##### 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 March 31, 2007 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
    
    23-2491707(State or Other Jurisdiction of Incorporation or
    
    (I.R.S. Employer Identification No.)Organization)
 6640 Carothers Parkway, Suite 500
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 March 31, 2007 and December 31, 2006 (Unaudited)
    
    
    1Condensed Consolidated Statements of Income for the three month periods ended March 31, 2007 and 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2007 and 2006
(Unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 6. Exhibits
    
    
    20Ex-10.3 Nonstatutory Stock OptionEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 Certification




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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)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,669
    
    
    $
    18,541Accounts receivable, less allowance for doubtful accounts of
$19,940 and $18,903, respectively
    
    
    190,748
    
    
    
    180,137Prepaids and other
    
    
    44,620
    
    
    
    44,582Total current assets
    
    
    251,037
    
    
    
    243,260Property and equipment, net of accumulated depreciation
    
    
    562,473
    
    
    
    543,806Cost in excess of net assets acquired
    
    
    776,395
    
    
    
    761,026Other assets
    
    
    33,592
    
    
    
    33,104Total assets
    
    $
    1,623,497
    
    
    $
    1,581,196LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    25,411
    
    
    $
    25,294Salaries and benefits payable
    
    
    59,219
    
    
    
    66,438Other accrued liabilities
    
    
    42,953
    
    
    
    45,855Current portion of long-term debt
    
    
    2,836
    
    
    
    2,386Total current liabilities
    
    
    130,419
    
    
    
    139,973Long-term debt, less current portion
    
    
    760,842
    
    
    
    740,921Deferred tax liability
    
    
    37,331
    
    
    
    44,924Other liabilities
    
    
    28,633
    
    
    
    27,599Total liabilities
    
    
    957,225
    
    
    
    953,417Stockholders equity:Common stock, $0.01 par value, 125,000 shares authorized;
54,239 and 53,421 issued and outstanding, respectively
    
    
    542
    
    
    
    534Additional paid-in capital
    
    
    544,086
    
    
    
    523,193Retained earnings
    
    
    121,644
    
    
    
    104,052Total stockholders equity
    
    
    666,272
    
    
    
    627,779Total liabilities and stockholders equity
    
    $
    1,623,497
    
    
    $
    1,581,196
  1




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PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited, in thousands except for per share amounts)
 Three Months Ended March 31,2007
    
    
    2006Revenue
    
    $
    323,718
    
    
    $
    242,312Salaries, wages and employee benefits (including
share-based compensation of $3,673 and $6,254
for 2007 and 2006, respectively)
    
    
    180,999
    
    
    
    139,798Professional fees
    
    
    31,035
    
    
    
    22,715Supplies
    
    
    18,477
    
    
    
    14,015Rentals and leases
    
    
    4,637
    
    
    
    3,347Other operating expenses
    
    
    31,774
    
    
    
    23,722Provision for doubtful accounts
    
    
    6,706
    
    
    
    4,766Depreciation and amortization
    
    
    6,298
    
    
    
    4,744Interest expense
    
    
    14,386
    
    
    
    9,208294,312
    
    
    
    222,315Income from continuing operations
before income taxes
    
    
    29,406
    
    
    
    19,997Provision for income taxes
    
    
    11,262
    
    
    
    7,599Income from continuing operations
    
    
    18,144
    
    
    
    12,398Loss from discontinued operations, net of
income tax benefit of $12 and $126
for 2007 and 2006, respectively
    
    
    (19
    )
    
    
    (206
    )Net income
    
    $
    18,125
    
    
    $
    12,192Basic earnings per share:Income from continuing operations
    
    $
    0.34
    
    
    $
    0.24Loss from discontinued operations,
net of taxes
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.34
    
    
    $
    0.23Diluted earnings per share:Income from continuing operations
    
    $
    0.33
    
    
    $
    0.23Loss from discontinued operations,
net of taxes
    
    
    
    
    
    
    Net income
    
    $
    0.33
    
    
    $
    0.23Shares used in computing per share amounts:Basic
    
    
    53,804
    
    
    
    52,514Diluted
    
    
    55,237
    
    
    
    53,890
  2




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PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Three Months Ended March 31,2007
    
    
    2006Operating activities:Net income
    
    $
    18,125
    
    
    $
    12,192Adjustments to reconcile net income to
net cash provided by continuing
operating activities:Depreciation and amortization
    
    
    6,298
    
    
    
    4,744Share-based compensation
    
    
    3,673
    
    
    
    6,254Amortization of loan costs
    
    
    517
    
    
    
    405Loss from discontinued operations
    
    
    19
    
    
    
    206Change in income tax assets and liabilities
    
    
    (1,798
    )
    
    
    4,202Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    (9,305
    )
    
    
    (8,297
    )Prepaids and other current assets
    
    
    (924
    )
    
    
    (1,891
    )Accounts payable
    
    
    (831
    )
    
    
    (2,617
    )Salaries and benefits payable
    
    
    (9,432
    )
    
    
    (5,248
    )Accrued liabilities and other liabilities
    
    
    (1,064
    )
    
    
    (701
    )Net cash provided by continuing operating activities
    
    
    5,278
    
    
    
    9,249Net cash (used in) provided by discontinued operating activities
    
    
    (145
    )
    
    
    1,306Net cash provided by operating activities
    
    
    5,133
    
    
    
    10,555Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (25,241
    )
    
    
    (38,300
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    (9,872
    )
    
    
    (5,513
    )Other assets
    
    
    233
    
    
    
    239Net cash used in investing activities
    
    
    (34,880
    )
    
    
    (43,574
    )Financing activities:Principal payments on long-term debt
    
    
    (315
    )
    
    
    (93
    )Net increase in revolving credit facility
    
    
    19,000
    
    
    
    Payment of loan and issuance costs
    
    
    (85
    )
    
    
    (22
    )Excess tax benefits from share-based payment arrangements
    
    
    2,569
    
    
    
    2,446Proceeds from issuance of common stock upon exercise
of stock options
    
    
    5,706
    
    
    
    1,644Net cash provided by financing activities
    
    
    26,875
    
    
    
    3,975Net decrease in cash
    
    
    (2,872
    )
    
    
    (29,044
    )Cash and cash equivalents at beginning of the period
    
    
    18,541
    
    
    
    54,700Cash and cash equivalents at end of the period
    
    $
    15,669
    
    
    $
    25,656Effect of Acquisitions:Assets acquired, net of cash acquired
    
    $
    35,928
    
    
    $
    43,372Cash paid for prior year acquisitions
    
    
    2,081
    
    
    
    Liabilities assumed
    
    
    (2,064
    )
    
    
    (1,109
    )Long-term debt assumed
    
    
    (1,704
    )
    
    
    (3,963
    )Common stock issued
    
    
    (9,000
    )
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    25,241
    
    
    $
    38,300
  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 March 31,2007
    
    
    2006Numerator:Income from continuing operations
    
    $
    18,144
    
    
    $
    12,398Loss from discontinued operations, net of taxes
    
    
    (19
    )
    
    
    (206
    )Net income
    
    $
    18,125
    
    
    $
    12,192Denominator:Weighted average shares outstanding for basic earnings per share
    
    
    53,804
    
    
    
    52,514Effects of
dilutive stock options and restricted stock outstanding
    
    
    1,433
    
    
    
    1,376Shares used in computing diluted earnings per common share
    
    
    55,237
    
    
    
    53,890Basic earnings per share:Income from continuing operations
    
    $
    0.34
    
    
    $
    0.24Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (0.01
    )$
    0.34
    
    
    $
    0.23Diluted earnings per share:Income from continuing operations
    
    $
    0.33
    
    
    $
    0.23Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    $
    0.33
    
    
    $
    0.23
 4. Share-Based Compensation
      5. Mergers and Acquisitions
    5




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6. Long-term debt
  March 31,
    
    
    December 31,2007
    
    
    2006Senior credit facility:Revolving line of credit facility, expiring on December 21, 2009
and bearing interest of 6.6% and 6.7% at March 31, 2007
and December 31, 2006, respectively
    
    $
    120,000
    
    
    $
    101,000Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest of 7.1% at March 31, 2007
and December 31, 2006, respectively
    
    
    350,000
    
    
    
    350,0007 3/4% Senior Subordinated Notes
    
    
    220,000
    
    
    
    220,00010 5/8% Senior Subordinated Notes
    
    
    38,681
    
    
    
    38,681Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6%
    
    
    26,988
    
    
    
    27,062Other
    
    
    8,009
    
    
    
    6,564763,678
    
    
    
    743,307Less current portion
    
    
    2,836
    
    
    
    2,386Long-term debt
    
    $
    760,842
    
    
    $
    740,921
 Senior Credit Facility
   6




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7 3 / 4 % Notes
 3 4 3 4 3 4 3 4
 10 5 / 8 % Notes
 5 8 5 8 5 8
 Mortgage Loans
  7. Income Taxes
  Accounting for Uncertainty in Income Taxes  An
Interpretation of FASB Statement No. 109
    8. Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets
 7




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Three Months Ended March 31,2007
    
    
    2006Revenue
    
    $
    
    
    
    $
    1,846Salaries, wages and employee benefits
    
    
    12
    
    
    
    1,403Professional fees
    
    
    
    
    
    
    85Supplies
    
    
    
    
    
    
    209Rentals and leases
    
    
    3
    
    
    
    63Other operating expenses
    
    
    14
    
    
    
    385Provision for doubtful accounts
    
    
    2
    
    
    
    22Depreciation and amortization
    
    
    
    
    
    
    1131
    
    
    
    2,178Loss from discontinued operations before income taxes
    
    
    (31
    )
    
    
    (332
    )Benefit from income taxes
    
    
    (12
    )
    
    
    (126
    )Loss from discontinued operations, net of taxes
    
    $
    (19
    )
    
    $
    (206
    )
 9. Disclosures About Reportable Segments
 Disclosures About Segments of an Enterprise and
Related Information
  8




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Three Months Ended March 31, 2007Owned and
    
    
    ManagementLeased
    
    
    ContractsFacilities
    
    
    and Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    306,445
    
    
    $
    17,273
    
    
    $
    
    
    
    $
    323,718Adjusted EBITDA
    
    $
    60,858
    
    
    $
    2,431
    
    
    $
    (9,526
    )
    
    $
    53,763Interest expense
    
    
    9,027
    
    
    
    (4
    )
    
    
    5,363
    
    
    
    14,386Depreciation and amortization
    
    
    5,768
    
    
    
    186
    
    
    
    344
    
    
    
    6,298Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    11,262
    
    
    
    11,262Inter-segment expenses
    
    
    11,365
    
    
    
    788
    
    
    
    (12,153
    )
    
    
    Other expenses:Share-based compensation
    
    
    
    
    
    
    
    
    
    
    3,673
    
    
    
    3,673Total other expenses
    
    
    
    
    
    
    
    
    
    
    3,673
    
    
    
    3,673Income (loss) from continuing operations
    
    $
    34,698
    
    
    $
    1,461
    
    
    $
    (18,015
    )
    
    $
    18,144Segment assets
    
    $
    1,504,957
    
    
    $
    47,577
    
    
    $
    70,963
    
    
    $
    1,623,497
 Three Months Ended March 31, 2006Owned and
    
    
    ManagementLeased
    
    
    ContractsFacilities
    
    
    and Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    229,756
    
    
    $
    12,556
    
    
    $
    
    
    
    $
    242,312Adjusted EBITDA
    
    $
    44,766
    
    
    $
    2,144
    
    
    $
    (6,707
    )
    
    $
    40,203Interest expense
    
    
    3,985
    
    
    
    1
    
    
    
    5,222
    
    
    
    9,208Depreciation and amortization
    
    
    4,266
    
    
    
    170
    
    
    
    308
    
    
    
    4,744Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    7,599
    
    
    
    7,599Inter-segment expenses
    
    
    9,374
    
    
    
    535
    
    
    
    (9,909
    )
    
    
    Other expenses:Share-based compensation
    
    
    
    
    
    
    
    
    
    
    6,254
    
    
    
    6,254Total other expenses
    
    
    
    
    
    
    
    
    
    
    6,254
    
    
    
    6,254Income (loss) from continuing operations
    
    $
    27,141
    
    
    $
    1,438
    
    
    $
    (16,181
    )
    
    $
    12,398Segment assets
    
    $
    1,070,624
    
    
    $
    29,581
    
    
    $
    96,761
    
    
    $
    1,196,966
 10. Financial Information for the Company and Its Subsidiaries
  9




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Condensed Consolidating Balance Sheet
As of March 31, 2007
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    (1,820
    )
    
    $
    17,489
    
    
    $
    
    
    
    $
    15,669Accounts receivable, net
    
    
    
    
    
    
    190,748
    
    
    
    
    
    
    
    
    
    
    
    190,748Prepaids and other
    
    
    
    
    
    
    28,766
    
    
    
    15,854
    
    
    
    
    
    
    
    44,620Total current assets
    
    
    
    
    
    
    217,694
    
    
    
    33,343
    
    
    
    
    
    
    
    251,037Property and
equipment, net of accumulated depreciation
    
    
    
    
    
    
    534,149
    
    
    
    35,853
    
    
    
    (7,529
    )
    
    
    562,473Cost in excess of net assets acquired
    
    
    
    
    
    
    776,395
    
    
    
    
    
    
    
    
    
    
    
    776,395Investment in subsidiaries
    
    
    691,710
    
    
    
    
    
    
    
    
    
    
    
    (691,710
    )
    
    
    Other assets
    
    
    11,912
    
    
    
    18,103
    
    
    
    3,577
    
    
    
    
    
    
    
    33,592Total assets
    
    $
    703,622
    
    
    $
    1,546,341
    
    
    $
    72,773
    
    
    $
    (699,239
    )
    
    $
    1,623,497Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    25,411
    
    
    $
    
    
    
    $
    
    
    
    $
    25,411Salaries and benefits payable
    
    
    
    
    
    
    59,219
    
    
    
    
    
    
    
    
    
    
    
    59,219Other accrued liabilities
    
    
    13,112
    
    
    
    29,693
    
    
    
    12,599
    
    
    
    (12,451
    )
    
    
    42,953Current portion of long-term debt
    
    
    2,530
    
    
    
    
    
    
    
    306
    
    
    
    
    
    
    
    2,836Total current liabilities
    
    
    15,642
    
    
    
    114,323
    
    
    
    12,905
    
    
    
    (12,451
    )
    
    
    130,419Long-term debt, less current portion
    
    
    734,160
    
    
    
    
    
    
    
    26,682
    
    
    
    
    
    
    
    760,842Deferred tax liability
    
    
    
    
    
    
    37,331
    
    
    
    
    
    
    
    
    
    
    
    37,331Other liabilities
    
    
    4,281
    
    
    
    12,054
    
    
    
    12,298
    
    
    
    
    
    
    
    28,633Total liabilities
    
    
    754,083
    
    
    
    163,708
    
    
    
    51,885
    
    
    
    (12,451
    )
    
    
    957,225Stockholders (deficit) equity:Total stockholders (deficit) equity
    
    
    (50,461
    )
    
    
    1,382,633
    
    
    
    20,888
    
    
    
    (686,788
    )
    
    
    666,272Total liabilities and stockholders (deficit) equity
    
    $
    703,622
    
    
    $
    1,546,341
    
    
    $
    72,773
    
    
    $
    (699,239
    )
    
    $
    1,623,497
 Condensed Consolidating Balance Sheet
As of December 31, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    1,118
    
    
    $
    17,423
    
    
    $
    
    
    
    $
    18,541Accounts receivable, net
    
    
    
    
    
    
    180,137
    
    
    
    
    
    
    
    
    
    
    
    180,137Prepaids and other
    
    
    
    
    
    
    43,372
    
    
    
    1,210
    
    
    
    
    
    
    
    44,582Total current assets
    
    
    
    
    
    
    224,627
    
    
    
    18,633
    
    
    
    
    
    
    
    243,260Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    515,311
    
    
    
    36,085
    
    
    
    (7,590
    )
    
    
    543,806Cost in excess of net assets acquired
    
    
    
    
    
    
    761,026
    
    
    
    
    
    
    
    
    
    
    
    761,026Investment in subsidiaries
    
    
    681,856
    
    
    
    
    
    
    
    
    
    
    
    (681,856
    )
    
    
    Other assets
    
    
    12,349
    
    
    
    17,050
    
    
    
    3,705
    
    
    
    
    
    
    
    33,104Total assets
    
    $
    694,205
    
    
    $
    1,518,014
    
    
    $
    58,423
    
    
    $
    (689,446
    )
    
    $
    1,581,196Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    25,294
    
    
    $
    
    
    
    $
    
    
    
    $
    25,294Salaries and benefits payable
    
    
    
    
    
    
    66,438
    
    
    
    
    
    
    
    
    
    
    
    66,438Other accrued liabilities
    
    
    13,247
    
    
    
    32,461
    
    
    
    1,737
    
    
    
    (1,590
    )
    
    
    45,855Current portion of long-term debt
    
    
    2,084
    
    
    
    
    
    
    
    302
    
    
    
    
    
    
    
    2,386Total current liabilities
    
    
    15,331
    
    
    
    124,193
    
    
    
    2,039
    
    
    
    (1,590
    )
    
    
    139,973Long-term debt, less current portion
    
    
    714,061
    
    
    
    
    
    
    
    26,860
    
    
    
    
    
    
    
    740,921Deferred tax liability
    
    
    
    
    
    
    44,924
    
    
    
    
    
    
    
    
    
    
    
    44,924Other liabilities
    
    
    6,539
    
    
    
    12,140
    
    
    
    8,920
    
    
    
    
    
    
    
    27,599Total liabilities
    
    
    735,931
    
    
    
    181,257
    
    
    
    37,819
    
    
    
    (1,590
    )
    
    
    953,417Stockholders (deficit) equity:Total stockholders (deficit) equity
    
    
    (41,726
    )
    
    
    1,336,757
    
    
    
    20,604
    
    
    
    (687,856
    )
    
    
    627,779Total liabilities and stockholders (deficit) equity
    
    $
    694,205
    
    
    $
    1,518,014
    
    
    $
    58,423
    
    
    $
    (689,446
    )
    
    $
    1,581,196
 10




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##### Table of Contents



Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2007
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    323,718
    
    
    $
    4,534
    
    
    $
    (4,534
    )
    
    $
    323,718Salaries, wages and employee benefits
    
    
    
    
    
    
    180,999
    
    
    
    
    
    
    
    
    
    
    
    180,999Professional fees
    
    
    
    
    
    
    31,037
    
    
    
    (2
    )
    
    
    
    
    
    
    31,035Supplies
    
    
    
    
    
    
    18,477
    
    
    
    
    
    
    
    
    
    
    
    18,477Rentals and leases
    
    
    
    
    
    
    4,637
    
    
    
    
    
    
    
    
    
    
    
    4,637Other operating expenses
    
    
    
    
    
    
    31,380
    
    
    
    3,749
    
    
    
    (3,355
    )
    
    
    31,774Provision for doubtful accounts
    
    
    
    
    
    
    6,706
    
    
    
    
    
    
    
    
    
    
    
    6,706Depreciation and amortization
    
    
    
    
    
    
    6,084
    
    
    
    275
    
    
    
    (61
    )
    
    
    6,298Interest expense
    
    
    14,158
    
    
    
    
    
    
    
    228
    
    
    
    
    
    
    
    14,38614,158
    
    
    
    279,320
    
    
    
    4,250
    
    
    
    (3,416
    )
    
    
    294,312(Loss) income from continuing operations before
income taxes
    
    
    (14,158
    )
    
    
    44,398
    
    
    
    284
    
    
    
    (1,118
    )
    
    
    29,406(Benefit from) provision for income taxes
    
    
    (5,423
    )
    
    
    16,685
    
    
    
    
    
    
    
    
    
    
    
    11,262(Loss) income from continuing operations
    
    
    (8,735
    )
    
    
    27,713
    
    
    
    284
    
    
    
    (1,118
    )
    
    
    18,144Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    (19
    )Net (loss) income
    
    $
    (8,735
    )
    
    $
    27,694
    
    
    $
    284
    
    
    $
    (1,118
    )
    
    $
    18,125
 Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    242,312
    
    
    $
    2,821
    
    
    $
    (2,821
    )
    
    $
    242,312Salaries, wages and employee benefits
    
    
    
    
    
    
    139,798
    
    
    
    
    
    
    
    
    
    
    
    139,798Professional fees
    
    
    
    
    
    
    22,667
    
    
    
    48
    
    
    
    
    
    
    
    22,715Supplies
    
    
    
    
    
    
    14,015
    
    
    
    
    
    
    
    
    
    
    
    14,015Rentals and leases
    
    
    
    
    
    
    3,347
    
    
    
    
    
    
    
    
    
    
    
    3,347Other operating expenses
    
    
    
    
    
    
    23,170
    
    
    
    2,343
    
    
    
    (1,791
    )
    
    
    23,722Provision for doubtful accounts
    
    
    
    
    
    
    4,766
    
    
    
    
    
    
    
    
    
    
    
    4,766Depreciation and amortization
    
    
    
    
    
    
    4,542
    
    
    
    263
    
    
    
    (61
    )
    
    
    4,744Interest expense
    
    
    8,893
    
    
    
    
    
    
    
    315
    
    
    
    
    
    
    
    9,2088,893
    
    
    
    212,305
    
    
    
    2,969
    
    
    
    (1,852
    )
    
    
    222,315(Loss) income from continuing operations before
income taxes
    
    
    (8,893
    )
    
    
    30,007
    
    
    
    (148
    )
    
    
    (969
    )
    
    
    19,997(Benefit from) provision for income taxes
    
    
    (3,379
    )
    
    
    10,861
    
    
    
    117
    
    
    
    
    
    
    
    7,599(Loss) income from continuing operations
    
    
    (5,514
    )
    
    
    19,146
    
    
    
    (265
    )
    
    
    (969
    )
    
    
    12,398Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    
    
    
    
    (206
    )Net (loss) income
    
    $
    (5,514
    )
    
    $
    18,940
    
    
    $
    (265
    )
    
    $
    (969
    )
    
    $
    12,192
 11




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2007
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsOperating activities:Net (loss) income
    
    $
    (8,735
    )
    
    $
    27,694
    
    
    $
    284
    
    
    $
    (1,118
    )
    
    $
    18,125Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    
    
    
    
    6,084
    
    
    
    275
    
    
    
    (61
    )
    
    
    6,298Share-based compensation
    
    
    
    
    
    
    3,673
    
    
    
    
    
    
    
    
    
    
    
    3,673Amortization of loan costs
    
    
    506
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    517Loss from discontinued operations
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Change in income tax assets and liabilities
    
    
    
    
    
    
    (1,798
    )
    
    
    
    
    
    
    
    
    
    
    (1,798
    )Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (9,305
    )
    
    
    
    
    
    
    
    
    
    
    (9,305
    )Prepaids and other current assets
    
    
    
    
    
    
    (15,568
    )
    
    
    14,644
    
    
    
    
    
    
    
    (924
    )Accounts payable
    
    
    
    
    
    
    (831
    )
    
    
    
    
    
    
    
    
    
    
    (831
    )Salaries and benefits payable
    
    
    
    
    
    
    (9,432
    )
    
    
    
    
    
    
    
    
    
    
    (9,432
    )Accrued liabilities and other liabilities
    
    
    10,424
    
    
    
    (25,627
    )
    
    
    14,139
    
    
    
    
    
    
    
    (1,064
    )Net cash provided by (used in) continuing operating
activities
    
    
    2,214
    
    
    
    (25,110
    )
    
    
    29,353
    
    
    
    (1,179
    )
    
    
    5,278Net cash used in discontinued operating activities
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    
    
    
    
    (145
    )Net cash provided by (used in) operating activities
    
    
    2,214
    
    
    
    (25,255
    )
    
    
    29,353
    
    
    
    (1,179
    )
    
    
    5,133Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (25,241
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,241
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    
    
    
    
    (9,872
    )
    
    
    
    
    
    
    
    
    
    
    (9,872
    )Other assets
    
    
    
    
    
    
    361
    
    
    
    (128
    )
    
    
    
    
    
    
    233Net cash used in investing activities
    
    
    (25,241
    )
    
    
    (9,511
    )
    
    
    (128
    )
    
    
    
    
    
    
    (34,880
    )Financing activities:Principal payments on long-term debt
    
    
    (241
    )
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    (315
    )Net transfers to and from members
    
    
    (3,922
    )
    
    
    31,828
    
    
    
    (29,085
    )
    
    
    1,179
    
    
    
    Net increase in revolving credit facility
    
    
    19,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000Payment of loan and issuance costs
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85
    )Excess tax benefits from share-based payment arrangements
    
    
    2,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,569Proceeds from issuance of common stock upon exercise of
stock options
    
    
    5,706
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,706Net cash provided by (used in) financing activities
    
    
    23,027
    
    
    
    31,828
    
    
    
    (29,159
    )
    
    
    1,179
    
    
    
    26,875Net (decrease) increase in cash
    
    
    
    
    
    
    (2,938
    )
    
    
    66
    
    
    
    
    
    
    
    (2,872
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,118
    
    
    
    17,423
    
    
    
    
    
    
    
    18,541Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    (1,820
    )
    
    $
    17,489
    
    
    $
    
    
    
    $
    15,669
 12




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsOperating activities:Net (loss) income
    
    $
    (5,514)
    
    
    $
    18,940
    
    
    $
    (265
    )
    
    $
    (969
    )
    
    $
    12,192Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    4,542
    
    
    
    263
    
    
    
    (61
    )
    
    
    4,744Share-based compensation
    
    
    
    
    
    
    6,254
    
    
    
    
    
    
    
    
    
    
    
    6,254Amortization of loan costs
    
    
    
    
    
    
    394
    
    
    
    11
    
    
    
    
    
    
    
    405Loss from discontinued operations
    
    
    
    
    
    
    206
    
    
    
    
    
    
    
    
    
    
    
    206Change in income tax assets and liabilities
    
    
    
    
    
    
    4,202
    
    
    
    
    
    
    
    
    
    
    
    4,202Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (8,297
    )
    
    
    
    
    
    
    
    
    
    
    (8,297
    )Prepaids and other current assets
    
    
    
    
    
    
    6,050
    
    
    
    (7,941
    )
    
    
    
    
    
    
    (1,891
    )Accounts payable
    
    
    
    
    
    
    (2,617
    )
    
    
    
    
    
    
    
    
    
    
    (2,617
    )Salaries and benefits payable
    
    
    
    
    
    
    (5,248
    )
    
    
    
    
    
    
    
    
    
    
    (5,248
    )Accrued liabilities and other liabilities
    
    
    (108
    )
    
    
    (8,419
    )
    
    
    7,826
    
    
    
    
    
    
    
    (701
    )Net cash (used in) provided by continuing
operating activities
    
    
    (5,622
    )
    
    
    16,007
    
    
    
    (106
    )
    
    
    (1,030
    )
    
    
    9,249Net cash provided by discontinued operating activities
    
    
    
    
    
    
    1,306
    
    
    
    
    
    
    
    
    
    
    
    1,306Net cash (used in) provided by operating activities
    
    
    (5,622
    )
    
    
    17,313
    
    
    
    (106
    )
    
    
    (1,030
    )
    
    
    10,555Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (38,300
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,300
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    
    
    
    
    (5,513
    )
    
    
    
    
    
    
    
    
    
    
    (5,513
    )Other assets
    
    
    
    
    
    
    (150
    )
    
    
    389
    
    
    
    
    
    
    
    239Net cash (used in) provided by investing activities
    
    
    (38,300
    )
    
    
    (5,663
    )
    
    
    389
    
    
    
    
    
    
    
    (43,574
    )Financing activities:Principal payments on long-term debt
    
    
    (29
    )
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    (93
    )Net transfers to and from members
    
    
    39,883
    
    
    
    (40,900
    )
    
    
    (13
    )
    
    
    1,030
    
    
    
    Payment of loan and issuance costs
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22
    )Excess tax benefits from share-based payment
arrangements
    
    
    2,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,446Proceeds from issuance of common stock upon exercise of
stock options
    
    
    1,644
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,644Net cash provided by (used in) financing activities
    
    
    43,922
    
    
    
    (40,900
    )
    
    
    (77
    )
    
    
    1,030
    
    
    
    3,975Net (decrease) increase in cash
    
    
    
    
    
    
    (29,250
    )
    
    
    206
    
    
    
    
    
    
    
    (29,044
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    44,115
    
    
    
    10,585
    
    
    
    
    
    
    
    54,700Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    14,865
    
    
    $
    10,791
    
    
    $
    
    
    
    $
    25,656
 11. Recently Issued Accounting Pronouncement
 Fair Value Measurements.
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115.
 13




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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.
    
    
    our ability to complete the acquisition of Horizon Health
Corporation (NASDAQ: HORC) (Horizon Health) and successfully integrate Horizon
Health operations;
    
    potential competition that alters or impedes our acquisition strategy by decreasing our ability
to acquire additional inpatient facilities on favorable terms;
    
    our ability to successfully integrate and improve the operations of acquired inpatient facilities;
    
    our ability to maintain favorable and continuing relationships with physicians who use our
inpatient facilities;
    
    our substantial indebtedness and our ability to receive timely additional financing on terms
acceptable to us to fund our acquisition strategy and capital expenditure needs, including
financing for the acquisition of Horizon Health;
    
    risks inherent to the health care industry, including the impact of unforeseen changes in
regulation, reimbursement rates from federal and state health care programs or managed care
companies and exposure to claims and legal actions by patients and others;
    
    efforts by federal and state health care programs and managed care companies to reduce
reimbursement rates for our services;
    
    our ability to comply with applicable licensure and accreditation requirements;
    
    our ability to comply with extensive laws and government regulations related to billing,
physician relationships, adequacy of medical care and licensure;
    
    our ability to retain key employees who are instrumental to our successful operations;
    
    our ability to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act;
    
    our ability to ensure confidential information is not inappropriately disclosed and that we are
in compliance with federal and state health information privacy standards;
    
    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;
    
    our ability to obtain adequate levels of general and professional liability insurance; and
    
    those risks and uncertainties described from time to time in our filings with the SEC.
   Overview
    Sources of Revenue
 Patient Service Revenue
 14




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##### Table of Contents



Management
Contract and Other Revenue
  Results of Operations
  For the Three Months Ended March 31,2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %Revenue
    
    $
    323,718
    
    
    
    100.0
    %
    
    $
    242,312
    
    
    
    100.0
    %Salaries, wages, and employee benefits (including
share-based compensation of $3,673 and $6,254
for 2007 and 2006, respectively)
    
    
    180,999
    
    
    
    55.9
    %
    
    
    139,798
    
    
    
    57.7
    %Professional fees
    
    
    31,035
    
    
    
    9.6
    %
    
    
    22,715
    
    
    
    9.4
    %Supplies
    
    
    18,477
    
    
    
    5.7
    %
    
    
    14,015
    
    
    
    5.8
    %Provision for doubtful accounts
    
    
    6,706
    
    
    
    2.1
    %
    
    
    4,766
    
    
    
    1.9
    %Other operating expenses
    
    
    36,411
    
    
    
    11.3
    %
    
    
    27,069
    
    
    
    11.2
    %Depreciation and amortization
    
    
    6,298
    
    
    
    1.9
    %
    
    
    4,744
    
    
    
    1.9
    %Interest expense, net
    
    
    14,386
    
    
    
    4.4
    %
    
    
    9,208
    
    
    
    3.8
    %Income from continuing operations before
income taxes
    
    
    29,406
    
    
    
    9.1
    %
    
    
    19,997
    
    
    
    8.3
    %Provision for income taxes
    
    
    11,262
    
    
    
    3.5
    %
    
    
    7,599
    
    
    
    3.2
    %Income from continuing operations
    
    $
    18,144
    
    
    
    5.6
    %
    
    $
    12,398
    
    
    
    5.1
    %
 Three Months Ended March 31, 2007 Compared To Three Months Ended March 31, 2006
  15




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##### Table of Contents



Three Months Ended March 31,
    
    %2007
    
    2006
    
    ChangeTotal facility results:Revenue
    
    $
    306,445
    
    
    $
    229,756
    
    
    
    33.4
    %Number of facilities at period end
    
    
    75
    
    
    
    58
    
    
    
    29.3
    %Admissions
    
    
    32,571
    
    
    
    26,937
    
    
    
    20.9
    %Patient days
    
    
    556,911
    
    
    
    446,054
    
    
    
    24.9
    %Average length of stay
    
    
    17.1
    
    
    
    16.6
    
    
    
    3.0
    %Revenue per patient day
    
    $
    550
    
    
    $
    515
    
    
    
    6.8
    %Same-facility results:Revenue
    
    $
    241,306
    
    
    $
    228,376
    
    
    
    5.7
    %Number of facilities at period end
    
    
    58
    
    
    
    58
    
    
    
    0.0
    %Admissions
    
    
    27,370
    
    
    
    26,887
    
    
    
    1.8
    %Patient days
    
    
    447,082
    
    
    
    442,595
    
    
    
    1.0
    %Average length of stay
    
    
    16.3
    
    
    
    16.5
    
    
    
    -1.2
    %Revenue per patient day
    
    $
    540
    
    
    $
    516
    
    
    
    4.7
    %
 Revenue
 Salaries, wages and employee benefits
 Professional fees
 Supplies.
 Provision for doubtful accounts
 16




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##### Table of Contents



Other operating expenses
 Depreciation and amortization
 Interest expense, net
 Loss from discontinued operations, net of taxes
 Liquidity and Capital Resources
      17




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##### Table of Contents



Contractual Obligations
 Payments Due by Period (in thousands)Less than

    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    

3-5
years
    
    
    5 yearsLong-term debt (1):Senior Credit Facility:Revolving line of credit facility, expiring on December 21, 2009
and bearing interest of 6.6% and 6.7% at March 31, 2007
and December 31, 2006, respectively
    
    $
    120,000
    
    
    $
    
    
    
    $
    120,000
    
    
    $
    
    
    
    $
    Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest of 7.1% at March 31, 2007
and December 31, 2006, respectively
    
    
    350,000
    
    
    
    1,875
    
    
    
    3,000
    
    
    
    3,000
    
    
    
    342,1257 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 5.7% to 7.6%
    
    
    26,988
    
    
    
    306
    
    
    
    670
    
    
    
    756
    
    
    
    25,256755,669
    
    
    
    2,181
    
    
    
    123,670
    
    
    
    3,756
    
    
    
    626,062Lease and other obligations
    
    
    56,679
    
    
    
    10,755
    
    
    
    17,013
    
    
    
    7,598
    
    
    
    21,313Total contractual obligations
    
    $
    812,348
    
    
    $
    12,936
    
    
    $
    140,683
    
    
    $
    11,354
    
    
    $
    647,375
 
 (1)
    
    Excludes capital lease and other obligations of $8.0 million, which are included in lease and other obligations. 3 4 5 8 3 4 5 8
 Critical Accounting Policies
  Allowance for Doubtful Accounts
  18




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##### Table of Contents



Allowances for Contractual Discounts
  Professional and General Liability
  Income Taxes
  Accounting for Uncertainty in Income Taxes
 An Interpretation of FASB Statement No. 109
 Share-Based Compensation
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  19




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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 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 6. Exhibits.
 ExhibitNumber
    
    Description3.1
    
    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)).
 20




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##### Table of Contents



ExhibitNumber
    
    Description4.4
    
    Form of Notes (included in Exhibit 4.3).4.5
    
    Indenture, dated as of July 6, 2006, 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,
2006).4.6
    
    Form of Notes (included in Exhibit 4.5).10.1
    
    Psychiatric Solutions, Inc. 2007
Cash Bonus Plan (incorporated by reference to Exhibit 10.1 to the
Companys Current Report or Form 8-K, filed on February 22,
2007).10.2
    
    Psychiatric Solutions, Inc. 2007 Long-Term Equity Compensation Plan
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, filed on February 22, 2007).10.3*
    
    Form of Nonstatutory Stock Option
Agreement.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 21




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##### Table of Contents



SIGNATURES
  Psychiatric Solutions, Inc.By:
    /s/ Jack E. PolsonJack E. PolsonExecutive Vice President, Chief Accounting Officer