2% of second quarter 2003 revenue
from owned and leased inpatient facilities. On a same-facility basis,
professional fees from owned and leased inpatient facilities were $5.7 million
in the second quarter of 2004, or 11.6% of second quarter 2004 same-facility
revenue from owned and leased inpatient facilities. Professional fees from
inpatient management contracts were $1.5 million in the second quarter of 2004,
or 7.4% of second quarter 2004 revenue from inpatient management contracts,
compared to $926,000 in the second quarter of 2003, or 7.4% of second quarter
2003 revenue from inpatient management contracts. Professional fees for our
corporate office were $723,000 in the second quarter of 2004 compared to
$470,000 in the second quarter of 2003. Supplies.Supplies expense was $7.7 million, or 6.4% of revenue, for the quarter ended June 30, 2004 compared to $3.0 million, or
5.2% of revenue, for the quarter ended June 30, 2003.
Supplies expense from owned and leased inpatient facilities was $6.8 million in
the second quarter of 2004, or 6.8% of second quarter 2004 revenue from owned
and leased inpatient facilities, compared to $3.0 million in the second quarter
of 2003, or 6.7% of second quarter 2003 revenue from owned and leased inpatient facilities. Same-facility supplies expense
from owned and leased inpatient 22




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facilities was $3.4 million in the second
quarter of 2004, or 6.9% of second quarter 2004 same-facility revenue from
owned and leased inpatient facilities. Supplies expense from inpatient
management contracts was approximately $823,000 in the second quarter of 2004,
or 4.0% of second quarter 2004 revenue from inpatient management contracts,
compared to $8,000 in the second quarter of 2003, or less than 1% of second
quarter 2003 revenue from inpatient management contracts. Supplies expense at
owned and leased inpatient facilities has historically comprised the majority
of our total supplies expense; however, our inpatient management contracts
segment began to utilize supplies to a larger extent due to the assumption of
ten inpatient managed facilities from Ramsay. Supplies expense for our
corporate office consists of office supplies and is negligible to our supplies
expense overall. Provision for bad debts.The provision for bad debts was $2.6 million, or
2.2% of revenue, for the quarter ended June 30, 2004
compared to $1.3 million, or 2.3% of revenue, for the
quarter ended June 30, 2003. The provision for bad debts at owned and leased
inpatient facilities was $2.6 million in the second quarter of 2004, or 2.6% of
second quarter 2004 owned and leased inpatient facility revenue, compared to
$1.1 million in the second quarter of 2003, or 2.5% of second quarter 2003
owned and leased inpatient facility revenue. Historically, the provision for
bad debts from inpatient management contracts has amounted to less than 1.0% of
our revenue from inpatient management contracts. Other operating expenses.Other operating expenses were approximately
$15.6 million, or 12.9% of revenue, for the quarter ended
June 30, 2004 compared to $10.5 million, or 18.3% of revenue, for the quarter ended June 30, 2003. Other operating expenses for
owned and leased inpatient facilities were $9.4 million for the second quarter
of 2004, or 9.4% of second quarter 2004 owned and leased inpatient facility
revenue, compared to $4.2 million in the second quarter of 2003, or 9.3% of
second quarter 2003 owned and leased inpatient facility revenue. On a
same-facility basis, other operating expenses from owned and leased inpatient
facilities were $3.8 million in the second quarter of 2004, or 7.7% of second
quarter 2004 same-facility revenue from owned and leased inpatient facilities.
This decrease in other operating expenses from owned and leased inpatient
facilities as a percentage of revenues from owned and leased inpatient
facilities, on a same-facility basis, was due to efforts to lower or maintain
other operating expenses on higher volumes. Other operating expenses for
inpatient management contracts were $5.4 million in the second quarter of 2004,
or 26.5% of second quarter 2004 inpatient management contract revenue, compared
to $6.0 million in the second quarter of 2003, or 48.2% of second quarter 2003
inpatient management contract revenue. On a same-facility basis, other
operating expenses from inpatient management contracts were $4.2 million in the
second quarter of 2004, or 42.4% of second quarter 2004 same-facility revenue
from inpatient management contracts. Other operating expenses at our corporate
office increased to $731,000 in the second quarter of 2004 from $330,000 in the
second quarter of 2003. Depreciation and amortization.Depreciation and amortization expense was
$2.4 million for the quarter ended June 30, 2004 compared to $1.1 million for
the quarter ended June 30, 2003, an increase of $1.3 million or 118.2%. This
increase in depreciation and amortization expense is primarily the result of
the acquisitions of the inpatient facilities from Ramsay in June 2003, Alliance
Health Center in November 2003 and Brentwood in March 2004. Interest expense.Interest expense was $4.5 million for the quarter ended
June 30, 2004 compared to $2.4 million for the quarter ended June 30, 2003, an
increase of $2.1 million or 87.5%. This increase is primarily attributable to
the increase in our long-term debt from $173.3 million at June 30, 2003 to
$249.6 million at June 30, 2004. The increase in long-term debt at June 30,
2004 was due to the expansion of and borrowings on our senior credit facility. Other expenses.We had no other expenses for the quarter ended June 30,
2004. Other expenses totaled $4.5 million for the quarter ended June 30, 2003.
Other expenses for the second quarter of 2003 consisted of $4.6 million in loss
on the refinancing of our long-term debt and a gain of $84,000 for the change
in our reserve on stockholder notes. 23




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Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Revenue.Revenue from operations was $228.1 million for the six months
ended June 30, 2004 compared to $94.5 million for the six months ended June 30,
2003, an increase of $133.6 million or 141.4%. Revenue from owned and leased
inpatient facilities accounted for $186.5 million of the year to date 2004
results compared to $71.0 million of the year to date 2003 results, an increase
of $115.5 million or 162.7%. The increase in revenues from owned and leased
inpatient facilities relates primarily to revenues of $61.8 million in the six
months ended June 30, 2004 for the owned and leased inpatient facilities
acquired from Ramsay on June 30, 2003, revenues of $21.2 million from the
facilities acquired from The Brown Schools in April 2003 and $26.3 million for
other acquisitions that occurred during 2003 and 2004. The remainder of the
$6.2 million increase in revenues from owned and leased inpatient facilities is
primarily attributable to growth in admissions and patient days of 4.5% and
3.6%, respectively, on a same-facility basis. Revenue from inpatient management
contracts accounted for $41.6 million of the year to date 2004 results compared
to $23.5 million of the year to date 2003 results, an increase of $18.1 million
or 77.0%. The increase in revenues from inpatient management contracts relates
primarily to revenues of $21.4 million in the six months ended June 30, 2004
from inpatient managed facilities acquired from Ramsay in June 2003. Salaries, wages, and employee benefits.Salaries, wages and employee
benefits expense was $125.1 million, or 54.9% of revenue, for
the six months ended June 30, 2004 compared to $46.5 million, or 49.2% of revenue, for the six months ended June 30, 2003. Salaries, wages
and employee benefits expense from owned and leased inpatient facilities was
$100.4 million in the six months ended June 30, 2004, or 53.8% of year to date
2004 revenue from owned and leased inpatient facilities, compared to $38.5
million in the six months ended June 30, 2003, or 54.2% of year to date 2003
revenue from owned and leased inpatient facilities. On a same-facility basis,
salaries, wages and employee benefits expense from owned and leased inpatient
facilities was $39.8 million in the six months ended June 30, 2004, or 51.5% of
year to date 2004 same-facility revenue from owned and leased inpatient
facilities. This decrease in salaries, wages and employee benefits expense from
owned and leased inpatient facilities as a percentage of revenue from owned and
leased inpatient facilities, on a same-facility basis, relates to efforts
within our owned and leased inpatient facilities to maintain staffing levels on
higher volumes. Salaries, wages and employee benefits expense from inpatient
management contracts was $21.1 million in the six months ended June 30, 2004,
or 50.7% of year to date 2004 revenue from inpatient management contracts,
compared to $6.6 million in the six months ended June 30, 2003, or 28.1% of
year to date 2003 revenue from inpatient management contracts. The overall
increase in salaries, wages and benefits expense from inpatient management
contracts as a percent of inpatient revenue from inpatient management contracts
is the result of the assumption of 10 inpatient managed facilities from Ramsay.
On a same-facility basis, salaries, wages and employee benefits expense from
inpatient management contracts was $5.7 million in the six months ended June
30, 2004, or 28.8% of year to date 2004 same-facility revenue from inpatient
management contracts. Salaries, wages and employee benefits expense for our
corporate office was $3.7 million for the six months ended June 30, 2004
compared to $1.4 million for the six months ended June 30, 2003 as the result
of the addition of staff necessary to manage the inpatient facilities and
inpatient management contracts acquired during 2003 and 2004. Professional fees.Professional fees were $25.4 million, or 11.1% of revenue, for the six months ended June 30, 2004 compared to $11.3
million, or 12.0% of revenue, for the six months ended June
30, 2003. Professional fees from owned and leased inpatient facilities were
$21.1 million in the six months ended June 30, 2004, or 11.3% of year to date
2004 revenue from owned and leased inpatient facilities, compared to $8.6
million in the six months ended June 30, 2003, or 12.2% of year to date 2003
revenue from owned and leased inpatient facilities. On a same-facility basis,
professional fees from owned and leased inpatient facilities were $9.1 million
in the six months ended June 30, 2004, or 11.7% of year to date 2004
same-facility revenue from owned and leased inpatient facilities. Professional
fees from inpatient management contracts were $3.1 million in the six months
ended June 30, 2004, or 7.4% of year to date 2004 revenue from inpatient
management contracts, compared to $1.8 million in the six months ended June 30,
2003, or 7.7% of year to date 2003 revenue from inpatient management 24




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contracts. Professional fees for our corporate office were $1.2 million in
the six months ended June 30, 2004 compared to $887,000 in the six months ended
June 30, 2003. Supplies.Supplies expense was $14.6 million, or 6.4% of revenue, for the six months ended June 30, 2004 compared to $4.7 million, or
5.0% of revenue, for the six months ended June 30, 2003.
Supplies expense from owned and leased inpatient facilities was $12.9 million
in the six months ended June 30, 2004, or 6.9% of year to date 2004 revenue
from owned and leased inpatient facilities, compared to $4.6 million in the six
months ended June 30, 2003, or 6.5% of year to date 2003 revenue from owned and
leased inpatient facilities. Same-facility supplies expense from owned and
leased inpatient facilities was $5.2 million in the six months ended June 30,
2004, or 6.7% of year to date 2004 same-facility revenue from owned and leased
inpatient facilities. Supplies expense from inpatient management contracts was
approximately $1.7 million in the six months ended June 30, 2004, or 4.1% of
year to date 2004 revenue from inpatient management contracts, compared to
$19,000 in the six months ended June 30, 2003, or less than 1% of year to date
2003 revenue from inpatient management contracts. Supplies expense at owned and
leased inpatient facilities has historically comprised the majority of our
total supplies expense; however, our inpatient management contracts segment
began to utilize supplies to a larger extent due to the assumption of ten
inpatient managed facilities from Ramsay. Supplies expense for our corporate
office consists of office supplies and is negligible to our supplies expense
overall. Provision for bad debts.The provision for bad debts was $4.7 million, or
2.1% of revenue, for the six months ended June 30, 2004
compared to $2.7 million, or 2.8% of revenue, for the six
months ended June 30, 2003. The provision for bad debts at owned and leased
inpatient facilities was $4.5 million in the six months ended June 30, 2004, or
2.4% of year to date 2004 owned and leased inpatient facility revenue, compared
to $2.3 million in the six months ended June 30, 2003, or 3.2 % of year to date
2003 owned and leased inpatient facility revenue. This reduction in provision
for bad debts from owned and leased inpatient facilities as a percentage of
owned and leased inpatient facility revenue was driven by the acquisition of
inpatient facilities from The Brown Schools and Ramsay, which have fewer
self-pay accounts. Historically, the provision for bad debts from inpatient
management contracts has amounted to less than 1.0% of our revenue from
inpatient management contracts. Other operating expenses.Other operating expenses were approximately
$30.2 million, or 13.2% of revenue, for the six months ended
June 30, 2004 compared to $17.9 million, or 18.9% of revenue,
for the six months ended June 30, 2003. Other operating expenses for owned and
leased inpatient facilities were $18.0 million for the six months ended June
30, 2004, or 9.7% of year to date 2004 owned and leased inpatient facility
revenue, compared to $6.5 million in the six months ended June 30, 2003, or
9.1% of year to date 2003 owned and leased inpatient facility revenue. On a
same-facility basis, other operating expenses from owned and leased inpatient
facilities were $6.1 million in the six months ended June 30, 2004, or 7.9% of
year to date 2004 same-facility revenue from owned and leased inpatient
facilities. Other operating expenses for inpatient management contracts were
$10.8 million in the six months ended June 30, 2004, or 26.0% of year to date
2004 inpatient management contract revenue, compared to $10.7 million in the
six months ended June 30, 2003, or 45.7% of year to date 2003 inpatient
management contract revenue. On a same-facility basis, other operating expenses
from inpatient management contracts were $8.5 million in the six months ended
June 30, 2004, or 42.9% of year to date 2004 same-facility revenue from
inpatient management contracts. Other operating expenses at our corporate
office increased to $1.4 million in the six months ended June 30, 2004 from
$707,000 in the six months ended June 30, 2003 as the result of the costs
necessary to manage the inpatient facilities and inpatient management contracts
acquired during 2003 and 2004. Depreciation and amortization.Depreciation and amortization expense was
$4.5 million for the six months ended June 30, 2004 compared to $1.7 million
for the six months ended June 30, 2003, an increase of $2.8 million or 164.7%.
This increase in depreciation and amortization expense is primarily the result
of the acquisitions of the inpatient facilities from The Brown Schools in April
2003, Ramsay in June 2003, Alliance Health Center in November 2003 and
Brentwood in March 2004. 25




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Interest expense.Interest expense was $9.0 million for the six months
ended June 30, 2004 compared to $3.8 million for the six months ended June 30,
2003, an increase of $5.2 million or 136.8%. This increase is primarily
attributable to the increase in our long-term debt from $173.3 million at June
30, 2003 to $249.6 million at June 30, 2004 as a result of the expansion of and
borrowings on our senior credit facility. Other expenses.Other expenses totaled $6.4 million for the six months
ended June 30, 2004 compared to $5.0 million for the six months ended June 30,
2003. Other expenses for the six months ended June 30, 2004 consisted of $6.4
million in loss on the refinancing of our long-term debt. Other expenses for
the six months ended June 30, 2003 consisted of $4.6 million in loss on the
refinancing of our long-term debt, expense of $960,000 to recognize the change
in fair value of stock purchase put warrants and a gain of $545,000 for the
change in our reserve on stockholder notes. The stock purchase put warrants
related to the issuance of debt to The 1818 Mezzanine Fund II, L.P. (the 1818
Fund) in 2002. Our requirement to mark these warrants to market ended,
effective April 1, 2003, when the 1818 Fund provided us with a written consent
to waive its ability to require that we repurchase the warrants for cash. Liquidity and Capital Resources As of June 30, 2004, we had working capital of $44.1 million, including
cash and cash equivalents of $12.1 million, compared to working capital of
$66.9 million at December 31, 2003. The decrease in working capital is
primarily due to the acquisitions of Brentwood, Palmetto, Heartland, Piedmont
and Alliance Behavioral during the six months ended June 30, 2004, for which we
used $112.2 million in cash and cash equivalents for the acquisitions, offset
by borrowings of $75.0 million under our revolving line of credit with Bank of
America and the addition of $11.3 million in working capital from the acquired
companies. Cash provided by operating activities was $18.1 million for the six months
ended June 30, 2004 compared to cash provided by operating activities of $4.2
million for the six months ended June 30, 2003. The increase in cash flows from
operating activities was primarily due to cash generated from the inpatient
facilities acquired and inpatient management contracts assumed through the
acquisitions that occurred subsequent to the second quarter of 2003. Cash used in investing activities was $121.4 million for the six months
ended June 30, 2004 compared to cash used in investing activities of
approximately $95.0 million for the six months ended June 30, 2003. Cash used
in investing activities for the six months ended June 30, 2004 was primarily
the result of $30.9 million paid for the acquisition of Brentwood, $48.1
million paid for the acquisition of Heartland and $33.2 million paid for other
acquisitions during the six months ended June 30, 2004. We also used $6.8
million for capital expenditures and $2.4 million for purchases of other assets
during the six months ended June 30, 2004. Cash used in investing activities
for the six months ended June 30, 2003 was primarily the result of cash paid
for the purchase of The Brown Schools facilities and Ramsay. Cash provided by financing activities was approximately $70.6 million for
the six months ended June 30, 2004 compared to cash provided by financing
activities of approximately $98.4 million for the six months ended June 30,
2003. Cash provided by financing activities for the six months ended June 30,
2004 was primarily the result of $75.0 million borrowed under our revolving
line of credit to purchase Brentwood, Heartland, Piedmont and Alliance
Behavioral, offset by cash paid to exit our credit facility with CapitalSource
Finance LLC (CapSource) of approximately $3.8 million. Cash provided by
financing activities for the six months ended June 30, 2003 consisted primarily
of the issuance of $150 million in senior subordinated 10 5/8% notes and $25.0
million of series A convertible preferred stock, offset by the purchase of the
facilities from The Brown Schools paid directly by our former lender. On January 6, 2004, we terminated our senior credit facility with
CapSource and entered into a new credit agreement (the Credit Agreement) with
Bank of America that provides for a revolving credit facility of up to $50.0
million. As a result of the termination of our senior credit facility with
CapSource, 26




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we recorded a loss on refinancing long-term debt of $6.4 million for the
quarter ended March 31, 2004, including approximately $3.8 million paid as a
termination fee to CapSource. On June 4, 2004, our credit agreement with Bank
of America was amended and expanded to provide for a revolving credit facility
of up to $125.0 million. Our credit facility with Bank of America 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 $2.5 million and the stock of our operating subsidiaries.In
addition, our credit facility is fully and unconditionally guaranteed by
substantially all of our operating subsidiaries. The revolving line of credit
accrues interest at our choice of the Base Rate or the Eurodollar Rate (as
defined in the Credit Agreement) and is due in January 2007. The Base Rate
and Eurodollar Rate fluctuate based upon market rates and certain leverage
ratios, as defined in the Credit Agreement. At June 30, 2004, the weighted
average interest rate under the revolving line of credit was 3.8%. Until the
maturity date, we may borrow, repay and re-borrow an amount not to exceed the
lesser of $125.0 million or the borrowing base (as defined in the Credit
Agreement). As of June 30, 2004, we had $75.0 million of borrowings outstanding
and $42.3 million immediately available under the revolving line of credit. We
must pay on a quarterly basis a commitment fee in the amount of 0.5% per annum
on the unused portion of our revolving credit facility and a utilization fee in
the amount of 0.25% per annum on the unused portion of revolving facility when
borrowings under the revolving credit facility are less than $41.3 million.
Such fees were approximately $50,000 and $115,000 for the three and six months
ended June 30, 2004. Our revolving credit facility contains customary covenants which include:
(1) a limitation on capital expenditures and investments, sales of assets,
mergers, changes of ownership, new principal lines of business, indebtedness,
dividends and redemptions, (2) various financial covenants and (3)
cross-default covenants triggered by a default of any other indebtedness of at
least $3.0 million. As of June 30, 2004, 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 could become immediately
payable and additional borrowings could be restricted. On January 26, 2004, we entered into an interest rate swap agreement to
manage our exposure to fluctuations in interest rates. The swap agreement
effectively converts $20.0 million of fixed-rate long-term debt to a LIBOR
indexed variable rate instrument plus an agreed upon interest rate spread of
5.86%. On April 23, 2004, we entered into another interest rate swap agreement.
This swap agreement effectively converts $30.0 million of fixed-rate debt to a
LIBOR indexed variable rate instrument plus an agreed upon interest rate spread
of 5.51%. We believe that our working capital on hand, cash flows from operations
and funds available under our revolving line of credit will be sufficient to
fund our operating needs, planned capital expenditures and debt service
requirements for the next 12 months. In addition, we are actively seeking acquisitions that fit our corporate
growth strategy and may acquire additional inpatient psychiatric 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 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. 27




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Contractual Obligations Payments Due by Period (in thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsLong-term debt (1)
    
    $
    249,381
    
    
    $
    885
    
    
    $
    75,497
    
    
    $
    558
    
    
    $
    172,441Lease obligations
    
    
    34,683
    

    
    
    8,336
    
    
    
    10,147
    
    
    
    6,479
    
    
    
    9,721$
    284,064
    
    
    $
    9,221
    
    
    $
    85,644
    
    
    $
    7,037
    
    
    $
    182,162
   (1)
    
    Long-term debt excludes capital lease obligations which have been included
in lease obligations above. The fair value of our $150 million 10 5/8% senior subordinated notes was
approximately $171 million and $167 million as of June 30, 2004 and December
31, 2003, respectively. The carrying value of our other total long-term debt,
including current maturities, of $99.6 million and $25.0 million at June 30,
2004 and December 31, 2003, respectively, approximated fair value. We had
$125.0 million of variable rate debt outstanding at June 30, 2004, including
our interest rate swap agreement. At the June 30, 2004 borrowing level, a
hypothetical 10% adverse change in interest rates, would decrease our net
income and cash flows by approximately $665,000 for the six months then ended. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. 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 our 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 those 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 and receivables due under our inpatient management contracts is critical
to our operating performance and cash flows. The primary collection risk with regard to patient receivables lies with
uninsured patient accounts or patient accounts for which primary insurance has
paid but a patient portion 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 contract 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 28




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facilities and cost settlement provisions requiring complex calculations.
We estimate the allowance for contractual discounts on a payer-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. Professional and General Liability We are subject to medical malpractice and other lawsuits due to the nature
of the services we provide. Due to our acquisition of Ramsay, we have two
distinct insurance programs that cover our inpatient facilities. For our
inpatient facilities that were not acquired from Ramsay, we have obtained
professional and general liability insurance for claims in excess of $3.0
million with an insured limit of $20.0 million. For the inpatient facilities
acquired from Ramsay, we have obtained professional and general liability
insurance for claims in excess of $500,000 with an insured limit of $25.0
million. These policies include umbrella coverage of $20.0 million and $25.0
million, respectively. 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. This self-insurance reserve is discounted to its
present value using a 5% discount rate. 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 established a captive insurance company to manage this additional
self-insured retention for our inpatient facilities not acquired from Ramsay.
We plan to merge these plans in the near future. 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. Income taxes As part of our process for preparing 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 future
deductible and taxable temporary differences are recorded as deferred tax
assets and liabilities that 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. If management determines that some or all of a deferred tax asset will
more likely than not be realized, then a valuation allowance is recorded
against the deferred tax asset. 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 acquired
entities. To the extent the valuation allowance can be reversed due to the
estimated future taxable income of acquired entities, then our valuation
allowance is reduced accordingly as an adjustment to purchase price. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The information required by this item is provided under Part I, Item 2 of
this Quarterly Report under the captions Managements Discussion and Analysis
of Financial Condition and Results of Operations  Liquidity and Capital
Resources and Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources - Contractual
Obligations. 29




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ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our chief executive officer and chief accounting officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered
by this quarterly report. Based on that evaluation, the chief executive officer
and chief accounting officer have concluded that our disclosure controls and
procedures effectively and timely provide them with material information
relating to Psychiatric Solutions and its consolidated subsidiaries required to
be disclosed in the reports we file or submit under the Exchange Act. Changes in Internal Controls Over Financial Reporting During the period covered by this report, there have been no changes in
our internal control over financial reporting that have materially affected or
are reasonable likely to materially affect our internal control over financial
reporting. 
 PART II  OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS 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 On May 4, 2004, we held our annual meeting of stockholders. The following
matters were submitted to a vote of stockholders: (1) The stockholders elected Class II directors, William F. Carpenter III,
Mark P. Clein and Richard D. Gore. The votes were as follows: William F.
Carpenter III
Votes cast for
    
    
    15,039,843Votes withheld
    
    
    201,156Mark P.
Clein
Votes cast for
    
    
    15,018,618Votes withheld
    
    
    222,381Richard D.
Gore
Votes cast for
    
    
    14,797,749Votes withheld
    
    
    443,250
 30




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(2) The stockholders approved an amendment to the Amended and Restated
Psychiatric Solutions, Inc. Equity Incentive Plan. The votes were as follows: Votes cast for
    
    
    7,985,346Votes cast against
    
    
    5,468,082Abstentions
    
    
    36,628Broker non-votes
    
    
    1,750,943
 (3) The stockholders approved the waiver of the lock-up restrictions on
our series A preferred stock. The votes were as follows: Votes cast for
    
    
    11,713,132Votes cast against
    
    
    1,655,063Abstentions
    
    
    121,861Broker non-votes
    
    
    1,750,943
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits  2.1
    
    Asset Purchase Agreement, dated April 23, 2004, by and among
Psychiatric Solutions, Inc., Fort Lauderdale Hospital, Inc.,
Millwood Hospital, L.P., PSI Pride Institute, Inc., PSI Summit
Hospital, Inc., Fort Lauderdale Hospital Management, LLC, Millwood
Health, LLC, Pride Institute, LLC and Summit Health, LLC
(incorporated by reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K, filed on June 2, 2004).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 Companys
Annual Report on Form 10-K for the fiscal year ended April 30, 1998
(the 1998 10-K)).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 Companys 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 Companys Definitive Proxy Statement
filed January 22, 2003).3.4
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to the Companys Annual Report on Form 10-K for the fiscal year
ended April 30, 1997 (the 1997 10-K)).4.1
    
    Reference is made to Exhibits 3.1 through 3.4.4.2
    
    Common Stock Specimen Certificate (incorporated by reference to
Exhibit 4.2 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 (the 2002 10-K)).4.3
    
    Contingent Value Rights Agreement, dated August 2, 2002
(incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K, filed on August 5, 2002).4.4
    
    Stock Purchase Agreement, dated as of January 6, 2003, by and among
Psychiatric Solutions, Inc. and the Purchasers named therein
(incorporated by reference to Appendix B of the Companys Definitive
Proxy Statement, filed January 22, 2003). 31




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4.5
    
    Registration Rights Agreement, dated as of January 6, 2003, by and
among Psychiatric Solutions, Inc. and the Purchasers named therein
(incorporated by reference to Appendix C of the Companys Definitive
Proxy Statement, filed January 22, 2003).4.6
    
    Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of the Company (Incorporated by
reference to Appendix D of the Companys Definitive Proxy Statement
filed January 22, 2003).4.7
    
    Indenture, dated as of June 30, 2003, between Psychiatric Solutions,
Inc., the Guarantors named therein and Wachovia Bank, National
Association, as Trustee (incorporated by reference to the Companys
Registration Statement on Form S-4, filed on July 30, 2003 (Reg. No.
333-107453) (the 2003 S-4)).4.8
    
    Form of Notes (included in Exhibit 4.7).4.9
    
    Purchase Agreement, dated as of June 19, 2003, between Psychiatric
Solutions, Inc., the Guarantors named therein, Lehman Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jefferies &
Company, Inc. (incorporated by reference to Exhibit 4.12 to the 2003
S-4).4.10
    
    Exchange and Registration Rights Agreement, dated as of June 30,
2003, among Psychiatric Solutions, Inc., the Guarantors named
therein, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 4.13 to the 2003 S-4).10.1
    
    Credit Agreement, dated as of January 6, 2004, by and among
Psychiatric Solutions, Inc., the Guarantors named therein, Bank of
America, N.A., as administrative agent, swing line lender and l/c
issuer, and the Lenders thereunder (incorporated by reference to
Exhibit 10.1 to the
Companys Form 10-Q, filed May 14, 2004).  10.2*
    
    First Amendment to the Credit Agreement, dated as of January 16,
2004, by and among Psychiatric Solutions, Inc., the Guarantors named
therein, Bank of America, N.A., as Administrative Agent, and the
Lenders thereunder.10.3*
    
    Second Amendment to the Credit Agreement, dated as of June 4, 2004,
by and among Psychiatric Solutions, Inc., the Guarantors named
therein, Bank of America, N.A., as Administrative Agent, and the
Lenders thereunder.10.4*
    
    Third Amendment to the Credit Agreement, dated as of June 24, 2004,
by and among Psychiatric Solutions, Inc., the Guarantors named
therein, Bank of America, N.A., as Administrative Agent, and the
Lenders thereunder.10.5*
    
    Confirmation of Interest Rate Swap Agreement, dated
April 26, 2004, between Bank of
America, N.A. and Psychiatric Solutions, Inc.10.6
    
    Interest Rate Swap Agreement, dated January 28, 2004, between
Bank of America, N.A. and Psychiatric Solutions, Inc. (incorporated
by reference to Exhibit 10.2 to the Companys Form 10-Q, filed
May 14, 2004).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. 32




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* Filed herewith.  (b)
    
    Reports on Form 8-K  1.
    
    On May 5, 2004, we furnished pursuant to Item 12 of
Form 8-K, a copy of our press release announcing our
operating results for the first quarter ended March
31, 2004 and the acquisition of Palmetto Behavioral
Health System, LLC.2.
    
    On May 12, 2004, we filed a Report on Form 8-K/A,
which amended and restated our previous Form 8-K filed
March 3, 2004 to include financial statements and pro
forma information required by Item 7 of Form 8-K.3.
    
    On June 2, 2004, we filed a Report on Form 8-K, which
reported the issuance of a press release announcing
the completion of the acquisition of four freestanding
inpatient psychiatric facilities from Heartland
Healthcare. Notwithstanding the foregoing, information furnished under Item 9 and
Item 12 of our Current Reports on Form 8-K, including the related
exhibits, shall not be deemed to be filed for purposes of Section 18
of the Securities Exchange Act of 1934, as amended (the Exchange
Act), or incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such a filing. 33




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PSYCHIATRIC SOLUTIONS, INC.Dated:
August 11, 2004
    
    
    
    /s/ Jack E. PolsonJack E. Polson
Chief Accounting Officer
 34