UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 0-20488

PSYCHIATRIC SOLUTIONS, INC.

840 Crescent Centre Drive, Suite 460
Franklin, TN 37067
(Address of Principal Executive Offices, Including Zip Code)

(615) 312-5700
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     As of August 6, 2004, 14,648,484 shares of the registrant’s common stock were outstanding.

PSYCHIATRIC SOLUTIONS, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PSYCHIATRIC SOLUTIONS, INC.

See notes to condensed consolidated financial statements

1

See notes to condensed consolidated financial statements

2

PSYCHIATRIC SOLUTIONS, INC.

See notes to condensed consolidated financial statements

3

PSYCHIATRIC SOLUTIONS, INC.

1. Recent Developments

On June 30, 2004, we completed the acquisition of substantially all the assets of Alliance Behavioral Health Group (“Alliance Behavioral”), a system of inpatient behavioral health care facilities with 144 beds located in Santa Teresa, New Mexico, for $13.0 million. Because the acquisition of Alliance Behavioral was completed at the close of business on June 30, 2004, it had no impact on our results of operations for the three and six months ended June 30, 2004.

On June 11, 2004, we completed the acquisition of substantially all the assets of Piedmont Behavioral Health Center LLC (“Piedmont”), a 78 bed inpatient behavioral health care facility located in Leesburg, Virginia, for $10.0 million.

On June 4, 2004, we amended and increased our revolving credit facility with Bank of America, N.A. (“Bank of America”) to $125 million from its previous level of $50 million. In addition to several of our current lenders increasing their commitment under our revolving credit facility, several new lenders agreed to provide lending commitments.

On June 1, 2004, we completed the acquisition of four inpatient behavioral health care facilities from Heartland Healthcare (“Heartland”) for $47.0 million. The four facilities, located in Summit, New Jersey; Ft. Lauderdale; Florida; Arlington, Texas; and Eden Prairie, Minnesota, have a total of 360 beds.

On May 1, 2004, we completed the acquisition of all of the membership interests of Palmetto Behavioral Health System, LLC (“Palmetto”), an operator of two inpatient behavioral health care facilities, for approximately $6.0 million. The two inpatient facilities, located in Charleston and Florence, South Carolina, have 161 beds.

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

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for audited financial statements. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position have been included. The majority of our expenses are “cost of revenue” items. General and administrative expenses were approximately 2% of net revenue for the six months ended June 30, 2004. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the full year of 2004. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 25, 2004.

4

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

3. Earnings Per Share

Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share, requires dual presentation of basic and diluted earnings per share by entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of outstanding securities that, upon exercise or conversion, could share in our earnings. We have calculated our earnings per share in accordance with SFAS No. 128 for all periods presented.

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

The computation of diluted loss per share for the three months ended June 30, 2003 does not include accrued dividends on series A convertible preferred stock of $177,000, interest on convertible notes of $43,000, approximately 475,000 shares representing potentially dilutive increments of stock options and warrants outstanding, approximately 225,000 shares representing the weighted average of convertible debt outstanding during the period and approximately 2,572,000 shares representing the weighted average of series A convertible preferred stock outstanding during the period as the effects would have been anti-dilutive. The computation of diluted earnings per share for the six months ended June 30, 2003 does not include accrued dividends on series A convertible preferred stock of $177,000, interest on convertible notes of $124,000, approximately 323,000 shares representing the weighted average of convertible debt outstanding during the period and approximately 1,286,000 shares representing the weighted average of series A convertible preferred stock outstanding during the period as the effects would have been anti-dilutive.

4. Stock-Based Compensation

We account for our stock option plans using the intrinsic value method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Pursuant to APB Opinion No. 25, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. We plan to adopt the fair-value method of accounting for stock options when required by accounting principles generally accepted in the United States.

Pro forma information regarding interim net income and earnings per share is required by SFAS No. 148, and has been determined as if we had accounted for our employee stock options under the fair value

5

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

method. The fair value of options we have granted was estimated using the Black-Scholes option pricing model.

Option valuation models require the input of highly subjective assumptions. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

For purposes of pro forma disclosure, the estimated fair value of the options at grant date is amortized to expense over the option’s vesting period. The pro forma information follows (in thousands, except per share amounts):

5. Mergers and Acquisitions

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

On June 30, 2004, we completed the acquisition of substantially all the assets of Alliance Behavioral, a system of inpatient behavioral health care facilities with 144 beds located in Santa Teresa, New Mexico, for $13.0 million. We paid for the acquisition of Alliance Behavioral with borrowings under our revolving credit facility.

On June 11, 2004, we completed the acquisition of Piedmont, a 78 bed inpatient behavioral health care facility located in Leesburg, Virginia, for $10.0 million. We paid for the acquisition of Piedmont with borrowings under our revolving credit facility.

On June 1, 2004, we completed the acquisition of four inpatient behavioral health care facilities from Heartland for $47.0 million. The four facilities, located in Summit, New Jersey; Ft. Lauderdale, Florida; Arlington, Texas; and Eden Prairie, Minnesota, have a total of 360 beds. We drew down $28.0 million on our revolving credit facility and paid for the remainder of the acquisition with cash on hand.

On May 1, 2004, we completed the acquisition of all of the membership interests of Palmetto, an operator of two inpatient behavioral health care facilities, for approximately $6.0 million. The two inpatient facilities, located in Charleston and Florence, South Carolina, have 161 beds. We paid for the acquisition of Palmetto with cash on hand.

On March 1, 2004, we acquired two inpatient psychiatric facilities from Brentwood Behavioral Health (“Brentwood”) for $29.8 million cash with an arn-out of up to $5.0 million contingent upon future financial results. We drew down $17.0 million on our revolving line of credit and paid for the remainder of

6

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

the acquisition price with cash on hand. The inpatient facilities, which have an aggregate of 311 licensed beds, are located in Shreveport, Louisiana and Jackson, Mississippi.

On December 16, 2003, we acquired the 50-bed Calvary Center located in Phoenix, Arizona for approximately $4.0 million. We paid $650,000 of the purchase price on the acquisition date with the balance paid in January 2004 with cash on hand.

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

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

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

The purchase price allocations for Brentwood, Palmetto, Heartland, Piedmont and Alliance Behavioral are preliminary as of June 30, 2004, pending receipt of asset appraisals.

The following represents the unaudited pro forma results of consolidated operations as if the acquisitions of Brentwood, Palmetto, Heartland, Piedmont and Alliance Behavioral had occurred at the beginning of the periods presented, after giving effect to certain adjustments, including the depreciation and amortization of the assets acquired based upon their estimated fair values and changes in interest expense resulting from changes in consolidated debt (dollars in thousands, except per share data):

7

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

The pro forma information given does not purport to be indicative of what our results of operations would have been if the acquisitions had in fact occurred at the beginning of the periods presented, and is not intended to be a projection of the impact on our future results or trends. The pro forma information given includes a $6.4 million loss from refinancing long-term debt for the six months ended June 30, 2004, expense of $960,000 to revalue put warrants for the six months ended June 30, 2003 and income of $84,000 and $545,000 to release reserves on stockholder notes for the three and six months ended June 30, 2003.

6. Long-term debt

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

Senior Credit Facility

On January 6, 2004, we terminated our senior credit facility with CapitalSource Finance LLC (“CapSource”) and entered into a new credit agreement (the “Credit Agreement”) with Bank of America that provides for a revolving credit facility of up to $50.0 million. As a result of the termination of our senior credit facility with CapSource, we recorded a loss on refinancing long-term debt of $6.4 million for the quarter ended March 31, 2004, including approximately $3.8 million paid as a termination fee to CapSource. On June 4, 2004, our credit agreement with Bank of America was amended and expanded to provide for a revolving credit facility of up to $125.0 million. Our credit facility with Bank of America is secured by substantially all of the personal property owned by us or our subsidiaries, substantially all real property owned by us or our subsidiaries that has a value in excess of $2.5 million and the stock of our operating subsidiaries. In addition, the credit facility is fully and unconditionally guaranteed by substantially all of our operating subsidiaries. The revolving line of credit accrues interest at our choice of the “Base Rate” or the “Eurodollar Rate” (as defined in the Credit Agreement) and is due in January 2007. The “Base Rate” and “Eurodollar Rate” fluctuate based upon market rates and certain leverage ratios, as defined in the Credit Agreement. At June 30, 2004, the weighted average interest rate under the revolving line of credit was 3.8%. Until the maturity date, we may borrow, repay and re-borrow an amount not to exceed the lesser of $125.0 million or the borrowing base (as defined in the Credit Agreement). As of June 30, 2004, we had $75.0 million of borrowings outstanding and $42.3 million immediately available under the revolving line of credit. We must pay on a quarterly basis a commitment fee in the amount of 0.5% per annum on the unused portion of our revolving credit facility and a utilization fee in the amount of 0.25% per annum on the unused portion of the revolving credit facility when borrowings under the revolving

8

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

credit facility are less than $41.3 million. Such fees were approximately $50,000 and $115,000 for the three and six months ended June 30, 2004, respectively.

Our revolving credit facility contains customary covenants which include: (1) a limitation on capital expenditures and investments, sales of assets, mergers, changes of ownership, new principal lines of business, indebtedness, dividends and redemptions; (2) various financial covenants; and (3) cross-default covenants triggered by a default of any other indebtedness of at least $3.0 million. As of June 30, 2004, we were in compliance with all debt covenant requirements. If we violate one or more of these covenants, amounts outstanding under the revolving credit facility could become immediately payable and additional borrowings could be restricted.

10 5/8% Senior Subordinated Notes

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

Mortgage Loans

During 2002 and 2003, we borrowed approximately $23.8 million under mortgage loan agreements insured by the U.S. Department of Housing and Urban Development (“HUD”). These mortgage loans are secured by real estate located at Holly Hill Hospital in Raleigh, North Carolina, West Oaks Hospital in Houston, Texas, and Riveredge Hospital near Chicago, Illinois. Interest accrues on the Holly Hill, West Oaks and Riveredge HUD loans at 5.95%, 5.85% and 5.65%, respectively, and principal and interest are payable in 420 monthly installments through December 2037, September 2038 and December 2038, respectively. We used the proceeds from the mortgage loans to repay approximately $4.4 million in 2002 and $17.0 million in 2003 of our term debt under our former senior credit facility with CapSource, pay certain financing costs, and fund required escrow amounts for future improvements to the property. The carrying amount of assets held as collateral approximated $23.8 million as of June 30, 2004.

Subordinated Seller Notes

In connection with an acquisition in 2000, we issued a promissory note payable in the amount of $400,000 bearing interest at 9%. The principal amount we owe on this note is $80,000 at June 30, 2004, which is due on April 1, 2005. Accrued interest is due and payable on the first day of each calendar quarter.

We issued two promissory notes totaling $4.5 million in connection with our acquisitions of three facilities in 2001. At June 30, 2004, one note with a current principal balance of $577,000 remained outstanding. This note accrues interest at 9% per annum and is due June 30, 2005. Among other customary covenants, the note contains cross-default covenants triggered by a default of any other indebtedness of at least $1.0 million. We were in compliance with these covenants as of June 30, 2004.

7. Mezzanine Equity and Stockholders’ Equity

We issued 4,545,454 shares of our series A convertible preferred stock during the quarter ended June 30, 2003. Each share of series A convertible preferred stock is convertible into one share of our common stock. Holders of our series A convertible preferred stock are entitled to receive pay-in-kind dividends,

9

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

compounded quarterly, equal to 5% per share of the original share price through March 31, 2005. Thereafter, pay-in-kind dividends will compound quarterly at 7% per share of the original share price. Because we may be required to redeem the series A convertible preferred stock upon certain change of control events that may not be within our control, the series A convertible preferred stock has been classified outside of our permanent stockholders’ equity. During the quarter ended June 30, 2004, certain holders of our series A convertible preferred stock converted 2,272,727 shares of series A convertible preferred stock and related accrued dividends into 2,389,428 shares of our common stock.

As a part of the merger with PMR Corporation (“PMR”), we became the holder of promissory notes with certain stockholders of PMR. A certain provision of the stockholder notes allowed the stockholders to repay those notes with our common stock at the higher of a stated price or the market value of our common stock. As the stated price was higher than the market value at December 31, 2002, we recorded a reserve on the promissory notes equal to the difference between the stated price and market value. Due to the increase in the market price of our common stock during the three and six months ended June 30, 2003, we released $84,000 and $545,000, respectively, of the reserve on the stockholder notes. At December 31, 2003, we did not maintain a reserve balance on our stockholder notes because the market value exceeded the stated price. The right to repay the stockholder notes with our common stock expired on December 31, 2003. The current outstanding balance of these notes is $338,000.

8. Income Taxes

The provision recorded for the three and six months ended June 30, 2004 reflects an effective tax rate of approximately 38%. The benefit/provision recorded for the three and six months ended June 30, 2003 reflects an effective tax rate of approximately 38% and 78%, respectively, due to the non-deductible nature of the change in valuation of the put warrants during 2003.

9. Disclosures About Reportable Segments

In accordance with the criteria of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, we operate two reportable segments: (1) owned and leased facilities and (2) management contracts. Each of our inpatient facilities and inpatient management contracts qualifies as an operating segment under SFAS No. 131; however, none is individually material. We have aggregated our operations into two reportable segments based on characteristics of the services provided. As of June 30, 2004, the owned and leased facilities segment provides inpatient mental and behavioral health services in its 25 owned and 9 leased facilities in 19 states. As of June 30, 2004, the management contracts segment provides inpatient psychiatric management and development services to 41 behavioral health units in third party medical/surgical hospitals and clinics in 15 states and provides mental and behavioral health services to 10 inpatient facilities for state government agencies. Activities classified as “Corporate and Other” in the following schedule relate primarily to unallocated home office items.

Adjusted EBITDA is a non-GAAP financial measure and is defined as net income (loss) before interest expense (net of interest income), income taxes, depreciation, amortization, stock compensation, inter-segment expenses and other items included in the caption labeled “Other expenses.” These other expenses may occur in future periods, but the amounts recognized can vary significantly from period to period and do not directly relate to the ongoing operations of our health care facilities. Our management relies on adjusted EBITDA as the primary measure to review and assess the operating performance of our inpatient facilities and their management teams. We believe it is useful to investors to provide disclosures of our operating results on the same basis as that used by management. Management and investors also review adjusted EBITDA to evaluate our overall performance and to compare our current operating results with corresponding periods and with other companies in the health care industry. You should not consider adjusted EBITDA in isolation or as a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United

10

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

States. Because adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and is susceptible to varying calculations, it may not be comparable to similarly titled measures of other companies. The following is a financial summary by business segment for the periods indicated (dollars in thousands):

11

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

Assets totaling approximately $85.1 million representing the unallocated purchase price of Ramsay at June 30, 2003 have been reclassified to our owned and leased facilities segment from corporate and other for the three and six months ended June 30, 2003.

10. Recent Pronouncements

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after

12

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

January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The adoption of FIN 46 has not had a material effect on our results of operations or financial position.

11. Financial Information for Psychiatric Solutions and Its Subsidiaries

We conduct substantially all of our business through our subsidiaries. Presented below is condensed consolidated financial information for us and our subsidiaries as of June 30, 2004 and December 31, 2003, and for the three and six months ended June 30, 2004 and 2003. The information segregates the parent company (Psychiatric Solutions, Inc.), the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and eliminations. All of the subsidiary guarantees are both full and unconditional and joint and several.

Psychiatric Solutions, Inc.
Condensed Consolidating Balance Sheet
As of June 30, 2004
(Unaudited, dollars in thousands)

13

14

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

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2003
(Unaudited, dollars in thousands)

Psychiatric Solutions, Inc.
Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2004
(Unaudited, dollars in thousands)