##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 for the quarterly period ended June 30, 2006
 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.
  DELAWARE
(State or Other Jurisdiction of Incorporation or
Organization)
    
    23-2491707
(I.R.S. Employer Identification No.)
 840 Crescent Centre Drive, Suite 460
Franklin, TN 37067
 (615) 312-5700
 þ o
  þ o o
 o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 (Unaudited)
    
    
    1Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 2006 and 2005 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2006 and 2005 (Unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 6. Exhibits
    
    
    25EX-2.1 STOCK PURCHASE AGREEMENT 05/26/06EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CAOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CAO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited, in thousands)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    56,453
    
    
    $
    54,699Accounts receivable, less allowance for doubtful accounts of
$17,919 and $15,355, respectively
    
    
    147,123
    
    
    
    132,288Prepaids and other
    
    
    48,146
    
    
    
    53,473Total current assets
    
    
    251,722
    
    
    
    240,460Property and equipment, net of accumulated depreciation
    
    
    409,284
    
    
    
    378,163Cost in excess of net assets acquired
    
    
    548,373
    
    
    
    526,536Other assets
    
    
    27,494
    
    
    
    29,872Total assets
    
    $
    1,236,873
    
    
    $
    1,175,031LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,108
    
    
    $
    18,726Salaries and benefits payable
    
    
    46,131
    
    
    
    46,872Other accrued liabilities
    
    
    37,026
    
    
    
    34,363Current portion of long-term debt
    
    
    364
    
    
    
    325Total current liabilities
    
    
    101,629
    
    
    
    100,286Long-term debt, less current portion
    
    
    485,808
    
    
    
    482,064Deferred tax liability
    
    
    42,537
    
    
    
    32,151Other liabilities
    
    
    23,403
    
    
    
    20,818Total liabilities
    
    
    653,377
    
    
    
    635,319Stockholders equity:Common stock, $0.01 par value, 125,000 shares authorized;
53,054 and 52,430 issued and outstanding, respectively
    
    
    531
    
    
    
    524Additional paid-in capital
    
    
    511,992
    
    
    
    495,768Retained earnings
    
    
    70,973
    
    
    
    43,420Total stockholders equity
    
    
    583,496
    
    
    
    539,712Total liabilities and stockholders equity
    
    $
    1,236,873
    
    
    $
    1,175,031
  1




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited, in thousands except for per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    248,404
    
    
    $
    139,490
    
    
    $
    490,716
    
    
    $
    273,758Salaries, wages and employee benefits (including share-based compensation of $2,136 and $8,390 for the three
and six months ended June 30, 2006, respectively)
    
    
    138,133
    
    
    
    74,739
    
    
    
    277,932
    
    
    
    148,019Professional fees
    
    
    24,286
    
    
    
    14,582
    
    
    
    47,001
    
    
    
    28,615Supplies
    
    
    14,417
    
    
    
    8,655
    
    
    
    28,431
    
    
    
    16,917Rentals and leases
    
    
    3,296
    
    
    
    2,391
    
    
    
    6,643
    
    
    
    4,661Other operating expenses
    
    
    23,948
    
    
    
    15,736
    
    
    
    47,669
    
    
    
    30,891Provision for doubtful accounts
    
    
    4,592
    
    
    
    2,657
    
    
    
    9,358
    
    
    
    5,313Depreciation and amortization
    
    
    4,867
    
    
    
    3,044
    
    
    
    9,612
    
    
    
    5,924Interest expense
    
    
    9,270
    
    
    
    3,310
    
    
    
    18,478
    
    
    
    6,815Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,990222,809
    
    
    
    125,114
    
    
    
    445,124
    
    
    
    254,145Income from continuing operations
before income taxes
    
    
    25,595
    
    
    
    14,376
    
    
    
    45,592
    
    
    
    19,613Provision for income taxes
    
    
    9,726
    
    
    
    5,607
    
    
    
    17,325
    
    
    
    7,649Income from continuing operations
    
    
    15,869
    
    
    
    8,769
    
    
    
    28,267
    
    
    
    11,964(Loss) income from discontinued operations, net of
income tax benefit (provision) of $311, $39, $437
and $(45) for the respective three and six month
periods in 2006 and 2005
    
    
    (508
    )
    
    
    (62
    )
    
    
    (714
    )
    
    
    71Net income
    
    $
    15,361
    
    
    $
    8,707
    
    
    $
    27,553
    
    
    $
    12,035Basic earnings per share:Income from continuing operations
    
    $
    0.30
    
    
    $
    0.21
    
    
    $
    0.54
    
    
    $
    0.29(Loss) income from discontinued operations,
net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )
    
    
    Net income
    
    $
    0.29
    
    
    $
    0.21
    
    
    $
    0.52
    
    
    $
    0.29Diluted earnings per share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.21
    
    
    $
    0.52
    
    
    $
    0.28(Loss) income from discontinued operations,
net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.28
    
    
    $
    0.21
    
    
    $
    0.51
    
    
    $
    0.28Shares used in computing per share amounts:Basic
    
    
    52,913
    
    
    
    41,029
    
    
    
    52,715
    
    
    
    40,997Diluted
    
    
    54,070
    
    
    
    42,457
    
    
    
    53,981
    
    
    
    42,402
  2




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Six Months Ended June 30,2006
    
    
    2005Operating activities:Net income
    
    $
    27,553
    
    
    $
    12,035Adjustments to reconcile net income to
net cash provided by continuing
operating activities:Depreciation and amortization
    
    
    9,612
    
    
    
    5,924Share-based compensation
    
    
    8,390
    
    
    
    Amortization of loan costs
    
    
    811
    
    
    
    338Loss on refinancing long-term debt
    
    
    
    
    
    
    6,990Loss (income) from discontinued operations, net of taxes
    
    
    714
    
    
    
    (71
    )Change in income tax assets and liabilities
    
    
    16,283
    
    
    
    1,446Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    (9,267
    )
    
    
    (5,001
    )Prepaids and other current assets
    
    
    (4,999
    )
    
    
    (2,551
    )Accounts payable
    
    
    (1,339
    )
    
    
    434Salaries and benefits payable
    
    
    456
    
    
    
    3,957Accrued liabilities and other liabilities
    
    
    2,115
    
    
    
    3,378Net cash provided by continuing operating activities
    
    
    50,329
    
    
    
    26,879Net cash provided by discontinued operating activities
    
    
    1,708
    
    
    
    142Net cash provided by operating activities
    
    
    52,037
    
    
    
    27,021Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (44,471
    )
    
    
    (5,793
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    (13,123
    )
    
    
    (10,029
    )Cash paid for investments in equity method investees
    
    
    
    
    
    
    (840
    )Other assets
    
    
    (317
    )
    
    
    (883
    )Net cash used in investing activities
    
    
    (57,911
    )
    
    
    (17,545
    )Financing activities:Principal payments on long-term debt
    
    
    (180
    )
    
    
    (50,427
    )Net increase in revolving credit facility
    
    
    
    
    
    
    20,000Payment of loan and issuance costs
    
    
    (40
    )
    
    
    (487
    )Refinancing of long-term debt
    
    
    
    
    
    
    (5,316
    )Excess tax benefits from share-based payment arrangements
    
    
    4,248
    
    
    
    Proceeds from issuance of common stock upon exercise
of stock options
    
    
    3,600
    
    
    
    1,092Net cash provided by (used in) financing activities
    
    
    7,628
    
    
    
    (35,138
    )Net increase (decrease) in cash
    
    
    1,754
    
    
    
    (25,662
    )Cash and cash equivalents at beginning of the period
    
    
    54,699
    
    
    
    33,451Cash and cash equivalents at end of the period
    
    $
    56,453
    
    
    $
    7,789Effect of Acquisitions:Assets acquired, net of cash acquired
    
    $
    54,164
    
    
    $
    Cash paid for prior year acquisitions
    
    
    
    
    
    
    5,793Liabilities assumed
    
    
    (5,730
    )
    
    
    Long-term debt assumed
    
    
    (3,963
    )
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    44,471
    
    
    $
    5,793
  3




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##### Table of Contents



1. Recent Developments
    2. Basis of Presentation
  3. Earnings Per Share
 Earnings per Share
 4




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Income from continuing operations
    
    $
    15,869
    
    
    $
    8,769
    
    
    $
    28,267
    
    
    $
    11,964(Loss) income from discontinued operations, net of taxes
    
    
    (508
    )
    
    
    (62
    )
    
    
    (714
    )
    
    
    71Net income
    
    $
    15,361
    
    
    $
    8,707
    
    
    $
    27,553
    
    
    $
    12,035Denominator:Weighted average shares outstanding for basic earnings per share
    
    
    52,913
    
    
    
    41,029
    
    
    
    52,715
    
    
    
    40,997Effects of dilutive stock options and warrants outstanding
    
    
    1,157
    
    
    
    1,428
    
    
    
    1,266
    
    
    
    1,405Shares used in computing diluted earnings per common share
    
    
    54,070
    
    
    
    42,457
    
    
    
    53,981
    
    
    
    42,402Basic earnings per share:Income from continuing operations
    
    $
    0.30
    
    
    $
    0.21
    
    
    $
    0.54
    
    
    $
    0.29(Loss) income from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )
    
    
    $
    0.29
    
    
    $
    0.21
    
    
    $
    0.52
    
    
    $
    0.29Diluted earnings per share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.21
    
    
    $
    0.52
    
    
    $
    0.28(Loss) income from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    $
    0.28
    
    
    $
    0.21
    
    
    $
    0.51
    
    
    $
    0.28
 4. Share-Based Compensation
 Share Based Payment Accounting for Stock-Based Compensation, Accounting
for Stock Issued to Employees
   5




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2005Net income
    
    $
    8,707
    
    
    $
    12,035Pro forma compensation expense from stock options, net of taxes
    
    
    881
    
    
    
    2,705Pro forma net income
    
    $
    7,826
    
    
    $
    9,330Basic earnings per share, as reported
    
    $
    0.21
    
    
    $
    0.29Diluted earnings per share, as reported
    
    $
    0.21
    
    
    $
    0.28Basic pro forma earnings per share
    
    $
    0.19
    
    
    $
    0.23Diluted pro forma earnings per share
    
    $
    0.18
    
    
    $
    0.22
    WeightedWeighted
    
    AverageNumber
    
    Average
    
    Remaining
    
    Aggregateof
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Term (in years)
    
    ValueOutstanding at December 31, 2005
    
    
    4,472
    
    
    $
    13.01
    
    
    
    n/a
    
    
    
    n/aGranted
    
    
    1,932
    
    
    $
    32.81
    
    
    
    n/a
    
    
    
    n/aCanceled
    
    
    (45
    )
    
    $
    15.02
    
    
    
    n/a
    
    
    
    n/aExercised
    
    
    (570
    )
    
    $
    6.32
    
    
    
    n/a
    
    
    
    n/aOutstanding at June 30, 2006
    
    
    5,789
    
    
    $
    20.01
    
    
    
    8
    
    
    $
    59,123Exercisable at June 30, 2006
    
    
    2,093
    
    
    $
    14.69
    
    
    
    8
    
    
    $
    31,391
  Six Months Ended June 30,2006
    
    2005Weighted average grant-date fair value of options
    
    $
    9.75
    
    
    $
    7.50Risk-free interest rate
    
    
    5
    %
    
    
    4
    %Expected volatility
    
    
    30
    %
    
    
    33
    %Expected term (in years)
    
    
    4
    
    
    
    5Dividend yield
    
    
    0
    %
    
    
    0
    %
 6




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##### Table of Contents



5. Mergers and Acquisitions
    6. Long-term debt
  June 30,
    
    
    December 31,2006
    
    
    2005Senior credit facility:Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest of 6.9% and 6.2% at June 30, 2006
and December 31, 2005, respectively
    
    $
    200,000
    
    
    $
    200,0007 3/4% Senior Subordinated Notes due July 15, 2015
    
    
    220,000
    
    
    
    220,00010 5/8% Senior Subordinated Notes due June 15, 2013
    
    
    38,681
    
    
    
    38,681Mortgage loans on facilities, maturing in 2036, 2037 and 2038
and bearing fixed interest rates of 5.65% to 7.6%
    
    
    27,206
    
    
    
    23,377Other
    
    
    285
    
    
    
    331486,172
    
    
    
    482,389Less current portion
    
    
    364
    
    
    
    325Long-term debt
    
    $
    485,808
    
    
    $
    482,064
 Senior Credit Facility
   7




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##### Table of Contents



7 3 / 4 % Notes
 3 4 5 8 3 4 3 4
 10 5 / 8 % Notes
 5 8 5 8 5 8
 5 8 5 8 5 8 3 4
 Mortgage Loans
  7. Income Taxes
  Recently Issued Accounting Pronouncement
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No.
109
 8




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##### Table of Contents



8. Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    261
    
    
    $
    4,090
    
    
    $
    2,107
    
    
    $
    8,552Salaries, wages and employee benefits
    
    
    183
    
    
    
    2,976
    
    
    
    1,586
    
    
    
    6,065Professional fees
    
    
    
    
    
    
    306
    
    
    
    83
    
    
    
    532Supplies
    
    
    14
    
    
    
    375
    
    
    
    223
    
    
    
    696Rentals and leases
    
    
    34
    
    
    
    35
    
    
    
    98
    
    
    
    104Other operating expenses
    
    
    53
    
    
    
    458
    
    
    
    439
    
    
    
    943Provision for doubtful accounts
    
    
    25
    
    
    
    19
    
    
    
    47
    
    
    
    31Depreciation and amortization
    
    
    11
    
    
    
    11
    
    
    
    22
    
    
    
    36Interest expense
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    29Loss on sale of discontinued operation
    
    
    760
    
    
    
    
    
    
    
    760
    
    
    
    1,080
    
    
    
    4,191
    
    
    
    3,258
    
    
    
    8,436(Loss) income from discontinued operations before
income taxes
    
    
    (819
    )
    
    
    (101
    )
    
    
    (1,151
    )
    
    
    116(Benefit from) provision for income taxes
    
    
    (311
    )
    
    
    (39
    )
    
    
    (437
    )
    
    
    45(Loss) income from discontinued operations, net of taxes
    
    $
    (508
    )
    
    $
    (62
    )
    
    $
    (714
    )
    
    $
    71
 9. Disclosures About Reportable Segments
 Disclosures About Segments of an Enterprise and
Related Information
  9




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##### Table of Contents



Three Months Ended June 30, 2006Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    235,654
    
    
    $
    12,750
    
    
    $
    
    
    
    $
    248,404Adjusted EBITDA
    
    $
    46,305
    
    
    $
    2,225
    
    
    $
    (6,662
    )
    
    $
    41,868Interest expense
    
    
    5,112
    
    
    
    1
    
    
    
    4,157
    
    
    
    9,270Depreciation and amortization
    
    
    4,414
    
    
    
    170
    
    
    
    283
    
    
    
    4,867Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    9,726
    
    
    
    9,726Inter-segment expenses
    
    
    9,378
    
    
    
    533
    
    
    
    (9,911
    )
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    2,136
    
    
    
    2,136Income (loss) from continuing operations
    
    $
    27,401
    
    
    $
    1,521
    
    
    $
    (13,053
    )
    
    $
    15,869Segment assets
    
    $
    1,090,214
    
    
    $
    29,192
    
    
    $
    117,467
    
    
    $
    1,236,873
 Six Months Ended June 30, 2006Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    465,410
    
    
    $
    25,306
    
    
    $
    
    
    
    $
    490,716Adjusted EBITDA
    
    $
    91,071
    
    
    $
    4,369
    
    
    $
    (13,368
    )
    
    $
    82,072Interest expense
    
    
    9,097
    
    
    
    2
    
    
    
    9,379
    
    
    
    18,478Depreciation and amortization
    
    
    8,680
    
    
    
    341
    
    
    
    591
    
    
    
    9,612Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    17,325
    
    
    
    17,325Inter-segment expenses
    
    
    18,752
    
    
    
    1,068
    
    
    
    (19,820
    )
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    8,390
    
    
    
    8,390Income (loss) from continuing operations
    
    $
    54,542
    
    
    $
    2,958
    
    
    $
    (29,233
    )
    
    $
    28,267Segment assets
    
    $
    1,090,214
    
    
    $
    29,192
    
    
    $
    117,467
    
    
    $
    1,236,873
 10




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##### Table of Contents



Three Months Ended June 30, 2005
 Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    126,617
    
    
    $
    12,873
    
    
    $
    
    
    
    $
    139,490Adjusted EBITDA
    
    $
    23,242
    
    
    $
    2,488
    
    
    $
    (5,000
    )
    
    $
    20,730Interest expense
    
    
    8,362
    
    
    
    
    
    
    
    (5,052
    )
    
    
    3,310Depreciation and amortization
    
    
    2,718
    
    
    
    169
    
    
    
    157
    
    
    
    3,044Provision for income taxes
    
    
    825
    
    
    
    
    
    
    
    4,782
    
    
    
    5,607Inter-segment expenses
    
    
    3,844
    
    
    
    663
    
    
    
    (4,507
    )
    
    
    Income (loss) from
continuing operations
    
    $
    7,493
    
    
    $
    1,656
    
    
    $
    (380
    )
    
    $
    8,769Segment assets
    
    $
    418,564
    
    
    $
    28,193
    
    
    $
    38,274
    
    
    $
    485,031
 Six Months Ended June 30, 2005
 Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    247,950
    
    
    $
    25,808
    
    
    $
    
    
    
    $
    273,758Adjusted EBITDA
    
    $
    43,853
    
    
    $
    4,963
    
    
    $
    (9,474
    )
    
    $
    39,342Interest expense
    
    
    16,661
    
    
    
    1
    
    
    
    (9,847
    )
    
    
    6,815Depreciation and amortization
    
    
    5,283
    
    
    
    340
    
    
    
    301
    
    
    
    5,924Provision for income taxes
    
    
    1,224
    
    
    
    
    
    
    
    6,425
    
    
    
    7,649Inter-segment expenses
    
    
    7,381
    
    
    
    1,123
    
    
    
    (8,504
    )
    
    
    Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    6,990
    
    
    
    6,990Total other expenses
    
    
    
    
    
    
    
    
    
    
    6,990
    
    
    
    6,990Income (loss) from continuing operations
    
    $
    13,304
    
    
    $
    3,499
    
    
    $
    (4,839
    )
    
    $
    11,964Segment assets
    
    $
    418,564
    
    
    $
    28,193
    
    
    $
    38,274
    
    
    $
    485,031
 10. Financial Information for the Company and Its Subsidiaries
  11




---



##### Table of Contents



Condensed Consolidating Balance Sheet
As of June 30, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    44,511
    
    
    $
    11,942
    
    
    $
    
    
    
    $
    56,453Accounts receivable, net
    
    
    
    
    
    
    147,123
    
    
    
    
    
    
    
    
    
    
    
    147,123Prepaids and other
    
    
    
    
    
    
    41,306
    
    
    
    6,840
    
    
    
    
    
    
    
    48,146Total current assets
    
    
    
    
    
    
    232,940
    
    
    
    18,782
    
    
    
    
    
    
    
    251,722Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    380,360
    
    
    
    36,635
    
    
    
    (7,711
    )
    
    
    409,284Cost in excess of net assets acquired
    
    
    
    
    
    
    548,373
    
    
    
    
    
    
    
    
    
    
    
    548,373Investment in subsidiaries
    
    
    433,825
    
    
    
    
    
    
    
    
    
    
    
    (433,825
    )
    
    
    Other assets
    
    
    11,686
    
    
    
    12,314
    
    
    
    3,494
    
    
    
    
    
    
    
    27,494Total assets
    
    $
    445,511
    
    
    $
    1,173,987
    
    
    $
    58,911
    
    
    $
    (441,536
    )
    
    $
    1,236,873Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    18,108
    
    
    $
    
    
    
    $
    
    
    
    $
    18,108Salaries and benefits payable
    
    
    
    
    
    
    46,131
    
    
    
    
    
    
    
    
    
    
    
    46,131Other accrued liabilities
    
    
    12,572
    
    
    
    24,306
    
    
    
    4,960
    
    
    
    (4,812
    )
    
    
    37,026Current portion of long-term debt
    
    
    71
    
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    364Total current liabilities
    
    
    12,643
    
    
    
    88,545
    
    
    
    5,253
    
    
    
    (4,812
    )
    
    
    101,629Long-term debt, less current portion
    
    
    458,895
    
    
    
    
    
    
    
    26,913
    
    
    
    
    
    
    
    485,808Deferred tax liability
    
    
    
    
    
    
    42,537
    
    
    
    
    
    
    
    
    
    
    
    42,537Other liabilities
    
    
    2,720
    
    
    
    9,373
    
    
    
    11,310
    
    
    
    
    
    
    
    23,403Total liabilities
    
    
    474,258
    
    
    
    140,455
    
    
    
    43,476
    
    
    
    (4,812
    )
    
    
    653,377Stockholders (deficit) equity
    
    
    (28,747
    )
    
    
    1,033,532
    
    
    
    15,435
    
    
    
    (436,724
    )
    
    
    583,496Total liabilities and stockholders (deficit) equity
    
    $
    445,511
    
    
    $
    1,173,987
    
    
    $
    58,911
    
    
    $
    (441,536
    )
    
    $
    1,236,873
 Condensed Consolidating Balance Sheet
As of December 31, 2005
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    44,114
    
    
    $
    10,585
    
    
    $
    
    
    
    $
    54,699Accounts receivable, net
    
    
    
    
    
    
    132,288
    
    
    
    
    
    
    
    
    
    
    
    132,288Prepaids and other
    
    
    
    
    
    
    53,473
    
    
    
    
    
    
    
    
    
    
    
    53,473Total current assets
    
    
    
    
    
    
    229,875
    
    
    
    10,585
    
    
    
    
    
    
    
    240,460Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    356,817
    
    
    
    29,179
    
    
    
    (7,833
    )
    
    
    378,163Cost in excess of net assets acquired
    
    
    
    
    
    
    526,536
    
    
    
    
    
    
    
    
    
    
    
    526,536Investment in subsidiaries
    
    
    444,888
    
    
    
    
    
    
    
    
    
    
    
    (444,888
    )
    
    
    Other assets
    
    
    12,441
    
    
    
    14,016
    
    
    
    3,415
    
    
    
    
    
    
    
    29,872Total assets
    
    $
    457,329
    
    
    $
    1,127,244
    
    
    $
    43,179
    
    
    $
    (452,721
    )
    
    $
    1,175,031Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    18,726
    
    
    $
    
    
    
    $
    
    
    
    $
    18,726Salaries and benefits payable
    
    
    
    
    
    
    46,872
    
    
    
    
    
    
    
    
    
    
    
    46,872Other accrued liabilities
    
    
    12,994
    
    
    
    21,056
    
    
    
    313
    
    
    
    
    
    
    
    34,363Current portion of long-term debt
    
    
    77
    
    
    
    
    
    
    
    248
    
    
    
    
    
    
    
    325Total current liabilities
    
    
    13,071
    
    
    
    86,654
    
    
    
    561
    
    
    
    
    
    
    
    100,286Long-term debt, less current portion
    
    
    458,935
    
    
    
    
    
    
    
    23,129
    
    
    
    
    
    
    
    482,064Deferred tax liability
    
    
    
    
    
    
    32,151
    
    
    
    
    
    
    
    
    
    
    
    32,151Other liabilities
    
    
    3,011
    
    
    
    9,544
    
    
    
    8,263
    
    
    
    
    
    
    
    20,818Total liabilities
    
    
    475,017
    
    
    
    128,349
    
    
    
    31,953
    
    
    
    
    
    
    
    635,319Stockholders (deficit) equity
    
    
    (17,688
    )
    
    
    998,895
    
    
    
    11,226
    
    
    
    (452,721
    )
    
    
    539,712Total liabilities and stockholders (deficit) equity
    
    $
    457,329
    
    
    $
    1,127,244
    
    
    $
    43,179
    
    
    $
    (452,721
    )
    
    $
    1,175,031
 12




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    248,404
    
    
    $
    2,863
    
    
    $
    (2,863
    )
    
    $
    248,404Salaries, wages and employee benefits
    
    
    
    
    
    
    138,133
    
    
    
    
    
    
    
    
    
    
    
    138,133Professional fees
    
    
    
    
    
    
    24,260
    
    
    
    26
    
    
    
    
    
    
    
    24,286Supplies
    
    
    
    
    
    
    14,417
    
    
    
    
    
    
    
    
    
    
    
    14,417Rentals and leases
    
    
    
    
    
    
    3,296
    
    
    
    
    
    
    
    
    
    
    
    3,296Other operating expenses
    
    
    
    
    
    
    23,906
    
    
    
    1,822
    
    
    
    (1,780
    )
    
    
    23,948Provision for doubtful accounts
    
    
    
    
    
    
    4,592
    
    
    
    
    
    
    
    
    
    
    
    4,592Depreciation and amortization
    
    
    
    
    
    
    4,653
    
    
    
    275
    
    
    
    (61
    )
    
    
    4,867Interest expense
    
    
    8,945
    
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    9,2708,945
    
    
    
    213,257
    
    
    
    2,448
    
    
    
    (1,841
    )
    
    
    222,809(Loss) income from continuing operations before
income taxes
    
    
    (8,945
    )
    
    
    35,147
    
    
    
    415
    
    
    
    (1,022
    )
    
    
    25,595(Benefit from) provision for income taxes
    
    
    (3,399
    )
    
    
    13,125
    
    
    
    
    
    
    
    
    
    
    
    9,726(Loss) income from continuing operations
    
    
    (5,546
    )
    
    
    22,022
    
    
    
    415
    
    
    
    (1,022
    )
    
    
    15,869Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (508
    )
    
    
    
    
    
    
    
    
    
    
    (508
    )Net (loss) income
    
    $
    (5,546
    )
    
    $
    21,514
    
    
    $
    415
    
    
    $
    (1,022
    )
    
    $
    15,361
 Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    490,716
    
    
    $
    5,684
    
    
    $
    (5,684
    )
    
    $
    490,716Salaries, wages and employee benefits
    
    
    
    
    
    
    277,932
    
    
    
    
    
    
    
    
    
    
    
    277,932Professional fees
    
    
    
    
    
    
    46,927
    
    
    
    74
    
    
    
    
    
    
    
    47,001Supplies
    
    
    
    
    
    
    28,431
    
    
    
    
    
    
    
    
    
    
    
    28,431Rentals and leases
    
    
    
    
    
    
    6,643
    
    
    
    
    
    
    
    
    
    
    
    6,643Other operating expenses
    
    
    
    
    
    
    47,076
    
    
    
    4,165
    
    
    
    (3,572
    )
    
    
    47,669Provision for doubtful accounts
    
    
    
    
    
    
    9,358
    
    
    
    
    
    
    
    
    
    
    
    9,358Depreciation and amortization
    
    
    
    
    
    
    9,196
    
    
    
    538
    
    
    
    (122
    )
    
    
    9,612Interest expense
    
    
    17,837
    
    
    
    
    
    
    
    641
    
    
    
    
    
    
    
    18,47817,837
    
    
    
    425,563
    
    
    
    5,418
    
    
    
    (3,694
    )
    
    
    445,124(Loss) income from continuing operations before
income taxes
    
    
    (17,837
    )
    
    
    65,153
    
    
    
    266
    
    
    
    (1,990
    )
    
    
    45,592(Benefit from) provision for income taxes
    
    
    (6,778
    )
    
    
    23,986
    
    
    
    117
    
    
    
    
    
    
    
    17,325(Loss) income from continuing operations
    
    
    (11,059
    )
    
    
    41,167
    
    
    
    149
    
    
    
    (1,990
    )
    
    
    28,267Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (714
    )
    
    
    
    
    
    
    
    
    
    
    (714
    )Net (loss) income
    
    $
    (11,059
    )
    
    $
    40,453
    
    
    $
    149
    
    
    $
    (1,990
    )
    
    $
    27,553
 13




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2005
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    139,490
    
    
    $
    2,542
    
    
    $
    (2,542
    )
    
    $
    139,490Salaries, wages and employee benefits
    
    
    
    
    
    
    74,739
    
    
    
    
    
    
    
    
    
    
    
    74,739Professional fees
    
    
    
    
    
    
    14,567
    
    
    
    15
    
    
    
    
    
    
    
    14,582Supplies
    
    
    
    
    
    
    8,655
    
    
    
    
    
    
    
    
    
    
    
    8,655Rentals and leases
    
    
    
    
    
    
    2,391
    
    
    
    
    
    
    
    
    
    
    
    2,391Other operating expenses
    
    
    
    
    
    
    15,052
    
    
    
    2,488
    
    
    
    (1,804
    )
    
    
    15,736Provision for doubtful accounts
    
    
    
    
    
    
    2,657
    
    
    
    
    
    
    
    
    
    
    
    2,657Depreciation and amortization
    
    
    
    
    
    
    2,859
    
    
    
    246
    
    
    
    (61
    )
    
    
    3,044Interest expense
    
    
    2,975
    
    
    
    
    
    
    
    335
    
    
    
    
    
    
    
    3,3102,975
    
    
    
    120,920
    
    
    
    3,084
    
    
    
    (1,865
    )
    
    
    125,114(Loss) income before income taxes
    
    
    (2,975
    )
    
    
    18,570
    
    
    
    (542
    )
    
    
    (677
    )
    
    
    14,376(Benefit from) provision for income taxes
    
    
    (1,131
    )
    
    
    6,738
    
    
    
    
    
    
    
    
    
    
    
    5,607(Loss) income from continuing operations
    
    
    (1,844
    )
    
    
    11,832
    
    
    
    (542
    )
    
    
    (677
    )
    
    
    8,769Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (62
    )Net (loss) income
    
    $
    (1,844
    )
    
    $
    11,770
    
    
    $
    (542
    )
    
    $
    (677
    )
    
    $
    8,707
 Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2005
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    273,758
    
    
    $
    4,168
    
    
    $
    (4,168
    )
    
    $
    273,758Salaries, wages and employee benefits
    
    
    
    
    
    
    148,019
    
    
    
    
    
    
    
    
    
    
    
    148,019Professional fees
    
    
    
    
    
    
    28,560
    
    
    
    55
    
    
    
    
    
    
    
    28,615Supplies
    
    
    
    
    
    
    16,917
    
    
    
    
    
    
    
    
    
    
    
    16,917Rentals and leases
    
    
    
    
    
    
    4,661
    
    
    
    
    
    
    
    
    
    
    
    4,661Other operating expenses
    
    
    
    
    
    
    30,203
    
    
    
    3,380
    
    
    
    (2,692
    )
    
    
    30,891Provision for doubtful accounts
    
    
    
    
    
    
    5,313
    
    
    
    
    
    
    
    
    
    
    
    5,313Depreciation and amortization
    
    
    
    
    
    
    5,555
    
    
    
    491
    
    
    
    (122
    )
    
    
    5,924Interest expense
    
    
    6,106
    
    
    
    
    
    
    
    709
    
    
    
    
    
    
    
    6,815Loss on refinancing of long-term debt
    
    
    6,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,99013,096
    
    
    
    239,228
    
    
    
    4,635
    
    
    
    (2,814
    )
    
    
    254,145(Loss) income before income taxes
    
    
    (13,096
    )
    
    
    34,530
    
    
    
    (467
    )
    
    
    (1,354
    )
    
    
    19,613(Benefit from) provision for income taxes
    
    
    (4,976
    )
    
    
    12,625
    
    
    
    
    
    
    
    
    
    
    
    7,649(Loss) income from continuing operations
    
    
    (8,120
    )
    
    
    21,905
    
    
    
    (467
    )
    
    
    (1,354
    )
    
    
    11,964Income from discontinued operations, net of taxes
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Net (loss) income
    
    $
    (8,120
    )
    
    $
    21,976
    
    
    $
    (467
    )
    
    $
    (1,354
    )
    
    $
    12,035
 14




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsOperating activities:Net (loss) income
    
    $
    (11,059
    )
    
    $
    40,453
    
    
    $
    149
    
    
    $
    (1,990
    )
    
    $
    27,553Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    9,196
    
    
    
    538
    
    
    
    (122
    )
    
    
    9,612Share-based compensation
    
    
    
    
    
    
    8,390
    
    
    
    
    
    
    
    
    
    
    
    8,390Amortization of loan costs
    
    
    789
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    811Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    714
    
    
    
    
    
    
    
    
    
    
    
    714Change in income tax assets and liabilities
    
    
    
    
    
    
    16,283
    
    
    
    
    
    
    
    
    
    
    
    16,283Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (9,267
    )
    
    
    
    
    
    
    
    
    
    
    (9,267
    )Prepaids and other current assets
    
    
    
    
    
    
    1,841
    
    
    
    (6,840
    )
    
    
    
    
    
    
    (4,999
    )Accounts payable
    
    
    
    
    
    
    (1,339
    )
    
    
    
    
    
    
    
    
    
    
    (1,339
    )Salaries and benefits payable
    
    
    
    
    
    
    456
    
    
    
    
    
    
    
    
    
    
    
    456Accrued liabilities and other liabilities
    
    
    (1,047
    )
    
    
    (4,506
    )
    
    
    7,668
    
    
    
    
    
    
    
    2,115Net cash (used in) provided by continuing operating activities
    
    
    (11,317
    )
    
    
    62,221
    
    
    
    1,537
    
    
    
    (2,112
    )
    
    
    50,329Net cash provided by discontinued operating activities
    
    
    
    
    
    
    1,708
    
    
    
    
    
    
    
    
    
    
    
    1,708Net cash (used in) provided by operating activities
    
    
    (11,317
    )
    
    
    63,929
    
    
    
    1,537
    
    
    
    (2,112
    )
    
    
    52,037Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (44,471
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,471
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    
    
    
    
    (13,123
    )
    
    
    
    
    
    
    
    
    
    
    (13,123
    )Other assets
    
    
    
    
    
    
    (511
    )
    
    
    194
    
    
    
    
    
    
    
    (317
    )Net cash (used in) provided by investing activities
    
    
    (44,471
    )
    
    
    (13,634
    )
    
    
    194
    
    
    
    
    
    
    
    (57,911
    )Financing activities:Principal payments on long-term debt
    
    
    (46
    )
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    (180
    )Net transfers to and from members
    
    
    48,026
    
    
    
    (49,898
    )
    
    
    (240
    )
    
    
    2,112
    
    
    
    Payment of loan and issuance costs
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )Excess tax benefits from share-based payment arrangements
    
    
    4,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,248Proceeds from issuance of common stock upon exercise of
stock options
    
    
    3,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,600Net cash provided by (used in) financing activities
    
    
    55,788
    
    
    
    (49,898
    )
    
    
    (374
    )
    
    
    2,112
    
    
    
    7,628Net increase in cash
    
    
    
    
    
    
    397
    
    
    
    1,357
    
    
    
    
    
    
    
    1,754Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    44,114
    
    
    
    10,585
    
    
    
    
    
    
    
    54,699Cash and cash equivalents at end of year
    
    $
    
    
    
    $
    44,511
    
    
    $
    11,942
    
    
    $
    
    
    
    $
    56,453
 15




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2005
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsOperating Activities:Net (loss) income
    
    $
    (8,120
    )
    
    $
    21,976
    
    
    $
    (467
    )
    
    $
    (1,354
    )
    
    $
    12,035Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    5,555
    
    
    
    491
    
    
    
    (122
    )
    
    
    5,924Amortization of loan costs
    
    
    316
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    338Loss on refinancing long-term debt
    
    
    6,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,990Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    (71
    )Change in income tax assets and liabilities
    
    
    
    
    
    
    1,446
    
    
    
    
    
    
    
    
    
    
    
    1,446Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (5,001
    )
    
    
    
    
    
    
    
    
    
    
    (5,001
    )Prepaids and other current assets
    
    
    
    
    
    
    (692
    )
    
    
    (1,859
    )
    
    
    
    
    
    
    (2,551
    )Accounts payable
    
    
    
    
    
    
    434
    
    
    
    
    
    
    
    
    
    
    
    434Salaries and benefits payable
    
    
    
    
    
    
    3,957
    
    
    
    
    
    
    
    
    
    
    
    3,957Accrued liabilities and other liabilities
    
    
    (1,855
    )
    
    
    (210
    )
    
    
    5,443
    
    
    
    
    
    
    
    3,378Net cash (used in) provided by continuing operating activities
    
    
    (2,669
    )
    
    
    27,394
    
    
    
    3,630
    
    
    
    (1,476
    )
    
    
    26,879Net cash provided by discontinued operating activities
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    142Net cash (used in) provided by operating activities
    
    
    (2,669
    )
    
    
    27,536
    
    
    
    3,630
    
    
    
    (1,476
    )
    
    
    27,021Investing Activities:Cash paid for acquisitions, net of cash acquired
    
    
    (5,793
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,793
    )Capital purchases of property and equipment
    
    
    
    
    
    
    (10,029
    )
    
    
    
    
    
    
    
    
    
    
    (10,029
    )Investment in equity method investee
    
    
    (840
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (840
    )Other assets
    
    
    4,068
    
    
    
    
    
    
    
    (4,951
    )
    
    
    
    
    
    
    (883
    )Net cash used in investing activities
    
    
    (2,565
    )
    
    
    (10,029
    )
    
    
    (4,951
    )
    
    
    
    
    
    
    (17,545
    )Financing Activities:Net principal payments on long-term debt
    
    
    (50,311
    )
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    (50,427
    )Net increase in revolving credit facility
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000Net transfers to and from members
    
    
    40,256
    
    
    
    (41,995
    )
    
    
    263
    
    
    
    1,476
    
    
    
    Payment of loan and issuance costs
    
    
    (487
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (487
    )Refinancing of long-term debt
    
    
    (5,316
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,316
    )Proceeds from issuance of common stock upon exercise of
stock options
    
    
    1,092
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,092Net cash provided by (used in) financing activities
    
    
    5,234
    
    
    
    (41,995
    )
    
    
    147
    
    
    
    1,476
    
    
    
    (35,138
    )Net decrease in cash
    
    
    
    
    
    
    (24,488
    )
    
    
    (1,174
    )
    
    
    
    
    
    
    (25,662
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    30,988
    
    
    
    2,463
    
    
    
    
    
    
    
    33,451Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    6,500
    
    
    $
    1,289
    
    
    $
    
    
    
    $
    7,789
 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
 This Quarterly Report 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 integrate and
improve the operations of acquired facilities; (3) our ability to maintain favorable and continuing
relationships with physicians who use our facilities; (4) our ability to receive timely additional
financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs;
(5) risks inherent to the health care industry, including the impact of changes in regulation and
exposure to claims and legal actions by patients and others; (6) reductions in reimbursement rates
from federal and various state health care programs or managed care companies; (7) our ability to
comply with applicable licensure and accreditation requirements; (8) our ability to retain key
employees who are instrumental to our successful operations; (9) our ability to maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act; (10) our ability to
ensure confidential information is not inappropriately disclosed and that we are in compliance with
federal and state health information privacy standards; (11) our ability to comply with federal and
state governmental regulation covering health care-related products and services on-line, including
the regulation of medical devices and the practice of medicine and pharmacology; (12) our ability
to obtain adequate levels of general and professional liability insurance; and (13) those risks and
uncertainties described from time to time in our filings with the Securities and Exchange
Commission (the SEC). The forward-looking statements herein are qualified in their entirety by
the risk factors set forth in our filings with the SEC. A copy of our filings may be obtained from
the Public Reference Room of the SEC at 450 Fifth Street NW, Washington, D.C. at prescribed rates.
 Overview
   Sources of Revenue
 Patient Service Revenue
  17




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##### Table of Contents



Management Contract Revenue
  Results of Operations
  For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenue
    
    $
    248,404
    
    
    
    100.0
    %
    
    $
    139,490
    
    
    
    100.0
    %
    
    $
    490,716
    
    
    
    100.0
    %
    
    $
    273,758
    
    
    
    100.0
    %Salaries, wages, and employee benefits (including
share-based compensation of $2,136 and $8,390
for the three months and six months ended
June 30, 2006, respectively)
    
    
    138,133
    
    
    
    55.6
    %
    
    
    74,739
    
    
    
    53.6
    %
    
    
    277,932
    
    
    
    56.6
    %
    
    
    148,019
    
    
    
    54.1
    %Professional fees
    
    
    24,286
    
    
    
    9.8
    %
    
    
    14,582
    
    
    
    10.4
    %
    
    
    47,001
    
    
    
    9.6
    %
    
    
    28,615
    
    
    
    10.4
    %Supplies
    
    
    14,417
    
    
    
    5.8
    %
    
    
    8,655
    
    
    
    6.2
    %
    
    
    28,431
    
    
    
    5.8
    %
    
    
    16,917
    
    
    
    6.2
    %Provision for doubtful accounts
    
    
    4,592
    
    
    
    1.8
    %
    
    
    2,657
    
    
    
    1.9
    %
    
    
    9,358
    
    
    
    1.9
    %
    
    
    5,313
    
    
    
    1.9
    %Other operating expenses
    
    
    27,244
    
    
    
    11.0
    %
    
    
    18,127
    
    
    
    13.0
    %
    
    
    54,312
    
    
    
    11.1
    %
    
    
    35,552
    
    
    
    13.0
    %Depreciation and amortization
    
    
    4,867
    
    
    
    2.0
    %
    
    
    3,044
    
    
    
    2.2
    %
    
    
    9,612
    
    
    
    1.9
    %
    
    
    5,924
    
    
    
    2.2
    %Interest expense, net
    
    
    9,270
    
    
    
    3.7
    %
    
    
    3,310
    
    
    
    2.4
    %
    
    
    18,478
    
    
    
    3.8
    %
    
    
    6,815
    
    
    
    2.5
    %Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    6,990
    
    
    
    2.5
    %Income from continuing operations before
income taxes
    
    
    25,595
    
    
    
    10.3
    %
    
    
    14,376
    
    
    
    10.3
    %
    
    
    45,592
    
    
    
    9.3
    %
    
    
    19,613
    
    
    
    7.2
    %Provision for income taxes
    
    
    9,726
    
    
    
    3.9
    %
    
    
    5,607
    
    
    
    4.0
    %
    
    
    17,325
    
    
    
    3.5
    %
    
    
    7,649
    
    
    
    2.8
    %Income from continuing operations
    
    $
    15,869
    
    
    
    6.4
    %
    
    $
    8,769
    
    
    
    6.3
    %
    
    $
    28,267
    
    
    
    5.8
    %
    
    $
    11,964
    
    
    
    4.4
    %
 Three Months Ended June 30, 2006 Compared To Three Months Ended June 30, 2005
  Three Months Ended June 30,
    
    %2006
    
    2005
    
    ChangeTotal facility results:Revenue
    
    $
    235,654
    
    
    $
    126,617
    
    
    
    86.1
    %Number of facilities
at period end
    
    
    59
    
    
    
    34
    
    
    
    73.5
    %Admissions
    
    
    26,361
    
    
    
    14,694
    
    
    
    79.4
    %Patient days
    
    
    456,202
    
    
    
    286,241
    
    
    
    59.4
    %Average length of stay
    
    
    17.3
    
    
    
    19.5
    
    
    
    -11.3
    %Revenue per patient day
    
    $
    517
    
    
    $
    442
    
    
    
    17.0
    %Same-facility results:Revenue
    
    $
    136,775
    
    
    $
    126,617
    
    
    
    8.0
    %Number of facilities
at period end
    
    
    34
    
    
    
    34
    
    
    
    0.0
    %Admissions
    
    
    14,837
    
    
    
    14,694
    
    
    
    1.0
    %Patient days
    
    
    292,173
    
    
    
    286,241
    
    
    
    2.1
    %Average length of stay
    
    
    19.7
    
    
    
    19.5
    
    
    
    1.0
    %Revenue per patient day
    
    $
    468
    
    
    $
    442
    
    
    
    5.9
    %
 Revenue
 18




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##### Table of Contents



Salaries, wages and employee benefits Share Based Payment Accounting for Stock Issued to Employees
 Professional fees
 Supplies.
 Provision for doubtful accounts
 Other operating expenses
 Depreciation and amortization
 Interest expense, net
 Loss from discontinued operations, net of taxes
 19




---



##### Table of Contents



Six Months Ended June 30, 2006 Compared To Six Months Ended June 30, 2005
  Six Months Ended June 30,
    
    %2006
    
    2005
    
    ChangeTotal facility results:Revenue
    
    $
    465,410
    
    
    $
    247,950
    
    
    
    87.7
    %Number of facilities
at period end
    
    
    59
    
    
    
    34
    
    
    
    73.5
    %Admissions
    
    
    53,298
    
    
    
    29,513
    
    
    
    80.6
    %Patient days
    
    
    902,256
    
    
    
    561,324
    
    
    
    60.7
    %Average length of stay
    
    
    16.9
    
    
    
    19.0
    
    
    
    -11.1
    %Revenue per patient day
    
    $
    516
    
    
    $
    442
    
    
    
    16.7
    %Same-facility results:Revenue
    
    $
    271,713
    
    
    $
    247,950
    
    
    
    9.6
    %Number of facilities
at period end
    
    
    34
    
    
    
    34
    
    
    
    0.0
    %Admissions
    
    
    30,077
    
    
    
    29,513
    
    
    
    1.9
    %Patient days
    
    
    580,720
    
    
    
    561,324
    
    
    
    3.5
    %Average length of stay
    
    
    19.3
    
    
    
    19.0
    
    
    
    1.6
    %Revenue per patient day
    
    $
    468
    
    
    $
    442
    
    
    
    5.9
    %
 Revenue
 Salaries, wages and employee benefits
 Professional fees
 Supplies.
 20




---



##### Table of Contents



Provision for doubtful accounts
 Other operating expenses
 Depreciation and amortization
 Interest expense, net
 Other expenses.
 Loss from discontinued operations, net of taxes
 Liquidity and Capital Resources
    5 8
 21




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##### Table of Contents



Contractual Obligations
 Payments Due by Period (in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsLong-term debt (1):Senior Credit Facility:Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest of 6.9% at June 30, 2006
    
    $
    200,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    200,0007 3/4% Senior Subordinated Notes due July 15, 2015
    
    
    220,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,00010 5/8% Senior Subordinated Notes due June 15, 2013
    
    
    38,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,681Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.65% to 7.60%
    
    
    27,206
    
    
    
    293
    
    
    
    641
    
    
    
    722
    
    
    
    25,550485,887
    
    
    
    293
    
    
    
    641
    
    
    
    722
    
    
    
    484,231Lease and other obligations
    
    
    44,867
    
    
    
    8,339
    
    
    
    13,220
    
    
    
    6,977
    
    
    
    16,331Total contractual obligations
    
    $
    530,754
    
    
    $
    8,632
    
    
    $
    13,861
    
    
    $
    7,699
    
    
    $
    500,562
 
 (1)
    
    Excludes capital lease obligations of $285,000, which are included in lease and other obligations. 3 4 5 8 3 4 5 8
 Critical Accounting Policies
  Allowance for Doubtful Accounts
   22




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##### Table of Contents



Allowances for Contractual Discounts
  Professional and General Liability
  Income Taxes
  Share-Based Compensation
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  23




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##### Table of Contents



Item 4. Controls and Procedures.
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
  
 Item 4. Submission of Matters to a Vote of Security Holders
  (1)
    
    The stockholders elected Christopher Grant, Jr. and David M. Dill as Class I directors of
the Company. The votes were as follows:
 Christopher Grant, Jr.Votes cast for
    
    
    42,083,786Votes withheld
    
    
    3,288,600David M. DillVotes cast for
    
    
    43,578,441Votes withheld
    
    
    1,793,945
 (2)
    
    The stockholders approved the Psychiatric Solutions, Inc. Executive Performance Incentive
Plan. The votes were as follows:
 Votes cast for
    
    
    42,548,546Votes cast against
    
    
    2,704,150Abstentions
    
    
    119,688
 (3)
    
    The stockholders approved an amendment to the Psychiatric Solutions, Inc. Equity
Incentive Plan. The votes were as follows:
 Votes cast for
    
    
    27,019,008Votes cast against
    
    
    10,700,490Abstentions
    
    
    66,130Broker non-votes
    
    
    7,586,758
 (4)
    
    The stockholders ratified the appointment of Ernst & Young LLP as our independent
registered public accounting firm for the fiscal year ending December 31, 2006. The votes
were as follows:
 Votes cast for
    
    
    45,290,605Votes cast against
    
    
    67,996Abstentions
    
    
    13,784
 24




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description2.1*
    
    Stock Purchase Agreement, dated May 26, 2006, by and
between FHC Health Systems, Inc. and Psychiatric
Solutions, Inc.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).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 on January 22, 2003).3.4
    
    Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Psychiatric
Solutions, Inc., filed with the Delaware Secretary
of State on December 15, 2005 (incorporated by
reference to Exhibit 3.4 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 2005).3.5
    
    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).4.1
    
    Reference is made to Exhibits 3.1 through 3.5.4.2
    
    Common Stock Specimen Certificate (incorporated by
reference to Exhibit 4.2 to the Companys Annual Report
on Form 10-K for the fiscal year ended December 31,
2002).4.3
    
    Indenture, dated as of June 30, 2003, among Psychiatric
Solutions, Inc., the Guarantors named therein and
Wachovia Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.10 to the
Companys Registration Statement on Form S-4, filed on
July 30, 2003 (Registration No. 333-107453) (the 2003
S-4)).4.4
    
    Form of Notes (included in Exhibit 4.3).4.5
    
    Purchase Agreement, dated as of June 19, 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 4.12 to the
2003 S-4).4.6
    
    Indenture, dated as of July 6, 2005, by and among
Psychiatric Solutions, Inc., the Guarantors named
therein and Wachovia Bank, National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to
the Companys Current Report on Form 8-K, filed July 8,
2005).4.7
    
    Form of Notes (included in Exhibit 4.6).4.8
    
    Purchase Agreement, dated as of June 30, 2005, among
Psychiatric Solutions, Inc., the Guarantors named
therein, Citigroup Global Markets Inc. on behalf of
Banc of America Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, J.P. Morgan Securities
Inc. and Lehman Brothers Inc. (incorporated by
reference to Exhibit 4.3 to the Companys Current
Report on Form 8-K, filed on July 8, 2005).4.9
    
    Exchange and Registration Rights Agreement, dated as of
July 6, 2005, among Psychiatric Solutions, Inc., the
subsidiary guarantors from time to time party thereto,
and Citigroup Global Markets Inc. on behalf of Banc of
America Securities LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, J.P. Morgan Securities Inc. and
Lehman Brothers Inc. (incorporated by reference to
Exhibit 4.4 to the Companys Current Report on Form
8-K, filed on July 8, 2005).10.1
    
    Psychiatric Solutions, Inc. Executive Performance
Incentive Plan (incorporated by reference to Appendix A
of the Companys Definitive Proxy Statement filed April
21, 2006).
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##### Table of Contents



ExhibitNumber
    
    Description10.2
    
    Third Amendment to the Psychiatric Solutions, Inc.
Equity Incentive Plan (incorporated by reference to
Appendix B of the Companys Definitive Proxy Statement
filed April 21, 2006).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 26




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SIGNATURES
  Psychiatric Solutions, Inc.By:
    /s/ Jack E. PolsonJack E. PolsonChief Accounting Officer