PSYCHIATRIC SOLUTIONS, INC. 10-Q

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 March 31, 2004 or


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		for the transition period from to

Commission file number 0-20488

PSYCHIATRIC SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE		23-2491707
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

113 Seaboard Lane, Suite C-100
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 May 7, 2004, 14,324,203 shares of the registrant’s common stock were outstanding.

PSYCHIATRIC SOLUTIONS, INC.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003			1
Condensed Consolidated Statements of Income for the three month periods ended March 31, 2004 and 2003 (Unaudited)			2
Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2004 and 2003 (Unaudited)			3
Notes to Condensed Consolidated Financial Statements (Unaudited)			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			23
Item 4. Controls and Procedures			24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			24
Item 6. Exhibits and Reports on Form 8-K			24
Ex-10.1 CREDIT AGREEMENT
Ex-10.2 INTEREST RATE SWAP AGREEMENT
EX-31.1 SECTION 302 CEO CERTIFICATION
EX-31.2 SECTION 302 CFO CERTIFICATION
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)


	March 31,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	34,176		$	44,832
Accounts receivable, less allowance for doubtful accounts of $8,707(unaudited)and$7,491,respectively		65,278			60,055
Prepaids and other		6,762			8,529

Total current assets		106,216			113,416
Property and equipment, net of accumulated depreciation		175,851			149,757
Cost in excess of net assets acquired		70,501			68,970
Contracts, net		2,614			2,850
Other assets		16,685			13,642

Total assets	$	371,867		$	348,635

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,190		$	11,637
Salaries and benefits payable		16,634			13,642
Other accrued liabilities		23,743			20,168
Current portion of long-term debt		1,100			1,023

Total current liabilities		53,667			46,470
Long-term debt, less current portion		190,816			173,980
Deferred tax liability		6,681			6,762
Other liabilities		4,120			4,779

Total liabilities		255,284			231,991
Series A convertible preferred stock, $0.01 par value, 6,000 shares authorized; 4,545 shares issued and outstanding		25,617			25,316
Stockholders’ equity:
Common stock, $0.01 par value, 48,000 shares authorized; 11,995 and 11,937 issued and outstanding, respectively		120			119
Additional paid-in capital		91,412			91,423
Notes receivable from stockholders		(338	)		(338	)
Accumulated unrealized gains (losses)		4			(4	)
Accumulated (deficit) earnings		(232	)		128

Total stockholders’ equity		90,966			91,328

Total liabilities and stockholders’ equity	$	371,867		$	348,635

See notes to condensed consolidated financial statements

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except for per share amounts)


	Three Months Ended March 31,
	2004			2003
Revenue	$	107,584		$	37,104
Salaries, wages and employee benefits		58,995			17,785
Professional fees		12,056			4,451
Supplies		6,941			1,691
Rentals and leases		1,783			248
Other operating expenses		12,862			7,159
Provision for doubtful accounts		2,027			1,322
Depreciation and amortization		2,117			667
Interest expense		4,456			1,420
Loss on refinancing long-term debt		6,407			—
Change in valuation of put warrants		—			960
Change in reserve on stockholder notes		—			(461	)

		107,644			35,242
(Loss) income before income taxes		(60	)		1,862
(Benefit from)provision for income taxes		(23	)		1,073

Net (loss) income		(37	)		789
Accrued preferred stock dividends		323			—

Net (loss) income available to common stockholders	$	(360	)	$	789

Earnings per common share:
Basic	$	(0.03	)	$	0.10

Diluted	$	(0.03	)	$	0.10

Shares used in computing per share amounts:
Basic		11,958			7,739
Diluted		11,958			8,209

See notes to condensed consolidated financial statements

PSYCHIATRIC SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


	Three Months Ended March 31,
	2004			2003
Operating Activities
Net (loss) income	$	(37	)	$	789
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,117			667
Provision for doubtful accounts		2,027			1,322
Accretion of detachable warrants		—			77
Non-cash stock compensation expense		—			5
Amortization of loan costs		199			160
Loss on refinancing long-term debt		6,407			—
Change in valuation of put warrants		—			960
Change in reserve on stockholder notes		—			(461	)
Long-term interest accrued		—			81
Changes in operating assets and liabilities:
Accounts receivable		(3,195	)		(3,986	)
Prepaids and other assets		1,981			(973	)
Accounts payable		(2,320	)		148
Salaries and benefits payable		2,065			(1,178	)
Accrued liabilities and other liabilities		5,745			3,514

Net cash provided by operating activities		14,989			1,125
Investing activities:
Cash paid for acquisitions, net of cash acquired		(33,211	)		—
Capital purchases of property and equipment		(3,058	)		(628	)
Other assets		(1,505	)		(180	)

Net cash used in investing activities		(37,774	)		(808	)
Financing activities:
Net principal borrowings on long-term debt		16,856			1,336
Refinancing of long-term debt		(3,844	)		—
Payment of loan and issuance costs		(987	)		—
Proceeds from issuance of common stock		104			—

Net cash provided by financing activities		12,129			1,336
Net (decrease) increase in cash		(10,656	)		1,653
Cash at beginning of the period		44,832			2,392

Cash at end of the period	$	34,176		$	4,045

Significant Non-cash Transactions:
Loss on refinancing long-term debt	$	(2,563	)	$	—

Effect of Acquisitions:
Assets acquired, net of cash acquired	$	31,682		$	—
Cash payment for prior-year acquisition		3,350			—
Liabilities assumed		(1,821	)		—

Cash paid for acquisitions, net of cash acquired	$	33,211		$	—

See notes to condensed consolidated financial statements

PSYCHIATRIC SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

1. Recent Developments

On March 1, 2004, we acquired two inpatient psychiatric facilities from Brentwood Behavioral Health (“Brentwood”) for $29.8 million cash with an earn-out of up to $5.0 million contingent upon future financial results. We drew down $17.0 million on our revolving line of credit and paid the remainder of the acquisition price with cash on hand. The inpatient facilities, which have an aggregate of 311 licensed beds, are located in Shreveport, Louisiana and Jackson, Mississippi.

On January 6, 2004, we terminated our senior credit facility with CapitalSource Finance LLC (“CapSource”) and entered into a new credit agreement with Bank of America, N.A. (“Bank of America”) that provides for a revolving credit facility of up to $50.0 million. As a result of the termination of our senior credit facility with CapSource, we recorded a loss on refinancing long-term debt of $6.4 million for the quarter ended March 31, 2004.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for audited financial statements. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position have been included. The majority of our expenses are “cost of revenue” items. General and administrative expenses were approximately 2% of net revenue for the three months ended March 31, 2004. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the full year. 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 include no dilution and are 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 reflect 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.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):


	Three months ended March 31,
	2004			2003
Numerator:
Net (loss) income available to common stockholders	$	(360	)	$	789
Denominator:
Weighted average shares outstanding for basic earnings per share		11,958			7,739
Effects of dilutive stock options and warrants outstanding		—			470

Shares used in computing diluted earnings per common share		11,958			8,209

Earnings per common share, basic	$	(0.03	)	$	0.10

Earnings per common share, diluted	$	(0.03	)	$	0.10

The computation of diluted earnings per share for the three months ended March 31, 2004 does not include approximately 4.7 million shares representing the weighted average of common shares into which our series A preferred stock is convertible and approximately 540,000 shares representing stock options and warrants outstanding during the period as the effects would have been anti-dilutive. The computation of diluted earnings per share for the three months ended March 31, 2003 does not include interest on convertible debt of $81,000 and approximately 422,000 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 do not plan to adopt the fair-value method of accounting for stock options at the current time.

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.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 March 31,
	2004			2003
Net (loss) income available to common stockholders	$	(360	)	$	789
Pro forma compensation expense from stock options		290			93

Pro forma net (loss) income available to common stockholders	$	(650	)	$	696

Basic earnings per share, as reported	$	(0.03	)	$	0.10

Diluted earnings per share, as reported	$	(0.03	)	$	0.10

Basic pro forma earnings per share	$	(0.05	)	$	0.09

Diluted pro forma earnings per share	$	(0.05	)	$	0.08

5. Mergers and Acquisitions

Acquiring free-standing psychiatric facilities is a key part of our business strategy. Because we have grown through mergers and acquisitions accounted for as purchases, it is difficult to make meaningful comparisons between our financial statements for the fiscal periods presented.

On March 1, 2004, we acquired two inpatient psychiatric facilities from Brentwood for $29.8 million cash with an earn-out of up to $5.0 million contingent upon future financial results. We drew down $17.0 million on our revolving line of credit and paid the remainder of the acquisition price in cash. The facilities, which have an aggregate of 311 licensed beds, are located in Shreveport, Louisiana and Jackson, Mississippi.

On November 1, 2003, we acquired the 109-bed Alliance Health Center located in Meridian, Mississippi for approximately $13.0 million. The acquisition was entirely financed through our then-existing line of credit. Alliance Health Center is a licensed acute care hospital that provides psychiatric care for children, adolescents and adults. In addition, we recently completed the construction of a 60-bed residential treatment center which opened in May 2004.

On June 30, 2003, we consummated the acquisition of Ramsay Youth Services, Inc. (“Ramsay”), a public company that traded on the Nasdaq SmallCap Market under the symbol “RYOU,” for approximately $81.3 million, consisting of $56.2 million in cash, or $5.00 per share, $22.3 million in net assumed debt that was repaid in connection with the acquisition and $2.8 million in fees and expenses. We financed the acquisition of Ramsay with proceeds from the issuance of $150 million in 10 5/8% senior subordinated notes and the private placement of $12.5 million of our series A convertible preferred stock. The 11 owned or leased inpatient behavioral health care facilities we acquired from Ramsay, which have an aggregate of 1,292 beds, are located primarily in the Southeastern region of the United States with locations also in Michigan, Missouri and Utah. In the acquisition, we also assumed 10 contracts to manage behavioral health care facilities for government agencies in Florida, Georgia and Puerto Rico.

In April 2003, we consummated the acquisition of six inpatient behavioral health care facilities from The Brown Schools, Inc. (“The Brown Schools”) for $63.0 million in cash. The six facilities, which have an aggregate of 895 licensed beds, are located in Austin, San Antonio and San Marcos, Texas; Charlottesville, Virginia; Colorado Springs, Colorado; and Tulsa, Oklahoma. The Brown Schools offer a full continuum of care for troubled adolescents and adults. We financed the acquisition of The Brown Schools with proceeds from the private placement of $12.5 million of our series A convertible preferred stock and an increase in funding under our senior credit facility.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

The purchase price allocation for Brentwood is preliminary as of March 31, 2004, pending receipt of asset appraisals.

The following represents the unaudited pro forma results of consolidated operations as if the acquisition of Brentwood 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):


	For the three months ended March 31,
	2004			2003
Revenue	$	113,220		$	43,925
Net (loss) income available to common stockholders		(59	)		880

Earnings per common share, basic	$	—		$	0.11

Earnings per diluted share, diluted	$	—		$	0.11

The pro forma information given does not purport to be indicative of what our results of operations would have been if the acquisitions had in fact occurred at the beginning of the periods presented, and is not intended to be a projection of the impact on our future results or trends. The pro forma information given includes a $6.4 million loss from refinancing long-term debt for the three months ended March 31, 2004, expense of $960,000 to revalue put warrants for the three months ended March 31, 2003 and income of $461,000 to release reserves on stockholder notes for the three months ended March 31, 2003.

6. Long-term debt

Long-term debt consists of the following (in thousands):


	March 31,		December 31,
	2004		2003
Senior credit facilities:
Revolving line of credit, expired on January 6, 2004 and bearing interest at 6.25% at December 31, 2003	$	—	$	—
Revolving line of credit, entered into on January 6, 2004, expiring on January 6, 2007 and bearing interest of 3.625% at March 31, 2004		17,000		—
10 5/8% senior subordinated notes		150,000		150,000
Mortgage loans on facilities, maturing in 2037 and 2038 bearing fixed interest rates of 5.65% to 5.95%		23,778		23,833
Subordinated seller notes with varying maturities		1,023		1,170
Other		115		—

		191,916		175,003
Less current portion		1,100		1,023

Long-term debt	$	190,816	$	173,980

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

Senior Credit Facility

On January 6, 2004, we terminated our senior credit facility with CapSource and entered into a new credit agreement with Bank of America that provides for a revolving credit facility of up to $50.0 million. As a result of the termination of our senior credit facility with CapSource, we recorded a loss on refinancing long-term debt of $6.4 million for the quarter ended March 31, 2004, including approximately $3.8 million paid as a termination fee to CapSource. 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 March 31, 2004, the interest rate under the revolving line of credit was 3.625%. Until the maturity date, we may borrow, repay and re-borrow an amount not to exceed the lesser of $50.0 million or the borrowing base (as defined in the Credit Agreement). As of March 31, 2004, we had $17.0 million of borrowings outstanding and $33.0 million available under the revolving line of credit. We must pay on a quarterly basis a commitment fee in the amount of 0.5% per annum on the unused portion of our revolving credit facility and a utilization fee in the amount of 0.25% per annum on the unused portion of the revolving credit facility when borrowings under the revolving credit facility are less than $16.5 million. Such fees were approximately $65,000 for the three months ended March 31, 2004.

Our revolving credit facility contains customary covenants which include: (1) a limitation on capital expenditures and investments, sales of assets, mergers, changes of ownership, new principal lines of business, indebtedness, dividends and redemptions; (2) various financial covenants; and (3) cross-default covenants triggered by a default of any other indebtedness of at least $3.0 million. As of March 31, 2004, we were in compliance with all debt covenant requirements. If we violate one or more of these covenants, amounts outstanding under the revolving credit facility could become immediately payable and additional borrowings could be restricted.

10 5/8% Senior Subordinated Notes

On June 30, 2003, we issued $150 million in 10 5/8% senior subordinated notes, which are fully and unconditionally guaranteed on a senior subordinated basis by substantially all of our operating subsidiaries. Proceeds from the issuance of the senior subordinated notes and the private placement of $12.5 million in series A convertible preferred stock were used to finance the acquisition of Ramsay and pay down substantially all of our long-term debt. Interest on the senior subordinated notes accrues at the rate of 10.625% per annum and is payable semi-annually in arrears on June 15 and December 15, which commenced on December 15, 2003. The senior subordinated notes will mature on June 15, 2013.

Mortgage Loans

During 2002 and 2003, we borrowed approximately $23.8 million under mortgage loan agreements insured by the U.S. Department of Housing and Urban Development (“HUD”). These mortgage loans are secured by real estate located at Holly Hill Hospital in Raleigh, North Carolina, West Oaks Hospital in Houston, Texas, and Riveredge Hospital near Chicago, Illinois. Interest accrues on the Holly Hill, West Oaks and Riveredge HUD loans at 5.95%, 5.85% and 5.65%, respectively, and principal and interest are payable in 420 monthly installments through December 2037, September 2038 and December 2038, respectively. We used the proceeds from the mortgage loans to repay approximately $4.4 million in 2002 and $17.0 million in 2003 of our term debt under our former senior credit facility with CapSource, pay certain financing costs, and fund required escrow amounts for future improvements to the property. The carrying amount of assets held as collateral approximated $23.9 million as of March 31, 2004.

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 $160,000 at March 31, 2004, which is due in two equal installments on April 1, 2004 and 2005. Accured 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 March 31, 2004, one note with a current principal balance of $863,000 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 March 31, 2004.

7. Mezzanine Equity and Stockholders’ Equity

We issued 4,545,454 shares of our series A convertible preferred stock during the quarter ended June 30, 2003. Each share of series A convertible preferred stock is convertible into one share of our common stock. Holders of our series A convertible preferred stock are entitled to receive pay-in-kind dividends, compounded quarterly, equal to 5% per share of the original share price through March 31, 2005. Thereafter, pay-in-kind dividends will compound quarterly at 7% per share of the original share price. Because we may be required to redeem the series A convertible preferred stock upon certain change of control events that may not be within our control, the series A convertible preferred stock has been classified outside of our permanent stockholders’ equity.

As a part of the merger with 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 months ended March 31, 2003, we released $461,000 of the reserve on the stockholder notes. At December 31, 2003, we did not maintain a reserve balance on our stockholder notes because the market value exceeded the stated price. The right to repay the stockholder notes with our common stock expired on December 31, 2003. The current outstanding balance of these notes is $338,000.

8. Income Taxes

The benefit recorded for the three months ended March 31, 2004 reflects an effective tax rate of approximately 38%. The provision recorded for the three months ended March 31, 2003 reflects an effective tax rate of approximately 57.6% due to the non-deductible nature of the change in valuation of the put warrants during the period.

9. Disclosures About Reportable Segments

In accordance with the criteria of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, we operate two reportable segments: (1) owned and leased facilities and (2) management contracts. Each of our inpatient facilities and inpatient management contracts qualifies as an operating segment under SFAS No. 131; however, none is individually material. We have aggregated our operations into two reportable segments based on characteristics of the services provided. As of March 31, 2004, the owned and leased facilities segment provides inpatient mental and behavioral health services in its 22 owned and 4 leased facilities in 15 states. The management contracts segment provides inpatient psychiatric management and development services to 42 behavioral health units in third party medical/surgical hospitals and clinics in 15 states and provides mental and behavioral health services to 11 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 and other

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

items included in the caption labeled “Other expenses.” These other expenses may occur in future periods, but the amounts recognized can vary significantly from period to period and do not directly relate to the ongoing operations of our health care facilities. Our management relies on adjusted EBITDA as the primary measure to review and assess the operating performance of our inpatient facilities and their management teams. We believe it is useful to investors to provide disclosures of our operating results on the same basis as that used by management. Management and investors also review adjusted EBITDA to evaluate our overall performance and to compare our current operating results with corresponding periods and with other companies in the health care industry. You should not consider adjusted EBITDA in isolation or as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States. Because adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and is susceptible to varying calculations, it may not be comparable to similarly titled measures of other companies. The following is a financial summary by business segment for the periods indicated (dollars in thousands):


	Owned and
	Leased		Management			Corporate
	Facilities		Contracts			and Other			Consolidated
Three months ended March 31, 2004
Revenue	$	86,443	$	21,141		$	—		$	107,584
Adjusted EBITDA	$	12,992	$	2,369		$	(2,441	)	$	12,920
Interest expense		3,559		(5	)		902			4,456
Depreciation and amortization		1,744		314			59			2,117
Provision for income taxes		662		—			(685	)		(23	)
Inter-segment expenses		1,347		801			(2,148	)		—
Other expenses:
Loss on refinancing long-term debt		—		—			6,407			6,407

Net income (loss)	$	5,680	$	1,259		$	(6,976	)	$	(37	)

Segment assets	$	255,938	$	38,524		$	77,405		$	371,867


	Owned and
	Leased		Management			Corporate
	Facilities		Contracts			and Other			Consolidated
Three months ended March 31, 2003
Revenue	$	26,087	$	11,017		$	—		$	37,104
Adjusted EBITDA	$	4,090	$	1,839		$	(1,476	)	$	4,453
Interest expense		907		81			432			1,420
Depreciation and amortization		385		265			17			667
Provision for income taxes		—		40			1,033			1,073
Inter-segment expenses		940		674			(1,614	)		—
Other expenses:
Non-cash stock compensation expense		—		—			5			5
Change in valuation of put warrants		—		—			960			960
Change in reserve on stockholder notes		—		(461	)		—			(461	)

Total other expenses		—		(461	)		965			504

Net income (loss)	$	1,858	$	1,240		$	(2,309	)	$	789

Segment assets	$	53,727	$	34,449		$	8,444		$	96,620

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

10. Recent Pronouncements

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The adoption of FIN 46 has not had a material effect on our results of operations or financial position.

11. Financial Information for Psychiatric Solutions and Its Subsidiaries

We conduct substantially all of our business through our subsidiaries. Presented below is condensed consolidated financial information for us and our subsidiaries as of March 31, 2004 and December 31, 2003, and for the three months ended March 31, 2004 and 2003. The information segregates the parent company (Psychiatric Solutions, Inc.), the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and eliminations. All of the subsidiary guarantees are both full and unconditional and joint and several.

Psychiatric Solutions, Inc.
Condensed Consolidating Balance Sheet
March 31, 2004
(Dollars in thousands)


			Combined							Total
			Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent		Guarantors		Guarantors		Adjustments			Amounts
Current Assets:
Cash	$	—	$	32,511	$	1,665	$	—		$	34,176
Accounts receivable, net		—		65,278		—		—			65,278
Prepaids and other		—		6,406		356		—			6,762

Total current assets		—		104,195		2,022		—			106,216
Property and equipment, net of accumulated depreciation		—		153,382		30,788		(8,258	)		175,851
Cost in excess of net assets acquired		—		70,501		—		—			70,501
Contracts, net		—		2,614		—		—			2,614
Investment in subsidiaries		99,048		—		—		(99,048	)		—
Other assets		5,863		6,508		4,314		—			16,685

Total assets	$	104,911	$	337,200	$	37,124	$	(107,306	)	$	371,867

Current Liabilities:
Accounts payable	$	—	$	12,190	$	—	$	—		$	12,190
Salaries and benefits payable		—		16,634		—		—			16,634
Other accrued liabilities		5,173		18,449		1,087		(966	)		23,743
Current portion of long-term debt		—		875		225		—			1,100

Total current liabilities		5,173		48,148		1,312		(966	)		53,667
Long-term debt, less current portion		—		167,262		23,554		—			190,816
Deferred tax liability		—		6,681		—		—			6,681
Other liabilities		3,031		123		—		966			4,120

Total liabilities		8,204		222,214		24,866		—			255,284
Series A convertible preferred stock		25,617		—		—		—			25,617
Stockholders’ equity:
Total stockholders’ equity		71,090		114,986		12,258		(107,306	)		90,966

Total liabilities and stockholders’ equity	$	104,911	$	337,200	$	37,124	$	(107,306	)	$	371,867

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

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


			Combined							Total
			Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent		Guarantors		Guarantors		Adjustments			Amounts
Current Assets:
Cash	$	—	$	43,334	$	1,498	$	—		$	44,832
Accounts receivable, net		—		60,055		—		—			60,055
Prepaids and other		—		8,510		19		—			8,529

Total current assets		—		111,899		1,517		—			113,416
Property and equipment, net of accumulated depreciation		—		127,047		31,029		(8,319	)		149,757
Cost in excess of net assets acquired		—		68,970		—		—			68,970
Contracts, net		—		2,850		—		—			2,850
Investment in subsidiaries		199,154		—		—		(199,154	)		—
Other assets		7,731		1,958		3,953		—			13,642

Total assets	$	206,885	$	312,724	$	36,499	$	(207,473	)	$	348,635

Current Liabilities:
Accounts payable	$	—	$	11,637	$	—	$	—		$	11,637
Salaries and benefits payable		—		13,642		—		—			13,642
Other accrued liabilities		871		19,176		1,090		(969	)		20,168
Current portion of long-term debt		—		801		222		—			1,023

Total current liabilities		871		45,256		1,312		(969	)		46,470
Long-term debt, less current portion		150,369		—		23,611		—			173,980
Deferred tax liability		—		6,762		—		—			6,762
Other liabilities		3,218		592		—		969			4,779

Total liabilities		154,458		52,610		24,923		—			231,991
Series A convertible preferred stock		25,316		—		—		—			25,316
Stockholders’ equity:
Total stockholders’ equity		27,111		260,114		11,576		(207,473	)		91,328

Total liabilities and stockholders’ equity	$	206,885	$	312,724	$	36,499	$	(207,473	)	$	348,635

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2004
(Dollars in thousands)


				Combined								Total
				Subsidiary			Combined Non-		Consolidating			Consolidated
	Parent			Guarantors			Guarantors		Adjustments			Amounts
Revenue	$	—		$	107,584		$	892	$	(892	)	$	107,584
Salaries, wages and employee benefits		—			58,995			—		—			58,995
Professional fees		—			12,056			—		—			12,056
Supplies		—			6,941			—		—			6,941
Rentals and leases		—			1,783			—		—			1,783
Other operating expenses		310			13,444			—		(892	)		12,862
Provision for bad debts		—			2,027			—		—			2,027
Depreciation and amortization		—			1,876			241		—			2,117
Interest expense		4,085			—			371		—			4,456
Loss on refinancing of long-term debt		6,407			—			—		—			6,407

		10,802			97,122			612		(892	)		107,644
(Loss) income before income taxes		(10,802	)		10,462			280		—			(60	)
Benefit from income taxes		—			(23	)		—		—			(23	)

Net (loss) income		(10,802	)		10,485			280		—			(37	)
Accrued preferred stock dividends		—			323			—		—			323

Net (loss) income available to common shareholders	$	(10,802	)	$	10,162		$	280	$	—		$	(360	)

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2003
(Dollars in thousands)


				Combined							Total
				Subsidiary		Combined Non-		Consolidating			Consolidated
	Parent			Guarantors		Guarantors		Adjustments			Amounts
Revenue	$	—		$	37,104	$	400	$	(400	)	$	37,104
Salaries, wages and employee benefits		—			17,785		—		—			17,785
Professional fees		—			4,451		—		—			4,451
Supplies		—			1,691		—		—			1,691
Rentals and leases		—			248		—		—			248
Other operating expenses		(118	)		7,432		245		(400	)		7,159
Provision for bad debts		—			1,322		—		—			1,322
Depreciation and amortization		—			609		58		—			667
Interest expense		1,266			81		73		—			1,420
Change in reserve of stockholder notes		(461	)		—		—		—			(461	)
Change in valuation of put warrants		960			—		—		—			960

		1,647			33,619		376		(400	)		35,242
Income (loss) before income taxes		(1,647	)		3,485		24		—			1,862
Provision for income taxes		—			1,073		—		—			1,073

Net (loss) income	$	(1,647	)	$	2,412	$	24	$	—		$	789

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2004
(Dollars in thousands)


				Combined								Total
				Subsidiary			Combined Non-			Consolidating		Consolidated
	Parent			Guarantors			Guarantors			Adjustments		Amounts
Operating Activities
Net (loss) income	$	(10,802	)	$	10,487		$	278		$	—	$	(37	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		—			1,876			241			—		2,117
Provision for doubtful accounts		—			2,027			—			—		2,027
Amortization of loan costs		190			—			9			—		199
Loss on refinancing long-term debt		6,407			—			—			—		6,407
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(1,318	)		—			—		(1,318	)
Prepaids and other current assets		—			1,643			338			—		1,981
Accounts payable		—			(411	)		—			—		(411	)
Accrued liabilities and other liabilities		3,801			1,230			(3	)		—		5,028

Net cash (used in) provided by operating activities		(404	)		15,534			863			—		15,993
Investing Activities:
Cash paid for acquisitions, net of cash acquired		(29,861	)		—			—			—		(29,861	)
Capital purchases of property and equipment		—			(3,058	)		—			—		(3,058	)
Other assets		—			(6,541	)		(590	)		—		(7,131	)

Net used in investing activities		(29,861	)		(9,599	)		(590	)		—		(40,050	)
Financing Activities:
Net principal borrowings on long-term debt		16,910			—			(54	)		—		16,856
Net transfers to and from members		16,810			(16,758	)		(52	)		—		—
Payment of loan and issuance costs		(987	)		—			—			—		(987	)
Refinancing of long-term debt		(2,572	)		—			—			—		(2,572	)
Proceeds from issuance of common stock		104			—			—			—		104

Net cash provided by (used in) financing activities		30,265			(16,758	)		(106	)		—		13,401
Net (decrease) increase in cash		—			(10,823	)		167			—		(10,656	)
Cash at beginning of year		—			43,334			1,498			—		44,832

Cash at end of year	$	—		$	32,511		$	1,665		$	—	$	34,176

PSYCHIATRIC SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004

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

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2003
(Dollars in thousands)


				Combined								Total
				Subsidiary			Combined Non-			Consolidating		Consolidated
	Parent			Guarantors			Guarantors			Adjustments		Amounts
Operating Activities
Net (loss) income	$	(1,647	)	$	2,412		$	24		$	—	$	789
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		—			609			58			—		667
Provision for doubtful accounts		—			1,322			—			—		1,322
Accretion of detachable warrants		—			77			—			—		77
Non-cash stock compensation expense		—			5			—			—		5
Amortization of loan costs		160			—			—			—		160
Change in deferred tax liability		—			1,033			—			—		1,033
Change in valuation of put warrants		960			—			—			—		960
Change in reserve on stockholder notes		(461	)		—			—			—		(461	)
Long-term interest accrued		—			81			—			—		81
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		—			(3,986	)		—			—		(3,986	)
Prepaids and other current assets		—			(714	)		(259	)		—		(973	)
Accounts payable		—			148			—			—		148
Accrued liabilities and other liabilities		324			787			192			—		1,303


Net cash (used in) provided by operating activities		(664	)		1,774			15			—		1,125
Investing activities:
Capital purchases of property and equipment		—			(628	)		—			—		(628	)
Other assets		—			(180	)		—			—		(180	)

Net cash used in investing activities		—			(808	)		—			—		(808	)
Financing activities:
Net principal borrowings on long-term debt		2,375			(1,027	)		(12	)		—		1,336
Net transfers to and from members		(1,711	)		1,711			—			—		—

Net cash provided by (used in) financing activities		664			684			(12	)		—		1,336
Net increase in cash		—			1,650			3			—		1,653
Cash at beginning of year		—			1,175			1,217			—		2,392

Cash at end of year	$	—		$	2,825		$	1,220		$	—	$	4,045

12. Subsequent Events

On April 1, April 2 and May 5, 2004, certain holders of our series A convertible preferred stock converted 2,181,818 shares of series A convertible preferred stock and related accrued dividends into 2,292,972 shares of our common stock.

On April 23, 2004, we entered into an interest rate swap agreement to manage our exposure to fluctuations in interest rates. The swap agreement effectively converts $30.0 million of fixed-rate long-term debt to a LIBOR indexed variable rate instrument plus an agreed upon interest rate spread of 5.51%.

On April 27, 2004, we announced the signing of a definitive agreement to purchase four inpatient behavioral health care facilities from Heartland Healthcare for $47.0 million. The four facilities, located in Summit, New Jersey, Ft. Lauderdale, Florida, Arlington, Texas and Eden Prairie, Minnesota, have a total of 360 beds. The transaction is expected to be completed by June 1, 2004, pending certain regulatory approvals.

On May 1, 2004, we completed the acquisition of all of the membership interests of Palmetto Behavioral Health System, LLC, an operator of two inpatient behavioral health care facilities, for approximately $6.0 million. The two inpatient facilities, located in Charleston and Florence, South Carolina, have 159 beds.

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 on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include statements regarding the intent, belief or current expectations of Psychiatric Solutions and its management. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause our actual results to differ materially from the results discussed in the forward-looking statements. Risks and uncertainties that might cause such differences include, but are not limited to: (1) potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional facilities on favorable terms; (2) our ability to improve the operations of acquired facilities; (3) our ability to maintain favorable and continuing relationships with physicians who use our facilities; (4) our limited operating history as a public company; (5) our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs; (6) risks inherent to the health care industry, including the impact of unforeseen changes in regulation, reimbursement rates from federal and state health care programs or managed care companies and exposure to claims and legal actions by patients and others; and (7) potential difficulties in integrating our operations with recently acquired operations. The forward-looking statements herein are qualified in their entirety by the risk factors set forth in our filings with the Securities and Exchange Commission, including the factors listed in our Annual Report on Form 10-K filed 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 March 31, 2004, we continued with our goals of making accretive acquisitions, expanding revenues and reducing expenses in our existing inpatient behavioral health care operations. On March 1, 2004, we acquired two inpatient psychiatric facilities from Brentwood Behavioral Health (“Brentwood”) for $29.8 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. Through the acquisition of Brentwood, we increased our inpatient facility operations to 26 facilities and approximately 3,200 beds at March 31, 2004.

On January 6, 2004, we entered into a revolving credit facility with Bank of America, N.A. (“Bank of America”) of up to $50 million and terminated our credit facility with CapitalSource Finance LLC (“CapitalSource”). On January 26, 2004, we entered into an interest rate swap agreement that 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.

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 improve operating results by optimizing staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing. During the quarter ended March 31, 2004, we increased revenue from owned and leased inpatient facilities by approximately 7.3% through same-facility growth. Same-facility growth also produced gains in owned and leased inpatient facility admissions and patient days of approximately 6.3% and 4.5%, respectively, for the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003. We owned five inpatient facilities throughout the quarter ended March 31, 2003.

Recent Acquisitions

On May 1, 2004, we completed the acquisition of all of the membership interests of Palmetto Behavioral Health System, LLC, an operator of two inpatient behavioral health care facilities, for approximately $6.0 million. The two facilities, located in Charleston and Florence, South Carolina, have 159 beds.

On March 1, 2004, we acquired two inpatient psychiatric facilities from Brentwood for $29.8 million cash with an earn-out of up to $5.0 million contingent upon future financial results. We drew down $17.0 million on our revolving line of credit and paid the remainder of the acquisition price with cash on hand. The facilities, which have an aggregate of 311 licensed beds, are located in Shreveport, Louisiana and Jackson, Mississippi.

On November 1, 2003, we acquired the 109-bed Alliance Health Center located in Meridian, Mississippi, for approximately $13.0 million. Alliance Health Center is a licensed acute care hospital that provides psychiatric care for children, adolescents and adults. In addition, we recently completed the construction of a 60-bed residential treatment center which opened in May 2004.

On June 30, 2003, we consummated the acquisition of Ramsay Youth Services, Inc. (“Ramsay”), a public company that traded on the Nasdaq SmallCap Market under the symbol “RYOU,” for approximately $81.3 million, consisting of $56.2 million in cash, or $5.00 per share, $22.3 million in net assumed debt that was repaid in connection with the acquisition and $2.8 million in fees and expenses. We financed the acquisition of Ramsay with proceeds from the issuance of $150 million in 10 5/8% senior subordinated notes and an issuance of $12.5 million of our series A convertible preferred stock. The 11 owned or leased inpatient behavioral health care facilities we acquired from Ramsay, which have an aggregate of 1,292 beds, are located primarily in the Southeastern region of the United States with locations also in Michigan, Missouri and Utah. In the acquisition, we also assumed 10 contracts to manage inpatient behavioral health care facilities for government agencies in Florida, Georgia and Puerto Rico.

Acquiring inpatient behavioral health care facilities is a key part of our business strategy. Because we have grown through acquisitions accounted for as purchases, it is difficult to make meaningful comparisons between our financial statements for the fiscal periods presented.

Sources of Revenue

Patient Service Revenue

Patient service revenue is generated by our inpatient facilities as a result of services provided to patients within the inpatient behavioral health care facility setting. Patient service revenue is reported on an accrual basis in the period in which services are rendered, at established rates, regardless of whether collection in full is expected. Patient service revenue includes amounts estimated by management to be

reimbursable by Medicare and Medicaid under provisions of cost or prospective reimbursement formulas in effect. Amounts received are generally less than the established billing rates of the inpatient facilities and the differences are reported as deductions from patient service revenue at the time the service is rendered. For the three months ended March 31, 2004, patient service revenue comprised approximately 80% of our total revenue.

Management Fee Revenue

Management contract revenue is earned by our inpatient management contract division. The inpatient management contract division receives contractually determined management fees from third party medical/surgical hospitals and clinics for providing psychiatric unit management and development services as well as management fees for managing inpatient behavioral health care facilities for government agencies. For the three months ended March 31, 2004, management contract revenue comprised approximately 20% of our total revenue.

Results of Operations

The following table sets forth, for the periods indicated, our operating results (dollars in thousands):


	Three Months Ended March 31,
	2004						2003
	Amount			%			Amount			%
Revenue	$	107,584			100.0	%	$	37,104			100.0	%
Salaries, wages, and employee benefits		58,995			54.8	%		17,785			47.9	%
Professional fees		12,056			11.2	%		4,451			12.0	%
Supplies		6,941			6.5	%		1,691			4.5	%
Provision for bad debts		2,027			1.9	%		1,322			3.6	%
Other operating expenses		14,645			13.6	%		7,407			20.0	%
Depreciation and amortization		2,117			2.0	%		667			1.8	%
Interest expense, net		4,456			4.1	%		1,420			3.8	%
Other expenses:
Loss on refinancing long-term debt		6,407			6.0	%		—			0.0	%
Change in valuation of put warrants		—			0.0	%		960			2.6	%
Change in reserve on stockholder notes		—			0.0	%		(461	)		-1.2	%

Total other expenses		6,407			6.0	%		499			1.4	%

(Loss) income before income taxes		(60	)		0.0	%		1,862			5.0	%
(Benefit from) provision for income taxes		(23	)		0.0	%		1,073			2.9	%

Net (loss) income	$	(37	)		0.0	%	$	789			2.1	%


	Three Months Ended March 31,
	2004		2003		% Change
Consolidated:
Number of facilities at period end		26		5		420.0	%
Admissions		10,231		4,344		135.5	%
Patient days		211,563		45,785		362.1	%
Same-facility (1):
Number of facilities at period end		5		5		0.0	%
Admissions		4,619		4,344		6.3	%
Patient days		47,862		45,785		4.5	%

(1)

For the three months ended March 31, 2004, excludes statistics for facilities purchased from The Brown Schools in April 2003, Ramsay purchased in June 2003, Alliance Health Center purchased in November 2003, Calvary Center purchased in December 2003 and facilities purchased from Brentwood in March 2004.

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Revenue. Revenue from operations was $107.6 million for the quarter ended March 31, 2004 compared to $37.1 million for the quarter ended March 31, 2003, an increase of $70.5 million or 190.0%. Revenue from owned and leased inpatient facilities accounted for $86.4 million of the first quarter 2004 results compared to $26.1 million of the first quarter 2003 results, an increase of $60.3 million or 231.0%. The increase in revenues from owned and leased inpatient facilities relates primarily to revenues of $20.7 million in the first quarter of 2004 for the facilities acquired from The Brown Schools in April 2003, $31.0 million in the first quarter of 2004 for the owned and leased inpatient facilities acquired from Ramsay on June 30, 2003, and $6.7 million in the first quarter of 2004 for other acquisitions that occurred during 2003 and 2004. The remainder of the increase in revenues from owned and leased inpatient facilities is primarily attributable to growth in admissions and patient days of 6.3% and 4.5%, respectively, on a same-facility basis. Revenue from inpatient management contracts accounted for $21.1 million of the first quarter 2004 results compared to $11.0 million of the first quarter 2003 results, an increase of $10.1 million or 91.8%. The increase in revenues from inpatient management contracts relates primarily to revenues of $11.0 million in the first quarter of 2004 from inpatient management contracts acquired from Ramsay in June 2003.

Salaries, wages, and employee benefits. Salaries, wages and employee benefits expense was $59.0 million, or 54.8% of first quarter 2004 revenue, for the quarter ended March 31, 2004 compared to $17.8 million, or 47.9% of first quarter 2003 revenue, for the quarter ended March 31, 2003. Salaries, wages and employee benefits expense from owned and leased inpatient facilities was $46.8 million in the first quarter of 2004, or 54.1% of first quarter 2004 revenue from owned and leased inpatient facilities, compared to $13.7 million in the first quarter of 2003, or 52.5% of first quarter 2003 revenue from owned and leased inpatient facilities. On a same-facility basis, salaries, wages and employee benefits expense from owned and leased inpatient facilities was $14.4 million in the first quarter of 2004, or 51.5% of first quarter 2004 same-facility revenue from owned and leased inpatient facilities. This decrease in salaries, wages and employee benefits expense from owned and leased inpatient facilities as a percentage of revenue from owned and leased inpatient facilities, on a same-facility basis, relates to efforts within our owned and leased inpatient facilities to maintain staffing levels on higher volumes. Salaries, wages and employee benefits expense from inpatient management contracts was $10.8 million in the first quarter of 2004, or 51.3% of first quarter 2004 revenue from inpatient management contracts, compared to $3.4 million in the first quarter of 2003, or 30.9% of first quarter 2003 revenue from inpatient management contracts. On a same-facility basis, salaries, wages and employee benefits expense from inpatient management contracts was $2.9 million in the first quarter of 2004, or 28.8% of first quarter 2004 same-facility revenue from inpatient management contracts. Salaries, wages and employee benefits expense for our corporate office

was $1.4 million for the first quarter of 2004 compared to $674,000 for the first quarter of 2003 as the result of the addition of staff necessary to manage the inpatient facilities and inpatient management contracts acquired during 2003 and 2004.

Professional fees. Professional fees were $12.1 million, or 11.2% of first quarter 2004 revenue, for the quarter ended March 31, 2004 compared to $4.5 million, or 12.0% of first quarter 2003 revenue, for the quarter ended March 31, 2003. Professional fees from owned and leased inpatient facilities were $9.9 million in the first quarter of 2004, or 11.5% of first quarter 2004 revenue from owned and leased inpatient facilities, compared to $3.2 million in the first quarter of 2003, or 12.1% of first quarter 2003 revenue from owned and leased inpatient facilities. On a same-facility basis, professional fees from owned and leased inpatient facilities were $3.3 million in the first quarter of 2004, or 11.9% of first quarter 2004 same-facility revenue from owned and leased inpatient facilities. Professional fees from inpatient management contracts were $1.6 million in the first quarter of 2004, or 7.7% of first quarter 2004 revenue from inpatient management contracts, compared to $881,000 in the first quarter of 2003, or 8.0% of first quarter 2003 revenue from inpatient management contracts. Professional fees for our corporate office were $467,000 in the first quarter of 2004 compared to $415,000 in the first quarter of 2003.

Supplies. Supplies expense was $6.9 million, or 6.5% of first quarter 2004 revenue, for the quarter ended March 31, 2004 compared to $1.7 million, or 4.5% of first quarter 2003 revenue, for the quarter ended March 31, 2003. Supplies expense from owned and leased inpatient facilities was $6.0 million in the first quarter of 2004, or 7.0% of first quarter 2004 revenue from owned and leased inpatient facilities, compared to $1.7 million in the first quarter of 2003, or 6.4% of first quarter 2003 revenue from owned and leased inpatient facilities. Same-facility supplies expense from owned and leased inpatient facilities was $1.8 million in the first quarter of 2004, or 6.4% of first quarter 2004 same-facility revenue from owned and leased inpatient facilities. Supplies expense from inpatient management contracts was approximately $900,000 in the first quarter of 2004, or 4.2% of first quarter 2004 revenue from inpatient management contracts, compared to $11,000 in the first quarter of 2003, or less than 1% of first quarter 2003 revenue from inpatient management contracts. Supplies expense at owned and leased inpatient facilities has historically comprised the majority of our supplies expense as a whole; however, our inpatient management contracts segment began to utilize supplies to a larger extent due to the assumption of ten inpatient management contracts from Ramsay. Supplies expense for our corporate office consists of office supplies and is negligible to our supplies expense overall.

Provision for bad debts. The provision for bad debts was $2.0 million, or 1.9% of first quarter 2004 revenue, for the quarter ended March 31, 2004 compared to $1.3 million, or 3.6% of first quarter 2003 revenue, for the quarter ended March 31, 2003. The provision for bad debts at owned and leased inpatient facilities was $1.9 million in the first quarter of 2004, or 2.2% of first quarter 2004 owned and leased inpatient facility revenue, compared to $1.2 million in the first quarter of 2003, or 4.5% of first quarter 2003 owned and leased inpatient facility revenue. This reduction in provision for bad debts from owned and leased inpatient facilities as a percentage of owned and leased inpatient facility revenue was driven by the acquisition of inpatient facilities from The Brown Schools and Ramsay, which have fewer self-pay accounts. Historically, the provision for bad debts from inpatient management contracts has amounted to less than 1.0% of revenue from inpatient management contracts.

Other operating expenses. Other operating expenses were approximately $14.6 million, or 13.6% of first quarter 2004 revenue, for the quarter ended March 31, 2004 compared to $7.4 million, or 20.0% of first quarter 2003 revenue, for the quarter ended March 31, 2003. Other operating expenses for owned and leased inpatient facilities were $8.8 million for the first quarter of 2004, or 10.1% of first quarter 2004 owned and leased inpatient facility revenue, compared to $2.3 million in the first quarter of 2003, or 8.8% of first quarter 2003 owned and leased inpatient facility revenue. On a same-facility basis, other operating expenses from owned and leased inpatient facilities were $2.3 million in the first quarter of 2004, or 8.3% of first quarter 2004 same-facility revenue from owned and leased inpatient facilities. Other operating expenses for inpatient management contracts were $5.3 million in the first quarter of 2004, or 25.1% of first quarter 2004 inpatient management contract revenue, compared to $4.7 million in the first quarter of 2003, or 42.9% of first quarter 2003 inpatient management contract revenue. On a same-facility basis, other

operating expenses from inpatient management contracts were $4.3 million in the first quarter of 2004, or 43.0% of first quarter 2004 same-facility revenue from inpatient management contracts. Other operating expenses at our corporate office increased to $576,000 in the first quarter of 2004 from $378,000 in the first quarter of 2003.

Depreciation and amortization. Depreciation and amortization expense was $2.1 million for the quarter ended March 31, 2004 compared to $667,000 for the quarter ended March 31, 2003, an increase of $1.4 million or 217.4%. This increase in depreciation and amortization expense is primarily the result of the acquisitions of the inpatient facilities from The Brown Schools in April 2003, Ramsay in June 2003, Alliance Health Center in November 2003 and Brentwood in March 2004.

Interest expense. Interest expense was $4.5 million for the quarter ended March 31, 2004 compared to $1.4 million for the quarter ended March 31, 2003, an increase of $3.1 million or 221.4%. This increase is primarily attributable to the increase in our long-term debt from $39.2 million at March 31, 2003 to $191.9 million at March 31, 2004 due to our 10 5/8% senior subordinated note offering and the expansion of our senior credit facility.

Other expenses. Other expenses totaled $6.4 million for the quarter ended March 31, 2004 compared to $499,000 for the quarter ended March 31, 2003. Other expenses for the first quarter of 2004 consisted of $6.4 million in loss on the refinancing of our long-term debt. Other expenses for the first quarter of 2003 consisted of $960,000 in expense recorded to recognize the change in fair value of stock purchase “put” warrants and the release of $461,000 in reserves related to our stockholder notes. The stock purchase “put” warrants related to the issuance of debt to The 1818 Mezzanine Fund II, L.P. (the “1818 Fund”) in 2002. Our requirement to mark these warrants to market ended, effective April 1, 2003, when the 1818 Fund provided us with a written consent to waive its ability to require that we repurchase the warrants for cash.

Liquidity and Capital Resources

As of March 31, 2004, we had working capital of $52.5 million, including cash and cash equivalents of $34.2 million, compared to working capital of $66.9 million at December 31, 2003. The decrease in working capital is primarily due to the acquisition of Brentwood during the three months ended March 31, 2004, in which we used $29.8 million in cash and cash equivalents for the acquisition, offset by $17.0 million borrowed under our revolving line of credit.

Cash provided by operating activities was $15.0 million for the three months ended March 31, 2004 compared to cash provided by operating activities of $1.1 million for the three months ended March 31, 2003. The increase in cash flows from operating activities was primarily due to cash generated from our acquisitions of the operations of Ramsay and the six inpatient facilities from The Brown Schools in 2003.

Cash used in investing activities was $37.8 million for the three months ended March 31, 2004 compared to cash used in investing activities of approximately $800,000 for the three months ended March 31, 2003. Cash used in investing activities for the three months ended March 31, 2004 was the result of $29.8 million paid for the acquisition of Brentwood, $3.3 million used to make the final payment on a prior-year acquisition, $3.0 million used for capital expenditures and $1.5 million used for purchases of other assets. Cash used in investing activities for the three months ended March 31, 2003 was primarily the result of cash used for capital expenditures of approximately $630,000.

Cash provided by financing activities was approximately $12.1 million for the three months ended March 31, 2004 compared to cash provided by financing activities of approximately $1.3 million for the three months ended March 31, 2003. Cash provided by financing activities for the three months ended March 31, 2004 was primarily the result of $17.0 million borrowed under our revolving line of credit to purchase Brentwood, offset by cash paid to exit our credit facility with CapSource of approximately $3.8

million. Cash provided by financing activities for the three months ended March 31, 2003 consisted of borrowings under our revolving line of credit.

On January 6, 2004, we terminated our senior credit facility with CapSource and entered into a new credit agreement (the “Credit Agreement”) with Bank of America that provides for a revolving credit facility of up to $50.0 million. As a result of the termination of our senior credit facility with CapSource, 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. Our credit facility 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 March 31, 2004, the interest rate under the revolving line of credit was 3.625%. Until the maturity date, we may borrow, repay and re-borrow an amount not to exceed the lesser of $50.0 million or the borrowing base (as defined in the Credit Agreement). As of March 31, 2004, we had $17.0 million of borrowings outstanding and $33.0 million available under the revolving line of credit. We must pay on a quarterly basis a commitment fee in the amount of 0.5% per annum on the unused portion of our revolving credit facility and a utilization fee in the amount of 0.25% per annum on the unused portion of revolving facility when borrowings under the revolving credit facility are less than $16.5 million. Such fees were approximately $65,000 for the three months ended March 31, 2004.

Our revolving credit facility contains customary covenants which include: (1) a limitation on capital expenditures and investments, sales of assets, mergers, changes of ownership, new principal lines of business, indebtedness, dividends and redemptions, (2) various financial covenants and (3) cross-default covenants triggered by a default of any other indebtedness of at least $3.0 million. As of March 31, 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 long-term 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						After
	Total		1 year		1-3 years		4-5 years		5 years
Long-term debt (1)	$	191,801	$	1,023	$	17,714	$	550	$	172,514
Lease obligations		23,519		5,886		9,016		6,009		2,608

	$	215,320	$	6,909	$	26,730	$	6,559	$	175,122

(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 $170 million and $167 million as of March 31, 2004 and December 31, 2003, respectively. The carrying value of our other total long-term debt, including current maturities, of $41.8 million and $25.0 million at March 31, 2004 and December 31, 2003, respectively, approximated fair value. We had $37.0 million of variable rate debt outstanding at March 31, 2004, including our interest rate swap agreement. At the March 31, 2004 borrowing level, a hypothetical 10% adverse change in interest rates, would decrease our net income and cash flows by approximately $200,000.

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 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 and assumptions subject to interpretation. We estimate the allowance for contractual discounts on a payer-specific basis given our interpretation of the applicable regulations or contract terms. The services authorized and provided and related reimbursement are often subject to interpretation that could result in payments that differ from our estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by our management.

Professional and General Liability

We are subject to medical malpractice and other lawsuits due to the nature of the services we provide. Due to our acquisition of Ramsay, we have two distinct insurance programs that cover our inpatient facilities. For our inpatient facilities that were not acquired from Ramsay, we have obtained professional and general liability insurance for claims in excess of $3.0 million with an insured limit of $10.0 million. In December 2003, we increased the insured limit to $20.0 million. For the inpatient facilities acquired from Ramsay, we have obtained professional and general liability insurance for claims in excess of $500,000 with an insured limit of $25.0 million. These policies include umbrella coverage of $20.0 million and $25.0 million, respectively. The self-insured reserves for professional and general liability risks are calculated based on historical claims, demographic factors, industry trends, severity factors, and other actuarial assumptions calculated by an independent third party. This self-insurance reserve is discounted to its present value using a 5% discount rate. This estimated accrual for professional and general liabilities could be significantly affected should current and future occurrences differ from historical claim trends and expectations. We have established a captive insurance company to manage this additional self-insured retention for our inpatient facilities not acquired from Ramsay. We plan to merge these plans in the near future. While claims are monitored closely when estimating professional and general liability accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in these estimates.

Income taxes

As part of our process for preparing consolidated financial statements, our management is required to compute income taxes in each of the jurisdictions in which we operate. This process involves estimating the current tax benefit or expense of future deductible and taxable temporary differences. The future deductible and taxable temporary differences are recorded as deferred tax assets and liabilities that are components of our balance sheet. Management then assesses our ability to realize the deferred tax assets based on reversals of deferred tax liabilities and, if necessary, estimates of future taxable income. If management determines that some or all of a deferred tax asset will more likely than not be realized, then a valuation allowance is recorded against the deferred tax asset. Management must also assess the impact of our acquisitions on the realization of deferred tax assets subject to a valuation allowance to determine if all or a portion of the valuation allowance will be offset by reversing taxable differences or future taxable income of acquired entities. To the extent the valuation allowance can be reversed due to the estimated future taxable income of acquired entities, then our valuation allowance is reduced accordingly as an adjustment to purchase price.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The information required by this item is provided under Part I, Item 2 of this Quarterly Report under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital

Resources” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Contractual Obligations.”

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief accounting officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief accounting officer have concluded that our disclosure controls and procedures effectively and timely provide them with material information relating to Psychiatric Solutions and its consolidated subsidiaries required to be disclosed in the reports we file or submit under the Exchange Act.

Changes in Internal Controls Over Financial Reporting

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonable likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to various claims and legal actions that arise in the ordinary course of our business. In the opinion of management, we are not currently a party to any proceeding which 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


	2.1		Asset Purchase Agreement, dated February 23, 2004, by and among Psychiatric Solutions, Inc., Brentwood Health Management, L.L.C., Brentwood, A Behavioral Health Company, L.L.C. and River Rouge, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed on March 3, 2004).

	2.2		Asset Purchase Agreement, dated February 23, 2004, by and among Psychiatric Solutions, Inc., Brentwood Health Management of MS, LLC, and Turner-Windham of Mississippi, LLC (incorporated by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K, filed on March 3, 2004).

	3.1		Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on March 9, 1998 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 1998 (the “1998 10-K)).

	3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation of PMR Corporation, filed with the Delaware Secretary of State on August 5, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2002).

	3.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Psychiatric


			Solutions, Inc., filed with the Delaware Secretary of State on March 21, 2003 (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement filed January 22, 2003).

	3.4		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 1997 (the “1997 10-K)).

	4.1		Reference is made to Exhibits 3.1 through 3.4.

	4.2		Common Stock Specimen Certificate (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the “2002 10-K”)).

	4.3		Contingent Value Rights Agreement, dated August 2, 2002 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on August 5, 2002).

	4.4		Stock Purchase Agreement, dated as of January 6, 2003, by and among Psychiatric Solutions, Inc. and the Purchasers named therein (incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement, filed January 22, 2003).

	4.5		Registration Rights Agreement, dated as of January 6, 2003, by and among Psychiatric Solutions, Inc. and the Purchasers named therein (incorporated by reference to Appendix C of the Company’s Definitive Proxy Statement, filed January 22, 2003).

	4.6		Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of the Company (Incorporated by reference to Appendix D of the Company’s Definitive Proxy Statement filed January 22, 2003).

	4.7		Indenture, dated as of June 30, 2003, between Psychiatric Solutions, Inc., the Guarantors named therein and Wachovia Bank, National Association, as Trustee (incorporated by reference to the Company’s Registration Statement on Form S-4, filed on July 30, 2003 (Reg. No. 333-107453) (the “2003 S-4”)).

	4.8		Form of Notes (included in Exhibit 4.7).

	4.9		Purchase Agreement, dated as of June 19, 2003, between Psychiatric Solutions, Inc., the Guarantors named therein, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jefferies & Company, Inc. (incorporated by reference to Exhibit 4.12 to the 2003 S-4).

	4.10		Exchange and Registration Rights Agreement, dated as of June 30, 2003, among Psychiatric Solutions, Inc., the Guarantors named therein, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Jefferies & Company, Inc. (incorporated by reference to Exhibit 4.13 to the 2003 S-4).

	10.1*		Credit Agreement, dated as of January 6, 2004, among Psychiatric Solutions, Inc., the Guarantors named therein, Bank of America, N.A., as administrative agent, swing line lender and l/c issuer, and the Lenders thereunder.

	10.2*		Interest Rate Swap Agreement, dated January 28, 2004, between Bank of America, N.A. and Psychiatric Solutions, Inc.

	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.

(b) Reports on Form 8-K

1. On March 3, 2004, we filed a Report on Form 8-K, which reported the issuance of a press release announcing the completion of the acquisition of two freestanding psychiatric facilities from Brentwood Behavioral Health.

2. On March 11, 2004, we furnished pursuant to Item 12 of Form 8-K, a copy of our press release announcing our operating results for the fourth quarter and year ended December 31, 2003.

Notwithstanding the foregoing, information furnished under Item 9 and Item 12 of our Current Reports on Form 8-K, including the related exhibits, shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

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: May 14, 2004		/s/ Jack E. Polson Jack E. Polson Chief Accounting Officer

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1.		On March 3, 2004, we filed a Report on Form 8-K, which reported the issuance of a press release announcing the completion of the acquisition of two freestanding psychiatric facilities from Brentwood Behavioral Health.

2.		On March 11, 2004, we furnished pursuant to Item 12 of Form 8-K, a copy of our press release announcing our operating results for the fourth quarter and year ended December 31, 2003.