##### Table of Contents



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 September 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
(State or Other Jurisdiction of
Incorporation or Organization)
    
    23-2491707
(I.R.S. Employer
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 November 9, 2004, 17,047,127 shares of the registrants common stock
were outstanding.




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC. TABLE OF CONTENTS  
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2004 and 2003 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 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
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 6. Exhibits and Reports on Form 8-K
    
    
    28EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CAOEX-32.1 SECTION 906 CERTIFICATIONS 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)
 September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash
    
    $
    17,722
    
    
    $
    44,954Accounts receivable, less allowance for doubtful accounts of
$10,688 (unaudited) and $7,491, respectively
    
    
    77,096
    
    
    
    56,616Prepaids and other
    
    
    8,563
    
    
    
    11,075Total current assets
    
    
    103,381
    
    
    
    112,645Property and equipment, net of accumulated depreciation
    
    
    194,043
    
    
    
    149,589Cost in excess of net assets acquired, net
    
    
    132,786
    
    
    
    68,970Contracts, net
    
    
    2,374
    
    
    
    2,850Other assets
    
    
    21,292
    
    
    
    13,604Total assets
    
    $
    453,876
    
    
    $
    347,658LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,407
    
    
    $
    11,417Salaries and benefits payable
    
    
    29,086
    
    
    
    13,074Other accrued liabilities
    
    
    26,407
    
    
    
    19,979Current portion of long-term debt
    
    
    860
    
    
    
    1,023Total current liabilities
    
    
    66,760
    
    
    
    45,493Long-term debt, less current portion
    
    
    243,492
    
    
    
    173,980Deferred tax liability
    
    
    9,926
    
    
    
    6,762Other liabilities
    
    
    4,557
    
    
    
    4,779Total liabilities
    
    
    324,735
    
    
    
    231,014Series A convertible preferred stock, $0.01 par value, 6,000 shares
authorized; 1,818 and 4,545 shares outstanding at September
30, 2004 and December 31, 2003, respectively
    
    
    10,117
    
    
    
    25,316Stockholders equity:Common stock, $0.01 par value, 48,000 shares authorized;
15,084 and 11,937 issued and outstanding at September
30, 2004 and December 31, 2003, respectively
    
    
    151
    
    
    
    119Additional paid-in capital
    
    
    108,971
    
    
    
    91,423Notes receivable from stockholders
    
    
    
    
    
    
    (338
    )Accumulated unrealized losses
    
    
    (4
    )
    
    
    (4
    )Accumulated earnings
    
    
    9,906
    
    
    
    128Total stockholders equity
    
    
    119,024
    
    
    
    91,328Total liabilities and stockholders equity
    
    $
    453,876
    
    
    $
    347,658
 See notes to condensed consolidated financial statements 1




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PSYCHIATRIC SOLUTIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited, in thousands except for per share amounts)
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    131,591
    
    
    $
    93,923
    
    
    $
    351,957
    
    
    $
    188,455Salaries, wages and employee benefits
    
    
    72,259
    
    
    
    49,973
    
    
    
    191,368
    
    
    
    96,494Professional fees
    
    
    13,951
    
    
    
    10,795
    
    
    
    38,620
    
    
    
    22,123Supplies
    
    
    8,689
    
    
    
    5,891
    
    
    
    22,648
    
    
    
    10,574Rentals and leases
    
    
    2,557
    
    
    
    1,622
    
    
    
    6,433
    
    
    
    2,404Other operating expenses
    
    
    14,365
    
    
    
    13,093
    
    
    
    39,923
    
    
    
    30,218Provision for bad debts
    
    
    3,417
    
    
    
    1,218
    
    
    
    8,080
    
    
    
    3,875Depreciation and amortization
    
    
    2,628
    
    
    
    1,887
    
    
    
    7,096
    
    
    
    3,621Interest expense, net
    
    
    5,105
    
    
    
    5,566
    
    
    
    14,077
    
    
    
    9,363Loss on refinancing long-term debt
    
    
    
    
    
    
    157
    
    
    
    6,407
    
    
    
    4,744Change in valuation of put warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Change in reserve on stockholder notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (545
    )122,971
    
    
    
    90,202
    
    
    
    334,652
    
    
    
    183,831Income from continuing operations before income taxes
    
    
    8,620
    
    
    
    3,721
    
    
    
    17,305
    
    
    
    4,624Provision for income taxes
    
    
    3,274
    
    
    
    1,414
    
    
    
    6,576
    
    
    
    2,122Income from continuing operations
    
    
    5,346
    
    
    
    2,307
    
    
    
    10,729
    
    
    
    2,502Income (loss) from discontinued operations, net of taxes
    
    
    18
    
    
    
    111
    
    
    
    (295
    )
    
    
    111Net income
    
    
    5,364
    
    
    
    2,418
    
    
    
    10,434
    
    
    
    2,613Accrued preferred stock dividends
    
    
    149
    
    
    
    315
    
    
    
    656
    
    
    
    492Net income available to common stockholders
    
    $
    5,215
    
    
    $
    2,103
    
    
    $
    9,778
    
    
    $
    2,121Basic earnings per share:Income from continuing operations
    
    $
    0.35
    
    
    $
    0.23
    
    
    $
    0.74
    
    
    $
    0.25Income (loss) from discontinued
operations, net of taxes
    
    
    
    
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    0.01$
    0.35
    
    
    $
    0.24
    
    
    $
    0.72
    
    
    $
    0.26Diluted earnings per share:Income from continuing operations
    
    $
    0.31
    
    
    $
    0.17
    
    
    $
    0.62
    
    
    $
    0.23Income (loss) from discontinued
operations, net of taxes
    
    $
    
    
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    0.01$
    0.31
    
    
    $
    0.18
    
    
    $
    0.60
    
    
    $
    0.24Shares used in computing per share amounts:Basic
    
    
    14,796
    
    
    
    8,628
    
    
    
    13,629
    
    
    
    8,177Diluted
    
    
    17,535
    
    
    
    13,515
    
    
    
    17,383
    
    
    
    10,978
 See notes to condensed consolidated financial statements 2




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PSYCHIATRIC SOLUTIONS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Nine Months Ended September 30,2004
    
    2003Operating ActivitiesNet income
    
    $
    10,434
    
    
    $
    2,613Adjustments to reconcile net income to net cash provided
by continuing operating activities:Loss (income) from discontinued operations, net of taxes
    
    
    295
    
    
    
    (111
    )Depreciation and amortization
    
    
    7,096
    
    
    
    3,621Provision for doubtful accounts
    
    
    8,080
    
    
    
    3,875Accretion of detachable warrants
    
    
    
    
    
    
    159Non-cash stock compensation expense
    
    
    
    
    
    
    14Amortization of loan costs
    
    
    706
    
    
    
    945Loss on refinancing long-term debt
    
    
    6,407
    
    
    
    4,744Change in deferred tax liability
    
    
    5,979
    
    
    
    1,742Change in valuation of put warrants
    
    
    
    
    
    
    960Change in reserve on stockholder notes
    
    
    
    
    
    
    (545
    )Long-term interest accrued
    
    
    
    
    
    
    124Changes in operating assets and liabilities:Accounts receivable
    
    
    (11,118
    )
    
    
    (11,980
    )Prepaids and other assets
    
    
    1,969
    
    
    
    2,963Accounts payable
    
    
    (5,141
    )
    
    
    (1,895
    )Salaries and benefits payable
    
    
    7,215
    
    
    
    (2,022
    )Accrued liabilities and other liabilities
    
    
    3,907
    
    
    
    8,026Net cash provided by continuing operating activities
    
    
    35,829
    
    
    
    13,233Investing Activities:Cash paid for acquisitions, net of cash acquired
    
    
    (115,842
    )
    
    
    (97,480
    )Purchase of long-term securities
    
    
    
    
    
    
    (971
    )Capital purchases of property and equipment
    
    
    (11,166
    )
    
    
    (3,089
    )Other assets
    
    
    (1,834
    )
    
    
    (1,455
    )Net cash used in investing activities
    
    
    (128,842
    )
    
    
    (102,995
    )Financing Activities:Net principal borrowings on long-term debt
    
    
    69,206
    
    
    
    77,615Refinancing of long-term debt
    
    
    (3,844
    )
    
    
    Payment of loan and issuance costs
    
    
    (2,027
    )
    
    
    (5,451
    )Proceeds from issuance of series A convertible preferred stock
    
    
    
    
    
    
    25,000Proceeds from repayment of stockholder notes
    
    
    338
    
    
    
    Proceeds from issuance of common stock
    
    
    2,108
    
    
    
    202Net cash provided by financing activities
    
    
    65,781
    
    
    
    97,366Net (decrease) increase in cash
    
    
    (27,232
    )
    
    
    7,604Cash at beginning of the period
    
    
    44,954
    
    
    
    2,392Cash at end of the period
    
    $
    17,722
    
    
    $
    9,996Significant Non-cash Transactions:Issuance of common stock upon conversion of series A
convertible preferred stock
    
    $
    15,791
    
    
    $
    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
    
    $
    108,782
    
    
    $
    181,601Liabilities assumed
    
    
    7,060
    
    
    
    (28,825
    )Long-term debt issued
    
    
    
    
    
    
    (55,296
    )Cash paid for acquisitions, net of cash acquired
    
    $
    115,842
    
    
    $
    97,480
 See notes to condensed consolidated financial statements 3




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PSYCHIATRIC SOLUTIONS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 SEPTEMBER 30, 2004
 1. Recent Developments During the third quarter of 2004, the operations of our facilities located in
Florida were disrupted by four hurricanes that occurred during the quarter.
None of the facilities owned by us were significantly damaged and all are
operational with the exception of one state-owned managed facility that was
permanently closed due to hurricane damages. We estimate that lost revenues and
additional expenses associated with these hurricanes totaled approximately
$350,000 (approximately $200,000 after tax) during the third quarter of 2004.
We do not anticipate any material impact on future operations as a result of
these hurricanes. During the third quarter, we exited two management contracts in Florida. In
addition to the storm damaged, state-owned facility mentioned above, one
contract ended upon completion of its term on September 22, 2004. These two
contracts and another exited in the second quarter of 2004 have been reported
as discontinued operations in our condensed consolidated balance sheets at
September 30, 2004 and December 31, 2003, condensed consolidated statements of
income for the three and nine months ended September 30, 2004 and 2003 and
condensed consolidated statements of cash flows for the nine months ended
September 30, 2004 and 2003. See Note 6 for further information on discontinued
operations. 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, the accompanying
unaudited condensed consolidated financial statements 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 3% of net revenue for
the nine months ended September 30, 2004. Operating results for the three and
nine months ended September 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. 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. 4




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts): Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Basic earnings per share:Income from continuing operations
    
    $
    5,346
    
    
    $
    2,307
    
    
    $
    10,729
    
    
    $
    2,502Accrued dividends on series A convertible preferred stock
    
    
    149
    
    
    
    315
    
    
    
    656
    
    
    
    492Income from continuing operations used in computing basic
earnings per common share
    
    
    5,197
    
    
    
    1,992
    
    
    
    10,073
    
    
    
    2,010Income (loss) from discontinued operations, net of taxes
    
    
    18
    
    
    
    111
    
    
    
    (295
    )
    
    
    111Net income available to common stockholders
    
    $
    5,215
    
    
    $
    2,103
    
    
    $
    9,778
    
    
    $
    2,121Diluted earnings per share:Income from continuing operations
    
    $
    5,346
    
    
    $
    2,307
    
    
    $
    10,729
    
    
    $
    2,502Income (loss) from discontinued operations, net of taxes
    
    
    18
    
    
    
    111
    
    
    
    (295
    )
    
    
    111Net income
    
    $
    5,364
    
    
    $
    2,418
    
    
    $
    10,434
    
    
    $
    2,613Denominator:Weighted average shares outstanding for basic earnings per share
    
    
    14,796
    
    
    
    8,628
    
    
    
    13,629
    
    
    
    8,177Effect of dilutive series A convertible preferred stock outstanding
    
    
    2,179
    
    
    
    4,545
    
    
    
    3,202
    
    
    
    2,372Effects of dilutive stock options and warrants outstanding
    
    
    560
    
    
    
    342
    
    
    
    552
    
    
    
    429Shares used in computing diluted earnings per common share
    
    
    17,535
    
    
    
    13,515
    
    
    
    17,383
    
    
    
    10,978Basic earnings per share:Income from continuing operations
    
    $
    0.35
    
    
    $
    0.23
    
    
    $
    0.74
    
    
    $
    0.25Income (loss) from discontinued operations, net of taxes
    
    
    
    
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    0.01$
    0.35
    
    
    $
    0.24
    
    
    $
    0.72
    
    
    $
    0.26Diluted earnings per share:Income from continuing operations
    
    $
    0.31
    
    
    $
    0.17
    
    
    $
    0.62
    
    
    $
    0.23Income (loss) from discontinued operations, net of taxes
    
    
    
    
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    0.01$
    0.31
    
    
    $
    0.18
    
    
    $
    0.60
    
    
    $
    0.24
 The computation of diluted earnings per share for the nine months ended
September 30, 2003 does not include interest on convertible notes of $124,000
and approximately 216,000 shares representing the weighted average of
convertible debt 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, which is currently set to take effect
in the third quarter of 2005. 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 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. 5




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 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 September 30,
    
    For the nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Net income available to common stockholders
    
    $
    5,215
    
    
    $
    2,103
    
    
    $
    9,778
    
    
    $
    2,121Pro forma compensation expense from stock options
    
    
    422
    
    
    
    168
    
    
    
    1,048
    
    
    
    405Pro forma net income available to common stockholders
    
    $
    4,793
    
    
    $
    1,935
    
    
    $
    8,730
    
    
    $
    1,716Basic earnings per share, as reported
    
    $
    0.35
    
    
    $
    0.24
    
    
    $
    0.72
    
    
    $
    0.26Diluted earnings per share, as reported
    
    $
    0.31
    
    
    $
    0.18
    
    
    $
    0.60
    
    
    $
    0.24Basic pro forma earnings per share
    
    $
    0.32
    
    
    $
    0.22
    
    
    $
    0.64
    
    
    $
    0.21Diluted pro forma earnings per share
    
    $
    0.28
    
    
    $
    0.17
    
    
    $
    0.54
    
    
    $
    0.20
 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. Acquired
assets and liabilities are recorded on our balance sheet at fair market value
on the date of acquisition, with any remaining unallocated purchase recorded to
cost in excess of net assets acquired on our balance sheet. The results of
operations of acquired free-standing inpatient psychiatric facilities are
included in our consolidated results of operations from the date of
acquisition. 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 $12.5 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 Behavioral Health
Center LLC (Piedmont), a 78 bed inpatient behavioral health care facility
located in Leesburg, Virginia, for $10.7 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 Healthcare (Heartland) for $49.9
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 Behavioral Health System, LLC (Palmetto), an operator of two
inpatient behavioral health care facilities, for approximately $6.4 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 $30.4 million cash with an
earn-out of up to $5.0 million contingent upon future financial results. The
inpatient facilities, which have an aggregate of 311 licensed beds, are located
in Shreveport, Louisiana and Jackson, Mississippi.We drew down $17.0 million on
our revolving line of credit and paid for the remainder of the acquisition
price with cash on hand. 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. Alliance Health Center
is a licensed acute care hospital that provides psychiatric care for children,
adolescents and adults. The acquisition was entirely financed through our
then-existing line of credit. In addition, we 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 had 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. 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. 6




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 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 had 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 September 30, 2004, pending final
valuations of certain assets and liabilities acquired. 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 September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    131,591
    
    
    $
    121,258
    
    
    $
    396,585
    
    
    $
    268,770Net income available to common
stockholders
    
    $
    5,215
    
    
    $
    3,374
    
    
    $
    12,140
    
    
    $
    5,307Earnings per share, basic
    
    $
    0.35
    
    
    $
    0.39
    
    
    $
    0.89
    
    
    $
    0.65Earnings per share, dilutive
    
    $
    0.31
    
    
    $
    0.27
    
    
    $
    0.74
    
    
    $
    0.53
 This pro forma information 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 provided above includes losses from refinancing long-term debt of
$6.4 million and $4.7 million for the nine months ended September 30, 2004 and
2003, respectively, a loss from refinancing long-term debt of $157,000 for the
three months ended September 30, 2003, expense of $960,000 to revalue put
warrants for the nine months ended September 30, 2003 and income of $545,000 to
release reserves on stockholder notes for the nine months ended September 30,
2003. 6. Discontinued Operations In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
requires that all components of an entity that have been disposed of (by sale,
by abandonment or in a distribution to owners) or are held for sale and whose
cash flows can be clearly distinguished from the rest of the entity be
presented as discontinued operations. During 2004, we exited three of our
contracts to manage state-owned facilities in Florida. Accordingly, the
operations of these contracts, net of applicable income taxes, have been
presented as discontinued operations and prior period condensed consolidated
statements of income have been reclassified. 7




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 The components of income (loss) from discontinued operations, net of taxes, are
as follows (in thousands): Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    3,136
    
    
    $
    4,548
    
    
    $
    10,863
    
    
    $
    4,548Salaries, wages and employee benefits
    
    
    1,984
    
    
    
    3,178
    
    
    
    8,022
    
    
    
    3,178Professional fees
    
    
    372
    
    
    
    438
    
    
    
    1,104
    
    
    
    438Supplies
    
    
    258
    
    
    
    313
    
    
    
    924
    
    
    
    313Rentals and leases
    
    
    84
    
    
    
    35
    
    
    
    146
    
    
    
    35Other operating expenses
    
    
    405
    
    
    
    396
    
    
    
    1,125
    
    
    
    396Depreciation and amortization
    
    
    4
    
    
    
    9
    
    
    
    18
    
    
    
    93,107
    
    
    
    4,369
    
    
    
    11,339
    
    
    
    4,369Income (loss) from discontinued operations before income taxes
    
    
    29
    
    
    
    179
    
    
    
    (476
    )
    
    
    179Provision for (benefit from) income taxes
    
    
    11
    
    
    
    68
    
    
    
    (181
    )
    
    
    68Income (loss) from discontinued operations, net of taxes
    
    $
    18
    
    
    $
    111
    
    
    $
    (295
    )
    
    $
    111
 7. Long-term debt Long-term debt consists of the following (in thousands): September 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 4.8% at September 30, 2004
    
    $
    70,000
    
    
    $
    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%
    
    
    23,668
    
    
    
    23,833Subordinated seller notes with varying maturities
    
    
    513
    
    
    
    1,170Other
    
    
    171
    
    
    
    244,352
    
    
    
    175,003Less current portion
    
    
    860
    
    
    
    1,023Long-term debt
    
    $
    243,492
    
    
    $
    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, N.A. (Bank of America) that provided 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 September 30, 2004, the weighted average interest
rate under the revolving line of credit was 4.8%. 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
September 30, 2004, we had $70.0 million of borrowings outstanding and $32.3
million immediately available under the revolving line of credit. We pay a
quarterly commitment fee of 0.5% per annum on the unused portion of our
revolving credit facility, and when 8




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 the balance of outstanding borrowings under the revolving credit facility is
less than $41.3 million we also pay a utilization fee of 0.25% per annum on the unused
portion of the revolving credit facility. Such fees were approximately $66,000
and $182,000 for the three and nine months ended September 30, 2004,
respectively. Our revolving credit facility contains customary covenants that include: (1) a
limitation on capital expenditures and investments, sales of assets, mergers,
changes of ownership, new principal lines of business, indebtedness, 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 September 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. Interest Rate Swap Agreements We have entered into interest rate swap agreements to manage our exposure to
fluctuations in interest rates. These swap agreements involve the exchange of
fixed and variable rate interest payments between two parties based on common
notional principal amounts and maturity dates. The swaps effectively convert
$50.0 million of our 10 5/8% senior subordinated notes to LIBOR indexed
variable rate instruments. The interest payments under these agreements are
settled on a net basis. 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 $23.7 million as of September 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 September 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 September 30, 2004, one note with
a current principal balance of $433,000 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 September 30, 2004. 8. 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,
compounded quarterly, equal to 5% per share of the original share price through
March 31, 2005 and 7% per share of the original share price thereafter. 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. During the quarter ended September 30,
2004, certain holders of our series A convertible preferred stock converted
454,545 shares of series A convertible preferred stock and related accrued
dividends into 481,600 shares of 9




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 our common stock. In the
fourth quarter of 2004, all remaining shares of series A convertible
preferred stock were converted into shares of our common stock (see Note 13). 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. On
September 14, 2004, the outstanding principal balance of these notes of
$338,000 plus accrued interest was repaid. At September 30, 2004, we had no
promissory notes from stockholders or management outstanding and under current
regulations of the Securities and Exchange Commission we are precluded from
entering into such agreements in the future. 9. Income Taxes The provision recorded for the three and nine months ended September 30, 2004
reflects an effective tax rate of approximately 38%. The provision recorded for
the three and nine months ended September 30, 2003 reflects an effective tax
rate of approximately 38% and 46%, respectively, due to the non-deductible
nature of the change in valuation of the put warrants during 2003. At September
30, 2004, a current income tax payable of $2.9 million is included in other
accrued liabilities. 10. 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 the characteristics of the
services provided. As of September 30, 2004, the owned and leased facilities
segment provided inpatient mental and behavioral health services in its 25
owned and 9 leased facilities in 19 states. As of September 30, 2004, the
management contracts segment provided 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 8 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 inpatient 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 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): 10




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedThree months ended September 30, 2004Revenue
    
    $
    114,391
    
    
    $
    17,200
    
    
    $
    
    
    
    $
    131,591Adjusted EBITDA
    
    $
    17,030
    
    
    $
    3,074
    
    
    $
    (3,751
    )
    
    $
    16,353Interest expense, net
    
    
    5,745
    
    
    
    (4
    )
    
    
    (636
    )
    
    
    5,105Provision for income taxes
    
    
    545
    
    
    
    
    
    
    
    2,729
    
    
    
    3,274Depreciation and amortization
    
    
    2,257
    
    
    
    280
    
    
    
    91
    
    
    
    2,628Inter-segment expenses
    
    
    3,295
    
    
    
    853
    
    
    
    (4,148
    )
    
    
    Income (loss) from continuing operations
    
    $
    5,188
    
    
    $
    1,945
    
    
    $
    (1,787
    )
    
    $
    5,346Segment assets
    
    $
    332,212
    
    
    $
    35,623
    
    
    $
    86,041
    
    
    $
    453,876
 Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedThree months ended September 30, 2003Revenue
    
    $
    74,461
    
    
    $
    19,462
    
    
    $
    
    
    
    $
    93,923Adjusted EBITDA
    
    $
    9,614
    
    
    $
    4,218
    
    
    $
    (2,496
    )
    
    $
    11,336Interest expense, net
    
    
    1,787
    
    
    
    (5
    )
    
    
    3,784
    
    
    
    5,566Provision for income taxes
    
    
    1,432
    
    
    
    
    
    
    
    (18
    )
    
    
    1,414Depreciation and amortization
    
    
    1,559
    
    
    
    302
    
    
    
    26
    
    
    
    1,887Inter-segment expenses
    
    
    1,413
    
    
    
    502
    
    
    
    (1,915
    )
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    157Income (loss) from continuing operations
    
    $
    3,423
    
    
    $
    3,419
    
    
    $
    (4,535
    )
    
    $
    2,307Segment assets
    
    $
    219,485
    
    
    $
    39,002
    
    
    $
    30,816
    
    
    $
    289,303
 Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedNine months ended September 30, 2004Revenue
    
    $
    300,906
    
    
    $
    51,051
    
    
    $
    
    
    
    $
    351,957Adjusted EBITDA
    
    $
    46,596
    
    
    $
    8,411
    
    
    $
    (10,122
    )
    
    $
    44,885Interest expense, net
    
    
    13,872
    
    
    
    (15
    )
    
    
    220
    
    
    
    14,077Provision for income taxes
    
    
    1,899
    
    
    
    
    
    
    
    4,677
    
    
    
    6,576Depreciation and amortization
    
    
    5,983
    
    
    
    885
    
    
    
    228
    
    
    
    7,096Inter-segment expenses
    
    
    8,655
    
    
    
    1,716
    
    
    
    (10,371
    )
    
    
    Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    6,407
    
    
    
    6,407Net income (loss)
    
    $
    16,187
    
    
    $
    5,825
    
    
    $
    (11,283
    )
    
    $
    10,729Segment assets
    
    $
    332,212
    
    
    $
    35,623
    
    
    $
    86,041
    
    
    $
    453,876
 11




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004 Owned andLeased
    
    Management
    
    CorporateFacilities
    
    Contracts
    
    and Other
    
    ConsolidatedNine months ended September 30, 2003Revenue
    
    $
    145,510
    
    
    $
    42,945
    
    
    $
    
    
    
    $
    188,455Adjusted EBITDA
    
    $
    20,792
    
    
    $
    8,177
    
    
    $
    (6,188
    )
    
    $
    22,781Interest expense, net
    
    
    4,057
    
    
    
    98
    
    
    
    5,208
    
    
    
    9,363Provision for income taxes
    
    
    1,432
    
    
    
    73
    
    
    
    617
    
    
    
    2,122Depreciation and amortization
    
    
    2,732
    
    
    
    832
    
    
    
    57
    
    
    
    3,621Inter-segment expenses
    
    
    4,259
    
    
    
    1,298
    
    
    
    (5,557
    )
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    4,744
    
    
    
    4,744Change in valuation of put warrants
    
    
    
    
    
    
    
    
    
    
    960
    
    
    
    960Change in reserve on stockholder notes
    
    
    
    
    
    
    
    
    
    
    (545
    )
    
    
    (545
    )Total other expenses
    
    
    
    
    
    
    
    
    
    
    5,159
    
    
    
    5,159Net income (loss)
    
    $
    8,312
    
    
    $
    5,876
    
    
    $
    (11,686
    )
    
    $
    2,502Segment assets
    
    $
    219,485
    
    
    $
    39,002
    
    
    $
    30,816
    
    
    $
    289,303
 Assets totaling approximately $85.4 million representing the unallocated
purchase price of Ramsay at September 30, 2003 have been reclassified to our
owned and leased facilities segment from corporate and other for the three and
nine months ended September 30, 2003. 11. 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 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. 12. 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 September 30, 2004 and December 31, 2003, and for the three
and nine months ended September 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. 12




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PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004
Psychiatric Solutions, Inc.
Condensed Consolidating Balance Sheet
As of September 30, 2004
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsCurrent Assets:Cash
    
    $
    
    
    
    $
    16,011
    
    
    $
    1,711
    
    
    $
    
    
    
    $
    17,722Accounts receivable, net
    
    
    
    
    
    
    77,096
    
    
    
    
    
    
    
    
    
    
    
    77,096Prepaids and other
    
    
    
    
    
    
    7,809
    
    
    
    754
    
    
    
    
    
    
    
    8,563Total current assets
    
    
    
    
    
    
    100,916
    
    
    
    2,465
    
    
    
    
    
    
    
    103,381Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    155,506
    
    
    
    30,400
    
    
    
    8,137
    
    
    
    194,043Cost in excess of net assets acquired
    
    
    
    
    
    
    132,786
    
    
    
    
    
    
    
    
    
    
    
    132,786Contracts, net
    
    
    
    
    
    
    2,374
    
    
    
    
    
    
    
    
    
    
    
    2,374Investment in subsidiaries
    
    
    297,330
    
    
    
    (285,281
    )
    
    
    
    
    
    
    (12,049
    )
    
    
    Other assets
    
    
    6,173
    
    
    
    10,778
    
    
    
    4,341
    
    
    
    
    
    
    
    21,292Total assets
    
    $
    303,503
    
    
    $
    117,079
    
    
    $
    37,206
    
    
    $
    (3,912
    )
    
    $
    453,876Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    10,405
    
    
    $
    2
    
    
    $
    
    
    
    $
    10,407Salaries and benefits payable
    
    
    
    
    
    
    29,086
    
    
    
    
    
    
    
    
    
    
    
    29,086Other accrued liabilities
    
    
    4,527
    
    
    
    21,759
    
    
    
    1,087
    
    
    
    (966
    )
    
    
    26,407Current portion of long-term debt
    
    
    
    
    
    
    632
    
    
    
    228
    
    
    
    
    
    
    
    860Total current liabilities
    
    
    4,527
    
    
    
    61,882
    
    
    
    1,317
    
    
    
    (966
    )
    
    
    66,760Long-term debt, less current portion
    
    
    220,052
    
    
    
    
    
    
    
    23,440
    
    
    
    
    
    
    
    243,492Deferred tax liability
    
    
    
    
    
    
    9,926
    
    
    
    
    
    
    
    
    
    
    
    9,926Other liabilities
    
    
    3,578
    
    
    
    13
    
    
    
    
    
    
    
    966
    
    
    
    4,557Total liabilities
    
    
    228,157
    
    
    
    71,821
    
    
    
    24,757
    
    
    
    
    
    
    
    324,735Series A convertible preferred stock
    
    
    10,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,117Stockholders equity:Total stockholders equity
    
    
    65,229
    
    
    
    45,258
    
    
    
    12,449
    
    
    
    (3,912
    )
    
    
    119,024Total liabilities and stockholders equity
    
    $
    303,503
    
    
    $
    117,079
    
    
    $
    37,206
    
    
    $
    (3,912
    )
    
    $
    453,876
 13




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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
    
    $
    
    
    
    $
    43,456
    
    
    $
    1,498
    
    
    $
    
    
    
    $
    44,954Accounts receivable, net
    
    
    
    
    
    
    56,616
    
    
    
    
    
    
    
    
    
    
    
    56,616Prepaids and other
    
    
    
    
    
    
    11,056
    
    
    
    19
    
    
    
    
    
    
    
    11,075Total current assets
    
    
    
    
    
    
    111,128
    
    
    
    1,517
    
    
    
    
    
    
    
    112,645Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    126,879
    
    
    
    31,029
    
    
    
    (8,319
    )
    
    
    149,589Cost 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
    
    
    
    1,920
    
    
    
    3,953
    
    
    
    
    
    
    
    13,604Total assets
    
    $
    206,885
    
    
    $
    311,747
    
    
    $
    36,499
    
    
    $
    (207,473
    )
    
    $
    347,658Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    11,417
    
    
    $
    
    
    
    $
    
    
    
    $
    11,417Salaries and benefits payable
    
    
    
    
    
    
    13,074
    
    
    
    
    
    
    
    
    
    
    
    13,074Other accrued liabilities
    
    
    871
    
    
    
    18,987
    
    
    
    1,090
    
    
    
    (969
    )
    
    
    19,979Current portion of long-term debt
    
    
    
    
    
    
    801
    
    
    
    222
    
    
    
    
    
    
    
    1,023Total current liabilities
    
    
    871
    
    
    
    44,279
    
    
    
    1,312
    
    
    
    (969
    )
    
    
    45,493Long-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
    
    
    
    51,633
    
    
    
    24,923
    
    
    
    
    
    
    
    231,014Series 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
    
    
    $
    311,747
    
    
    $
    36,499
    
    
    $
    (207,473
    )
    
    $
    347,658
 Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2004
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    131,591
    
    
    $
    878
    
    
    $
    (878
    )
    
    $
    131,591Salaries, wages and employee benefits
    
    
    
    
    
    
    72,259
    
    
    
    
    
    
    
    
    
    
    
    72,259Professional fees
    
    
    
    
    
    
    13,946
    
    
    
    5
    
    
    
    
    
    
    
    13,951Supplies
    
    
    
    
    
    
    8,689
    
    
    
    
    
    
    
    
    
    
    
    8,689Rentals and leases
    
    
    
    
    
    
    2,557
    
    
    
    
    
    
    
    
    
    
    
    2,557Other operating expenses
    
    
    (397
    )
    
    
    15,636
    
    
    
    4
    
    
    
    (878
    )
    
    
    14,365Provision for bad debts
    
    
    
    
    
    
    3,417
    
    
    
    
    
    
    
    
    
    
    
    3,417Depreciation and amortization
    
    
    
    
    
    
    2,383
    
    
    
    245
    
    
    
    
    
    
    
    2,628Interest expense
    
    
    4,731
    
    
    
    
    
    
    
    374
    
    
    
    
    
    
    
    5,1054,334
    
    
    
    118,887
    
    
    
    628
    
    
    
    (878
    )
    
    
    122,971(Loss) income from continuing operations before income taxes
    
    
    (4,334
    )
    
    
    12,704
    
    
    
    250
    
    
    
    
    
    
    
    8,620(Benefit from) provision for income taxes
    
    
    (1,647
    )
    
    
    4,921
    
    
    
    
    
    
    
    
    
    
    
    3,274(Loss) income from continuing operations
    
    
    (2,687
    )
    
    
    7,783
    
    
    
    250
    
    
    
    
    
    
    
    5,346Income from discontinued operations, net of taxes
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18Net (loss) income
    
    
    (2,687
    )
    
    
    7,801
    
    
    
    250
    
    
    
    
    
    
    
    5,364Accrued preferred stock dividends
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Net (loss) income available to common shareholders
    
    $
    (2,836
    )
    
    $
    7,801
    
    
    $
    250
    
    
    $
    
    
    
    $
    5,215
 14




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004
Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2003
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    93,923
    
    
    $
    419
    
    
    $
    (419
    )
    
    $
    93,923Salaries, wages and employee benefits
    
    
    
    
    
    
    49,973
    
    
    
    
    
    
    
    
    
    
    
    49,973Professional fees
    
    
    
    
    
    
    10,754
    
    
    
    41
    
    
    
    
    
    
    
    10,795Supplies
    
    
    
    
    
    
    5,891
    
    
    
    
    
    
    
    
    
    
    
    5,891Rentals and leases
    
    
    
    
    
    
    1,622
    
    
    
    
    
    
    
    
    
    
    
    1,622Other operating expenses
    
    
    
    
    
    
    13,260
    
    
    
    252
    
    
    
    (419
    )
    
    
    13,093Provision for bad debts
    
    
    
    
    
    
    1,218
    
    
    
    
    
    
    
    
    
    
    
    1,218Depreciation and amortization
    
    
    608
    
    
    
    1,209
    
    
    
    70
    
    
    
    
    
    
    
    1,887Interest expense
    
    
    5,457
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    5,566Loss on refinancing long-term debt
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1576,222
    
    
    
    83,927
    
    
    
    472
    
    
    
    (419
    )
    
    
    90,202(Loss) income from continuing operations before income taxes
    
    
    (6,222
    )
    
    
    9,996
    
    
    
    (53
    )
    
    
    
    
    
    
    3,721(Benefit from) provision for income taxes
    
    
    (2,133
    )
    
    
    3,567
    
    
    
    (20
    )
    
    
    
    
    
    
    1,414(Loss) income from continuing operations
    
    
    (4,089
    )
    
    
    6,429
    
    
    
    (33
    )
    
    
    
    
    
    
    2,307Income from discontinued operations, net of taxes
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    111Net (loss) income
    
    
    (4,089
    )
    
    
    6,540
    
    
    
    (33
    )
    
    
    
    
    
    
    2,418Accrued preferred stock dividends
    
    
    315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315Net (loss) income available to common shareholders
    
    $
    (4,404
    )
    
    $
    6,540
    
    
    $
    (33
    )
    
    $
    
    
    
    $
    2,103
 Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2004
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    351,957
    
    
    $
    2,738
    
    
    $
    (2,738
    )
    
    $
    351,957Salaries, wages and employee benefits
    
    
    
    
    
    
    191,368
    
    
    
    
    
    
    
    
    
    
    
    191,368Professional fees
    
    
    
    
    
    
    38,581
    
    
    
    39
    
    
    
    
    
    
    
    38,620Supplies
    
    
    
    
    
    
    22,648
    
    
    
    
    
    
    
    
    
    
    
    22,648Rentals and leases
    
    
    
    
    
    
    6,433
    
    
    
    
    
    
    
    
    
    
    
    6,433Other operating expenses
    
    
    357
    
    
    
    42,302
    
    
    
    2
    
    
    
    (2,738
    )
    
    
    39,923Provision for bad debts
    
    
    
    
    
    
    8,080
    
    
    
    
    
    
    
    
    
    
    
    8,080Depreciation and amortization
    
    
    
    
    
    
    6,366
    
    
    
    730
    
    
    
    
    
    
    
    7,096Interest expense
    
    
    12,954
    
    
    
    
    
    
    
    1,123
    
    
    
    
    
    
    
    14,077Loss on refinancing of long-term debt
    
    
    6,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,40719,718
    
    
    
    315,778
    
    
    
    1,894
    
    
    
    (2,738
    )
    
    
    334,652(Loss) income from continuing operations before income taxes
    
    
    (19,718
    )
    
    
    36,179
    
    
    
    844
    
    
    
    
    
    
    
    17,305(Benefit from) provision for income taxes
    
    
    (7,493
    )
    
    
    14,069
    
    
    
    
    
    
    
    
    
    
    
    6,576(Loss) income from continuing operations
    
    
    (12,225
    )
    
    
    22,110
    
    
    
    844
    
    
    
    
    
    
    
    10,729Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (295
    )
    
    
    
    
    
    
    
    
    
    
    (295
    )Net (loss) income
    
    
    (12,225
    )
    
    
    21,815
    
    
    
    844
    
    
    
    
    
    
    
    10,434Accrued preferred stock dividends
    
    
    656
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    656Net (loss) income available to common shareholders
    
    $
    (12,881
    )
    
    $
    21,815
    
    
    $
    844
    
    
    $
    
    
    
    $
    9,778
 15




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004
Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2003
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsRevenue
    
    $
    
    
    
    $
    188,455
    
    
    $
    1,227
    
    
    $
    (1,227
    )
    
    $
    188,455Salaries, wages and employee benefits
    
    
    
    
    
    
    96,494
    
    
    
    
    
    
    
    
    
    
    
    96,494Professional fees
    
    
    
    
    
    
    22,039
    
    
    
    84
    
    
    
    
    
    
    
    22,123Supplies
    
    
    
    
    
    
    10,574
    
    
    
    
    
    
    
    
    
    
    
    10,574Rentals and leases
    
    
    
    
    
    
    2,404
    
    
    
    
    
    
    
    
    
    
    
    2,404Other operating expenses
    
    
    571
    
    
    
    30,131
    
    
    
    743
    
    
    
    (1,227
    )
    
    
    30,218Provision for bad debts
    
    
    
    
    
    
    3,875
    
    
    
    
    
    
    
    
    
    
    
    3,875Depreciation and amortization
    
    
    936
    
    
    
    2,498
    
    
    
    187
    
    
    
    
    
    
    
    3,621Interest expense
    
    
    8,984
    
    
    
    124
    
    
    
    255
    
    
    
    
    
    
    
    9,363Loss on refinancing of long-term debt
    
    
    4,744
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,744Change in valuation of put warrants
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Change in reserve of stockholder notes
    
    
    (545
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (545
    )15,650
    
    
    
    168,139
    
    
    
    1,269
    
    
    
    (1,227
    )
    
    
    183,831(Loss) income from continuing operations before income taxes
    
    
    (15,650
    )
    
    
    20,316
    
    
    
    (42
    )
    
    
    
    
    
    
    4,624(Benefit from) provision for income taxes
    
    
    (5,582
    )
    
    
    7,720
    
    
    
    (16
    )
    
    
    
    
    
    
    2,122(Loss) income from continuing operations
    
    
    (10,068
    )
    
    
    12,596
    
    
    
    (26
    )
    
    
    
    
    
    
    2,502Income from discontinued operations, net of taxes
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    111Net (loss) income
    
    
    (10,068
    )
    
    
    12,707
    
    
    
    (26
    )
    
    
    
    
    
    
    2,613Accrued preferred stock dividends
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492Net (loss) income available to common shareholders
    
    $
    (10,560
    )
    
    $
    12,707
    
    
    $
    (26
    )
    
    $
    
    
    
    $
    2,121
 16




---



##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) SEPTEMBER 30, 2004 Psychiatric Solutions, Inc.
 Condensed Consolidating Statement of Cash Flows
 For the Nine Months Ended September 30, 2004
 (Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsOperating ActivitiesNet (loss) income
    
    $
    (12,225
    )
    
    $
    21,815
    
    
    $
    844
    
    
    $
    
    
    
    $
    10,434Adjustments to reconcile net (loss) income to net cash
cash provided by (used in) continuing operating activities:Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    295Depreciation and amortization
    
    
    
    
    
    
    6,366
    
    
    
    730
    
    
    
    
    
    
    
    7,096Provision for doubtful accounts
    
    
    
    
    
    
    8,080
    
    
    
    
    
    
    
    
    
    
    
    8,080Amortization of loan costs
    
    
    674
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    706Loss on refinancing long-term debt
    
    
    6,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,407Change in deferred tax liability
    
    
    
    
    
    
    5,979
    
    
    
    
    
    
    
    
    
    
    
    5,979Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (11,118
    )
    
    
    
    
    
    
    
    
    
    
    (11,118
    )Prepaids and other current assets
    
    
    
    
    
    
    2,704
    
    
    
    (735
    )
    
    
    
    
    
    
    1,969Accounts payable
    
    
    
    
    
    
    (5,141
    )
    
    
    
    
    
    
    
    
    
    
    (5,141
    )Accrued liabilities and other liabilities
    
    
    3,655
    
    
    
    7,468
    
    
    
    (1
    )
    
    
    
    
    
    
    11,122Net cash (used in) provided by continuing operating
activities
    
    
    (1,489
    )
    
    
    36,448
    
    
    
    870
    
    
    
    
    
    
    
    35,829Investing Activities:Cash paid for acquisitions, net of cash acquired
    
    
    (115,842
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,842
    )Capital purchases of property and equipment
    
    
    
    
    
    
    (11,166
    )
    
    
    
    
    
    
    
    
    
    
    (11,166
    )Other assets
    
    
    
    
    
    
    (1,447
    )
    
    
    (387
    )
    
    
    
    
    
    
    (1,834
    )Net used in investing activities
    
    
    (115,842
    )
    
    
    (12,613
    )
    
    
    (387
    )
    
    
    
    
    
    
    (128,842
    )Financing Activities:Net principal borrowings on long-term debt
    
    
    69,370
    
    
    
    
    
    
    
    (164
    )
    
    
    
    
    
    
    69,206Net transfers to and from members
    
    
    51,386
    
    
    
    (51,280
    )
    
    
    (106
    )
    
    
    
    
    
    
    Refinancing of long-term debt
    
    
    (3,844
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,844
    )Payment of loan and issuance costs
    
    
    (2,027
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,027
    )Proceeds from repayment of stockholder notes
    
    
    338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    338Proceeds from issuance of common stock
    
    
    2,108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,108Net cash provided by (used in) financing activities
    
    
    117,331
    
    
    
    (51,280
    )
    
    
    (270
    )
    
    
    
    
    
    
    65,781Net (decrease) increase in cash
    
    
    
    
    
    
    (27,445
    )
    
    
    213
    
    
    
    
    
    
    
    (27,232
    )Cash at beginning of year
    
    
    
    
    
    
    43,456
    
    
    
    1,498
    
    
    
    
    
    
    
    44,954Cash at end
of the period
    
    $
    
    
    
    $
    16,011
    
    
    $
    1,711
    
    
    $
    
    
    
    $
    17,722
 17




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2004
Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2003
(Unaudited, dollars in thousands) Combined
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    Combined Non-
    
    Consolidating
    
    ConsolidatedParent
    
    Guarantors
    
    Guarantors
    
    Adjustments
    
    AmountsOperating ActivitiesNet (loss) income
    
    $
    (10,068
    )
    
    $
    12,707
    
    
    $
    (26
    )
    
    $
    
    
    
    $
    2,613Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operating activities:Income from discontinued operations, net of taxes
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    
    
    
    
    (111
    )Depreciation and amortization
    
    
    
    
    
    
    3,434
    
    
    
    187
    
    
    
    
    
    
    
    3,621Provision for doubtful accounts
    
    
    
    
    
    
    3,875
    
    
    
    
    
    
    
    
    
    
    
    3,875Accretion of detachable warrants
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159Non-cash stock compensation expense
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Amortization of loan costs
    
    
    936
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    945Loss on refinancing long-term debt
    
    
    4,586
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    4,744Change in deferred tax liability
    
    
    
    
    
    
    1,742
    
    
    
    
    
    
    
    
    
    
    
    1,742Change 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
    
    
    
    
    
    
    (11,980
    )
    
    
    
    
    
    
    
    
    
    
    (11,980
    )Prepaids and other current assets
    
    
    (8,126
    )
    
    
    11,830
    
    
    
    2,433
    
    
    
    (3,174
    )
    
    
    2,963Accounts payable
    
    
    
    
    
    
    (1,895
    )
    
    
    
    
    
    
    
    
    
    
    (1,895
    )Accrued liabilities and other liabilities
    
    
    5,759
    
    
    
    1,194
    
    
    
    (949
    )
    
    
    
    
    
    
    6,004Net cash (used in) provided by continuing operating activities
    
    
    (6,339
    )
    
    
    21,092
    
    
    
    1,654
    
    
    
    (3,174
    )
    
    
    13,233Investing Activities:Cash paid for acquisitions, net of cash acquired
    
    
    (97,480
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,480
    )Purchase of long-term securities
    
    
    
    
    
    
    
    
    
    
    (971
    )
    
    
    
    
    
    
    (971
    )Capital purchases of property and equipment
    
    
    
    
    
    
    (3,089
    )
    
    
    
    
    
    
    
    
    
    
    (3,089
    )Other assets
    
    
    
    
    
    
    (1,449
    )
    
    
    (6
    )
    
    
    
    
    
    
    (1,455
    )Net used in investing activities
    
    
    (97,480
    )
    
    
    (4,538
    )
    
    
    (977
    )
    
    
    
    
    
    
    (102,995
    )Financing Activities:Net principal borrowings on long-term debt
    
    
    77,615
    
    
    
    
    
    
    
    6,834
    
    
    
    (6,834
    )
    
    
    77,615Net transfers to and from members
    
    
    6,453
    
    
    
    (9,037
    )
    
    
    (7,424
    )
    
    
    10,008
    
    
    
    Payment of loan and issuance costs
    
    
    (5,451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,451
    )Proceeds from issuance of series A convertible preferred stock
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Proceeds from issuance of common stock
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202Net cash provided by (used in) financing activities
    
    
    103,819
    
    
    
    (9,037
    )
    
    
    (590
    )
    
    
    3,174
    
    
    
    97,366Net increase in cash
    
    
    
    
    
    
    7,517
    
    
    
    87
    
    
    
    
    
    
    
    7,604Cash at beginning of year
    
    
    
    
    
    
    1,175
    
    
    
    1,217
    
    
    
    
    
    
    
    2,392Cash at end
of the period
    
    $
    
    
    
    $
    8,692
    
    
    $
    1,304
    
    
    $
    
    
    
    $
    9,996
 13. Subsequent Events In the fourth quarter of 2004, Oak Investment Partners X, L.P. and Oak X
Affiliates, L.P. converted 1,818,182 shares of our series A convertible
preferred stock and related pay-in-kind dividends into 1,942,442 shares of our
common stock. Following these conversions, we have no shares of our series A
convertible preferred stock outstanding. On November 1, 2004, we purchased the real estate housing the operations of
Summit Hospital in Summit, New Jersey for approximately $15.9 million. Summit
Hospital was one of four inpatient psychiatric facilities acquired from
Heartland on June 1, 2004. Subsequent to the acquisition of this facility on
June 1, 2004, we leased the real estate from a third party. 18




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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, Inc. 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 September 30, 2004, we continued forward with our
goal of expanding revenues and reducing expenses in our existing inpatient
behavioral health care operations. While we made no acquisitions during the
current quarter, we continue to actively pursue attractive acquisition targets
and reiterate our goal of expanding our business by making accretive
acquisitions of inpatient behavioral health care facilities. Our owned and
leased inpatient facility operations consisted of 34 facilities and
approximately 4,000 beds at September 30, 2004. 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 and reducing supply and other costs through
group purchasing. During the quarter ended September 30, 2004, we increased
same-facility revenue from the 22 owned and leased inpatient facilities that we
owned throughout the quarter ended September 30, 2003 by approximately 8.5%.
Same-facility growth also produced gains in owned and leased inpatient facility
admissions and patient days of approximately 6.8% and 7.2%, respectively, for
the quarter ended September 30, 2004 as compared to the quarter ended September
30, 2003. During the nine months ended September 30, 2004, we increased revenue
from owned and leased inpatient facilities by approximately 8.6% through
same-facility growth. Same-facility growth also produced gains in owned and
leased inpatient facility admissions and patient days of approximately 5.5% and
5.6%, respectively, for the nine months ended September 30, 2004 as compared to
the nine months ended September 30, 2003. Because of our acquisitions in 2003 and 2004, our results of operations
for the three and nine months ended September 30, 2004 are not comparable with
the same periods in 2003. As a result, we present 2004 same-facility
results and statistics in Managements Discussion and Analysis of Financial
Condition and Results of Operations to illustrate how our owned and leased
inpatient facilities have performed in comparison to 2003. Results and
statistics for 2004, presented on a same-facility basis, only include results
and statistics for the same periods in which we owned the acquired inpatient
facilities during 2003. To illustrate, our 2004 same-facility results and
statistics include the 6 inpatient facilities acquired from The Brown Schools,
Inc. (The Brown Schools) beginning in April 2004 and the 11 inpatient
facilities acquired from Ramsay Youth Services, Inc. (Ramsay) beginning in
July 2004. During the third quarter, the operations of our facilities located in
Florida were disrupted by four hurricanes that occurred during the quarter.
None of the facilities owned by us were significantly damaged and all are
operational with the exception of one state-owned managed facility that was
permanently closed due to the hurricane damages. We estimate that lost revenues
and additional expenses associated with these hurricanes amounted to
approximately $350,000 (approximately $200,000 or $0.01 per share
after tax) during the third quarter of 2004. We do not anticipate any material impact on
future operations as a result of these hurricanes. Our inpatient behavioral health care facilities are currently reimbursed
for the treatment of Medicare patients on a reasonable cost-based payment
system. On November 3, 2004, the Centers for Medicare and Medicaid Services
issued final rules for a prospective payment system (PPS) that will reimburse
behavioral health care providers for the treatment of Medicare patients on a
per diem basis. The new PPS rules are effective for cost report periods
beginning on or after January 1, 2005 and will be fully
phased-in for cost report periods beginning on or after July 1, 2008.
We believe the implementation of behavioral health inpatient PPS will
have a favorable affect on our future operations. 19




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##### Table of Contents



Recent Acquisitions 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 $12.5 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
$10.7 million. On June 1, 2004, we completed the acquisition of four inpatient behavioral
health care facilities from Heartland Healthcare (Heartland) for $49.9
million. The four inpatient 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 $6.4
million. The two inpatient 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 (Brentwood) for $30.4 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 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, 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 had
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 Schools for $63.0 million in cash. The
six facilities, which had 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. 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 owned and leased inpatient
facilities segment 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 nine
months ended September 30, 2004, patient service revenue comprised
approximately 85.5% of our total revenue. Management Fee Revenue Management contract revenue is earned by our inpatient management contract
segment. The inpatient management contract segment 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 nine months ended September 30,
2004, management contract revenue comprised approximately 14.5% of our total
revenue. 20




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##### Table of Contents



As previously reported, we exited two management contracts in Florida
during the third quarter of 2004. One management contract was canceled due to
the physical damage to the state-owned facility related to Hurricane Charley.
The other contract was ended upon completion of the term of the contract on
September 22, 2004. For the nine month period ended September 30, 2004, these
two contracts and the contract exited during the second quarter of 2004
generated revenues of $10.9 million and a loss of approximately $295,000. 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. Results of Operations The following table sets forth, for the periods indicated, our operating
results (dollars in thousands): Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Revenue
    
    $
    131,591
    
    
    
    100.0
    %
    
    $
    93,923
    
    
    
    100.0
    %
    
    $
    351,957
    
    
    
    100.0
    %
    
    $
    188,455
    
    
    
    100.0
    %Salaries, wages, and employee benefits
    
    
    72,259
    
    
    
    54.9
    %
    
    
    49,973
    
    
    
    53.2
    %
    
    
    191,368
    
    
    
    54.4
    %
    
    
    96,494
    
    
    
    51.2
    %Professional fees
    
    
    13,951
    
    
    
    10.6
    %
    
    
    10,795
    
    
    
    11.5
    %
    
    
    38,620
    
    
    
    11.0
    %
    
    
    22,123
    
    
    
    11.8
    %Supplies
    
    
    8,689
    
    
    
    6.6
    %
    
    
    5,891
    
    
    
    6.3
    %
    
    
    22,648
    
    
    
    6.4
    %
    
    
    10,574
    
    
    
    5.6
    %Provision for bad debts
    
    
    3,417
    
    
    
    2.6
    %
    
    
    1,218
    
    
    
    1.3
    %
    
    
    8,080
    
    
    
    2.3
    %
    
    
    3,875
    
    
    
    2.1
    %Other operating expenses
    
    
    16,922
    
    
    
    12.8
    %
    
    
    14,715
    
    
    
    15.6
    %
    
    
    46,356
    
    
    
    13.2
    %
    
    
    32,622
    
    
    
    17.3
    %Depreciation and amortization
    
    
    2,628
    
    
    
    2.0
    %
    
    
    1,887
    
    
    
    2.0
    %
    
    
    7,096
    
    
    
    2.0
    %
    
    
    3,621
    
    
    
    1.9
    %Interest expense, net
    
    
    5,105
    
    
    
    3.9
    %
    
    
    5,566
    
    
    
    5.9
    %
    
    
    14,077
    
    
    
    4.0
    %
    
    
    9,363
    
    
    
    5.0
    %Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    0.0
    %
    
    
    157
    
    
    
    0.2
    %
    
    
    6,407
    
    
    
    1.8
    %
    
    
    4,744
    
    
    
    2.5
    %Change in valuation of put warrants
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    960
    
    
    
    0.5
    %Change in reserve on stockholder notes
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (545
    )
    
    
    -0.3
    %Total other expenses
    
    
    
    
    
    
    0.0
    %
    
    
    157
    
    
    
    0.2
    %
    
    
    6,407
    
    
    
    1.8
    %
    
    
    5,159
    
    
    
    2.7
    %Income from continuing operations before income taxes
    
    
    8,620
    
    
    
    6.6
    %
    
    
    3,721
    
    
    
    4.0
    %
    
    
    17,305
    
    
    
    4.9
    %
    
    
    4,624
    
    
    
    2.4
    %Provision for income taxes
    
    
    3,274
    
    
    
    2.5
    %
    
    
    1,414
    
    
    
    1.5
    %
    
    
    6,576
    
    
    
    1.9
    %
    
    
    2,122
    
    
    
    1.1
    %Income from continuing operations
    
    $
    5,346
    
    
    
    4.1
    %
    
    $
    2,307
    
    
    
    2.5
    %
    
    $
    10,729
    
    
    
    3.0
    %
    
    $
    2,502
    
    
    
    1.3
    %
 The following table sets forth, for the periods indicated, selected
operating results and statistics from our owned and leased inpatient
facilities segment, on an
actual and same-facility basis (dollars in thousands): Three Months Ended September 30,
    
    Nine Months Ended
September 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeConsolidated:Revenue
    
    $
    114,391
    
    
    $
    74,461
    
    
    
    53.6
    %
    
    $
    300,906
    
    
    $
    145,510
    
    
    
    106.8
    %Number of facilities at period end
    
    
    34
    
    
    
    22
    
    
    
    54.5
    %
    
    
    34
    
    
    
    22
    
    
    
    54.5
    %Admissions
    
    
    13,849
    
    
    
    7,942
    
    
    
    74.4
    %
    
    
    35,897
    
    
    
    18,041
    
    
    
    99.0
    %Patient days
    
    
    270,142
    
    
    
    189,072
    
    
    
    42.9
    %
    
    
    722,801
    
    
    
    333,361
    
    
    
    116.8
    %Same-facility (1):Revenue
    
    $
    80,823
    
    
    $
    74,461
    
    
    
    8.5
    %
    
    $
    158,066
    
    
    $
    145,510
    
    
    
    8.6
    %Number of facilities at period end
    
    
    22
    
    
    
    22
    
    
    
    0.0
    %
    
    
    22
    
    
    
    22
    
    
    
    0.0
    %Admissions
    
    
    8,483
    
    
    
    7,942
    
    
    
    6.8
    %
    
    
    19,040
    
    
    
    18,041
    
    
    
    5.5
    %Patient days
    
    
    202,729
    
    
    
    189,072
    
    
    
    7.2
    %
    
    
    352,149
    
    
    
    333,361
    
    
    
    5.6
    %
   (1)
    
    On a same-facility basis, revenue and statistics for 2004 are
presented on a comparable basis to 2003. For the three and nine months
ended September 30, 2004, Alliance Health Center, Calvary Center,
Brentwood, Palmetto, Heartland, Piedmont and Alliance Behavioral results
have not been included in same-facility results. Also for the nine
months ended September 30, 2004, same-facility results exclude revenue
and statistics during the first quarter of 2004 for The Brown Schools
and revenue and statistics during the first and second quarters of 2004
for Ramsay. 21




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##### Table of Contents



Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003 Revenue.Revenue from operations was $131.6 million for the quarter ended
September 30, 2004 compared to $93.9 million for the quarter ended September
30, 2003, an increase of $37.7 million or 40.1%. Revenue from our owned and
leased inpatient facilities segment accounted for $114.4 million of the third
quarter 2004 results compared to $74.5 million of the third quarter 2003
results, an increase of $39.9 million or 53.6%. The increase in revenues from
our owned and leased inpatient facilities segment relates primarily to revenues
of $8.2 million in the third quarter of 2004 for the Brentwood acquisition,
$12.2 million in the third quarter of 2004 for the Heartland acquisition and
$13.2 million for other inpatient facilities acquired in 2004. The remaining
$6.3 million of the increase in revenues from our owned and leased inpatient
facilities segment is primarily attributable to growth in admissions and
patient days of 6.8% and 7.2%, respectively, on a same-facility basis. Revenue
from our inpatient management contracts segment accounted for $17.2 million of
the third quarter 2004 results compared to $19.5 million of the third quarter
2003 results, a decrease of $2.3 million or 11.8%. The decrease in revenues
from our inpatient management contracts segment relates primarily to 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 employee benefits.Salaries, wages and employee
benefits (SWB) expense was $72.3 million, or 54.9% of revenue, for the quarter ended
September 30, 2004 compared to $50.0 million, or 53.2% of revenue, for the
quarter ended September 30, 2003. SWB expense for our owned and leased inpatient facilities segment was $62.5
million in the third quarter of 2004, or 54.6% of revenue from this segment. On
a same-facility basis, SWB expense for our owned and leased inpatient
facilities segment was $44.6 million in the third quarter of 2004, or 55.2% of
same-facility revenue, compared to $41.3 million in the third quarter of 2003,
or 55.5% of revenue from this segment. The decrease in SWB expense for our owned and
leased inpatient facilities segment as a percentage of revenue on a
same-facility basis, as compared to 2003 results, is primarily related to
efforts to maintain staffing levels on higher volumes. SWB expense for our inpatient management contracts segment was
$7.6 million in the third quarter of 2004, or 44.2% of revenue from this
segment, compared to $7.3 million in the third quarter of 2003, or 37.4% of
revenue from this segment. This increase in SWB expense for our inpatient management contracts segment as a percentage
of revenue from this segment is primarily 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. SWB expense for our corporate
office increased to $2.2 million for the third quarter of 2004 from $1.4
million for the third quarter of 2003, primarily a result of hiring additional
staff to manage the inpatient facilities and inpatient management contracts
acquired or assumed during 2003 and 2004. Professional fees.Professional fees were $14.0 million, or 10.6% of
revenue, for the quarter ended September 30, 2004 compared to $10.8 million, or
11.5% of revenue, for the quarter ended September 30, 2003. Professional fees for our owned and leased inpatient facilities segment were
$12.0 million in the third quarter of 2004, or 10.5% of revenue from this
segment. On a same-facility basis, professional fees for our owned and leased
inpatient facilities segment were $8.5 million in the third quarter of 2004, or
10.6% of same-facility revenue, compared to $8.8 million in the third quarter
of 2003, or 11.8% of revenue from this segment. The decrease in professional fees for our owned and leased inpatient facilities
segment as a percentage of revenue on a same-facility basis, as compared to
2003 results, is primarily related to efforts to reduce reliance on contract
labor by optimizing employee staffing levels on higher volumes. Professional
fees for our inpatient management contracts segment were $1.2 million in the
third quarter of 2004, or 7.0% of revenue from this segment, compared to $1.2
million in the third quarter of 2003, or 6.4% of revenue from this segment.
Professional fees for our corporate office were $769,000 in the third quarter
of 2004 compared to $796,000 in the third quarter of 2003. Supplies.Supplies expense was $8.7 million, or 6.6% of revenue, for the
quarter ended September 30, 2004 compared to $5.9 million, or 6.3% of revenue,
for the quarter ended September 30, 2003. Supplies expense from our owned and
leased inpatient facilities segment was $8.1 million in the third quarter of
2004, or 7.1% of revenue from this segment, compared to $5.3 million in the
third quarter of 2003, or 7.2% of revenue from this segment. Same-facility
supplies expense from our owned and leased inpatient facilities segment was
$5.8 million in the third quarter of 2004, or 7.1% of same-facility revenue
from this segment. Supplies expense 22




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##### Table of Contents



for our inpatient management contracts segment was approximately $564,000 in
the third quarter of 2004, or 3.3% of revenue from this segment, compared to
$521,000 in the third quarter of 2003, or 2.7% of revenue from this segment.
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 $3.4 million, or
2.6% of revenue, for the quarter ended September 30, 2004 compared to $1.2
million, or 1.3% of revenue, for the quarter ended September 30, 2003. The
provision for bad debts at our owned and leased inpatient facilities segment
comprises the majority of our provision for bad debts as a
whole. The increase in the provision for bad debts as a percentage of revenue
results from our acquisition of inpatient psychiatric facilities during the
fourth quarter of 2003 and the nine months ended September 30, 2004, which have
higher provision for bad debts as a percentage of revenue than our management
contracts segment. Other operating expenses.Other operating expenses were approximately
$16.9 million, or 12.8% of revenue, for the quarter ended September 30, 2004
compared to $14.7 million, or 15.6% of revenue, for the quarter ended September
30, 2003. Other operating expenses for our owned and leased inpatient
facilities segment were $11.2 million for the third quarter of 2004, or 9.7% of
revenue from this segment, compared to $7.8 million in the third quarter of
2003, or 10.5% of revenue from this segment. On a same-facility basis, other
operating expenses from our owned and leased inpatient facilities segment were
$7.6 million in the third quarter of 2004, or 9.4% of same-facility revenue
from this segment. The decrease in other operating expenses for our owned and
leased inpatient facilities segment as a percentage of revenues on a
same-facility basis, as compared to 2003 results was due to efforts to lower or
maintain other operating expenses on higher volumes. Other operating expenses
for our inpatient management contracts segment were $5.0 million in the third
quarter of 2004, or 29.1% of revenue from this segment, compared to $6.6
million in the third quarter of 2003, or 34.1% of revenue from this segment.
This decrease in other operating expenses for our inpatient management
contracts segment as a percentage of revenue from this segment 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. Other operating expenses at our corporate office
increased to $758,000 in the third quarter of 2004 from $294,000 in the third
quarter of 2003. Depreciation and amortization.Depreciation and amortization expense was
$2.6 million for the quarter ended September 30, 2004 compared to $1.9 million
for the quarter ended September 30, 2003, an increase of approximately
$700,000. This increase in depreciation and amortization expense is primarily
the result of the acquisitions of Alliance Health Center, Brentwood, Palmetto,
Heartland, Piedmont and Alliance Behavioral. Interest expense, net.Interest expense (net of interest income) was $5.1
million for the quarter ended September 30, 2004 compared to $5.6 million for
the quarter ended September 30, 2003, a decrease of $461,000 or 8.3%. Our
long-term debt increased from $174.3 million at
September 30, 2003 to $244.4
million at September 30, 2004. The increase in long-term debt at September 30,
2004 was due to the expansion of and borrowings on our credit facility with
Bank of America, N.A. (Bank of America). Interest expense decreased because
our effective rate of borrowings decreased primarily as a result of our
interest rate swaps and a more favorable interest rate on our credit facility
with Bank of America. Other expenses.We had no other expenses for the quarter ended September
30, 2004. Other expenses totaled $157,000 for the quarter ended September 30,
2003, which resulted from a loss on the refinancing of our long-term debt. Income (loss) from discontinued operations, net of tax. Income from
discontinued operations was $18,000 for the quarter ended September 30, 2004
compared to $111,000 for the quarter ended September 30, 2003. Income (loss)
from discontinued operations represents the operating results of three
contracts to manage state-owned facilities in Florida, net of applicable income
taxes, which have terminated. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003 Revenue.Revenue from operations was $352.0 million for the nine months
ended September 30, 2004 compared to $188.5 million for the nine months ended
September 30, 2003, an increase of $163.5 million or 86.7%. Revenue from our
owned and leased inpatient facilities segment accounted for $300.9 million of
the year to date 2004 results compared to $145.5 million of the year to date
2003 results, an increase of $155.4 million or 106.8%. The increase in revenues
from our owned and leased inpatient facilities segment relates primarily to
revenues of $63.4 million from the Ramsay acquisition, revenues of $20.7
million from The Brown Schools acquisition and $59.9 million for other
inpatient facilities acquired during 2003 and 2004. The remaining $11.4 million
of the increase in revenues from our owned and leased inpatient facilities
segment is primarily attributable to growth in admissions and patient days of
5.5% and 5.6%, respectively, on a same-facility basis. Revenue from our
inpatient management contracts segment accounted for $51.1 million of the year
to date 2004 results compared to $42.9 million of the year to date 2003
results, an increase of $8.2 million or 19.1%. The increase in revenues from our
inpatient management contracts segment relates primarily to the
assumption of contracts to manage inpatient facilities from Ramsay. Salaries, wages and employee
benefits. SWB expense was $191.4 million, or 54.4% of revenue, for the nine months
ended September 30, 2004 compared to $96.5 million, or 51.2% of revenue, for
the nine months ended 23




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##### Table of Contents



September 30, 2003. SWB expense for our owned and leased inpatient facilities segment was $162.8
million in the nine months ended September 30, 2004, or 54.1% of revenue from
this segment. On a same-facility basis, SWB expense for our owned and leased
inpatient facilities segment was $84.4 million in the nine months ended
September 30, 2004, or 53.4% of same-facility revenue, compared to $79.4
million in the nine months ended September 30, 2003, or 54.5% of revenue from
this segment. The decrease in SWB expense for our owned and
leased inpatient facilities segment as a percentage of revenue on a
same-facility basis, as compared with 2003 results, is related primarily to
efforts to maintain staffing levels on higher volumes. SWB expense for our inpatient management contracts segment was
$22.6 million in the nine months ended September 30, 2004, or 44.3% of revenue
from this segment, compared to $13.9 million in the nine months ended September
30, 2003, or 32.3% of revenue from this segment. The increase in SWB expense for our inpatient management contracts
segment as a percent of revenue from this segment is the result of the
assumption of contracts to manage inpatient facilities from Ramsay. SWB expense for our corporate office
increased to $5.9 million for the nine months ended September 30, 2004 from
$3.3 million for the nine months ended September 30, 2003 primarily as a result
of hiring additional staff to manage the inpatient facilities and inpatient
management contracts acquired or assumed during 2003 and 2004. Professional fees.Professional fees were $38.6 million, or 11.0% of
revenue, for the nine months ended September 30, 2004 compared to $22.1
million, or 11.8% of revenue, for the nine months ended September 30, 2003. Professional fees for our owned and leased inpatient facilities segment were
$33.1 million in the nine months ended September 30, 2004, or 11.0% of revenue
from this segment. On a same-facility basis, professional fees for our owned
and leased inpatient facilities segment were $17.7 million in the nine months
ended September 30, 2004, or 11.2% of same-facility revenue, compared to $17.3
million in the nine months ended September 30, 2003, or 11.9% of revenue from
this segment. The decrease in professional fees for our owned and leased inpatient facilities
segment as a percentage of revenue on a same-facility basis, as compared to
2003 results, is primarily related to efforts to reduce reliance on contract
labor by optimizing employee staffing levels on higher volumes. Professional
fees for our inpatient management contracts segment were $3.5 million in the
nine months ended September 30, 2004, or 6.9% of revenue from this segment,
compared to $3.1 million in the nine months ended September 30, 2003, or 7.1%
of revenue from this segment. Professional fees for our corporate office were
$2.0 million in the nine months ended September 30, 2004 compared to $1.7
million in the nine months ended September 30, 2003. Supplies.Supplies expense was $22.6 million, or 6.4% of revenue, for the
nine months ended September 30, 2004 compared to $10.6 million, or 5.6% of
revenue, for the nine months ended September 30, 2003. Supplies expense from
our owned and leased inpatient facilities segment was $20.9 million in the nine
months ended September 30, 2004, or 7.0% of revenue from this segment, compared
to $10.0 million in the nine months ended September 30,
2003, or 6.8% of
revenue from this segment. Same-facility supplies expense from our owned and
leased inpatient facilities segment was $11.0 million in the nine months ended
September 30, 2004, or 7.0% of same-facility revenue. Supplies expense for our
inpatient management contracts segment was approximately $1.6 million in the
nine months ended September 30, 2004, or 3.2% of revenue from this segment,
compared to $540,000 in the nine months ended September 30, 2003, or 1.3% of
revenue from this segment. The increase in supplies expense for our
inpatient management contracts segment as a percent of revenue is primarily the
result of the assumption of contracts to manage inpatient
facilities from Ramsay, which have a higher utilization of supplies expense because we
manage entire facilities, as compared to units within facilities owned by
client hospitals where these expenses are paid by the client hospitals.
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 $8.1 million, or
2.3% of revenue, for the nine months ended September 30, 2004 compared to $3.9
million, or 2.1% of revenue, for the nine months ended September 30, 2003. The
provision for bad debts for our owned and leased inpatient facilities segment
comprises the majority of our provision for bad debts as a
whole. Other operating expenses.Other operating expenses were approximately
$46.4 million, or 13.2% of revenue, for the nine months ended September 30,
2004 compared to $32.6 million, or 17.3% of revenue, for the nine months ended
September 30, 2003. Other operating expenses for our owned and leased inpatient
facilities segment were $29.2 million for the nine months ended September 30,
2004, or 9.7% of revenue from this segment, compared to $14.1 million in the
nine months ended September 30, 2003, 24




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or 9.7% of revenue from this segment. On a same-facility basis, other operating
expenses from our owned and leased inpatient facilities segment were $13.6
million in the nine months ended September 30, 2004, or 8.6% of same-facility
revenue. The decrease in other operating expenses for our owned and leased
inpatient facilities segment as a percentage of revenue on a same-facility
basis, as compared to 2003 results, was primarily due to efforts to lower or
maintain other operating expenses on higher volumes. Other operating expenses
for our inpatient management contracts segment were $15.0 million in the nine
months ended September 30, 2004, or 29.4% of revenue from this segment,
compared to $17.4 million in the nine months ended September 30, 2003, or 40.4%
of revenue from this segment. This decrease in other operating expenses for our
inpatient management contracts segment as a percentage of revenue from this
segment is primarily 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. Other
operating expenses for our corporate office increased to $2.2 million in the
nine months ended September 30, 2004 from $1.1 million in the nine months ended
September 30, 2003 primarily as a result of additional costs necessary to
manage the inpatient facilities and inpatient management contracts acquired
during 2003 and 2004. Depreciation and amortization.Depreciation and amortization expense was
$7.1 million for the nine months ended September 30, 2004 compared to $3.6
million for the nine months ended September 30, 2003, an increase of $3.5
million. This increase in depreciation and amortization expense is primarily
the result of the acquisitions of The Brown Schools, Ramsay, Alliance Health
Center, Brentwood, Palmetto, Heartland, Piedmont and Alliance Behavioral. Interest
expense, net.Interest expense (net of interest income) was $14.1 million for the nine months
ended September 30, 2004 compared to $9.4 million for the nine months ended
September 30, 2003, an increase of $4.7 million or 50.0%. This increase is
primarily attributable to the increase in our long-term debt from $174.3
million at September 30, 2003 to $244.4 million at September 30, 2004 as a
result of the expansion of and borrowings on our credit facility with Bank of
America. Other expenses.Other expenses totaled $6.4 million for the nine months
ended September 30, 2004 compared to $5.2 million for the nine months ended
September 30, 2003. Other expenses for the nine months ended September 30, 2004
consisted of a $6.4 million loss on the refinancing of our long-term debt.
Other expenses for the nine months ended September 30, 2003 consisted of a
$4.7 million 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. Income (loss) from discontinued operations, net of tax. Loss from
discontinued operations was $295,000 for the nine months ended September 30,
2004 compared to income from discontinued operations of $111,000 for the nine
months ended September 30, 2003. Income (loss) from discontinued operations
represents the operating results of three contracts to manage state-owned
facilities in Florida, net of applicable income taxes, which have terminated. Liquidity and Capital Resources As of September 30, 2004, we had working capital of $36.6 million,
including cash and cash equivalents of $17.7 million, compared to working
capital of $67.2 million, including cash and cash equivalents of $45.0 million,
at December 31, 2003. The decrease in working capital is primarily due to our
acquisitions during the nine months ended September 30, 2004, for which we used
$115.8 million in cash and cash equivalents for the acquisitions, offset by
borrowings of $70.0 million under our revolving line of credit with Bank of
America and the addition of $8.2 million in working capital from the acquired
companies. Cash provided by operating activities was $35.8 million for the nine
months ended September 30, 2004 compared to $13.2 million for the nine months
ended September 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
in and subsequent to the second quarter of 2003. Cash used in investing activities was $128.8 million for the nine months
ended September 30, 2004 compared to $103.0 million for the nine months ended
September 30, 2003. Cash used in investing activities for the nine months ended
September 30, 2004 consisted primarily of $30.4 million paid for the
acquisition of Brentwood, $49.9 million paid for the acquisition of Heartland
and $35.5 million paid for other acquisitions during the nine months ended
September 30, 2004. We also used $11.2 million for capital expenditures during
the nine months ended September 30, 2004. Cash used in investing activities for
the nine months ended September 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 $65.8 million for
the nine months ended September 30, 2004 compared to $97.4 million for the same
period in 2003. Cash provided by financing activities for the nine months ended
September 30, 2004 consisted primarily of $70.0 million of
net borrowings under our
revolving line of credit used primarily 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 nine months ended September 30, 2003 25




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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 refinancing of our debt with CapSource. 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 provided 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, 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 September 30, 2004, the weighted
average interest rate under the revolving line of credit was 4.8%. 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 September 30, 2004, we had $70.0 million of borrowings
outstanding and $32.3 million immediately available under the revolving line of
credit. We pay quarterly a commitment fee of 0.5% per annum on the unused
portion of our revolving credit facility, and when borrowings under the
revolving credit facility are less than $41.3 million we also
pay a utilization fee of
0.25% per annum on the unused portion of our revolving credit facility. Such
fees were approximately $66,000 and $182,000 for the three and nine months
ended September 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 September 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. Contractual Obligations Payments Due by Period (in thousands)Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsLong-term debt (1)
    
    $
    244,181
    
    
    $
    741
    
    
    $
    70,505
    
    
    $
    566
    
    
    $
    172,369Lease obligations
    
    
    31,603
    
    
    
    7,201
    
    
    
    8,858
    
    
    
    6,577
    
    
    
    8,967$
    275,784
    
    
    $
    7,942
    
    
    $
    79,363
    
    
    $
    7,143
    
    
    $
    181,336
   (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 $169 million and $167 million as of September 30, 2004 and
December 31, 2003, respectively. The carrying value of our other total
long-term debt, including current maturities, of $94.2 million and $25.0
million at September 30, 2004 and December 31, 2003, respectively, approximated
fair value. We had $120.0 million of variable rate debt outstanding at
September 30, 2004, including our interest rate swap agreements. At the
September 30, 2004 borrowing level, a hypothetical 10% adverse change in
interest rates would decrease our net income and cash flows by approximately
$650,000 for the nine months then ended. 26




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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 facilities and cost settlement provisions
requiring complex calculations. We estimate the allowance for contractual
discounts on a payor-specific basis given our interpretation of the applicable
regulations or contract terms. The services authorized and provided and related
reimbursement are often subject to interpretation that could result in payments
that differ from our estimates. Additionally, updated regulations and contract
renegotiations occur frequently necessitating continual review and assessment
of the estimation process by our management. 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 all of our
inpatient facilities except those acquired from Ramsay, we have professional
and general liability insurance in umbrella form 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 professional and general liability insurance in
umbrella form for claims in excess of $500,000 with an insured limit of $26.0
million. The self-insured reserves for professional and general liability risks
are calculated based on historical claims, demographic factors, industry
trends, severity factors, and other actuarial assumptions calculated by an
independent third party. 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 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. 27




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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. 
 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 were effective in ensuring that information required to be disclosed
by us (including our consolidated subsidiaries) in reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported in a
timely manner. Changes in Internal Controls Over Financial Reporting During the period covered by this report, there has been no change in our
internal control over financial reporting that has materially affected, or is
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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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).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).
 28




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##### Table of Contents



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).31.1*
    
    Certification of the Chief Executive Officer of Psychiatric Solutions,
Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of the Chief Accounting Officer of Psychiatric Solutions,
Inc. Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certifications of the Chief Executive Officer and Chief Accounting
Officer of Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith. 29




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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: November 15, 2004
    /s/ Jack E. PolsonJack E. PolsonChief Accounting Officer 30