##### 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 September 30, 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 
Organization)
    
    (I.R.S. Employer Identification No.)
 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 September 30, 2007 and December 31, 2006 (Unaudited)
    
    
    1Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2007 and 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 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
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 6. Exhibits
    
    
    23Ex-31.1 Section 302 Certification of the CEOEx-31.2 Section 302 Certification of the CFOEx-32.1 Section 906 Certification of the CEO & CFO




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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)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,398
    
    
    $
    18,572Accounts receivable, less allowance for doubtful accounts of
$34,946 and $18,672, respectively
    
    
    241,838
    
    
    
    179,050Prepaids and other
    
    
    68,716
    
    
    
    45,364Total current assets
    
    
    332,952
    
    
    
    242,986Property and equipment, net of accumulated depreciation
    
    
    680,541
    
    
    
    539,758Cost in excess of net assets acquired
    
    
    1,089,053
    
    
    
    760,268Other assets
    
    
    66,765
    
    
    
    37,910Total assets
    
    $
    2,169,311
    
    
    $
    1,580,922LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    29,676
    
    
    $
    25,222Salaries and benefits payable
    
    
    79,990
    
    
    
    66,236Other accrued liabilities
    
    
    71,667
    
    
    
    45,855Current portion of long-term debt
    
    
    5,903
    
    
    
    2,386Total current liabilities
    
    
    187,236
    
    
    
    139,699Long-term debt, less current portion
    
    
    1,176,553
    
    
    
    740,921Deferred tax liability
    
    
    53,650
    
    
    
    44,924Other liabilities
    
    
    28,158
    
    
    
    27,599Total liabilities
    
    
    1,445,597
    
    
    
    953,143Minority interest
    
    
    4,433
    
    
    
    Stockholders equity:Common stock, $0.01 par value, 125,000 shares authorized;
54,608 and 53,421 issued and outstanding, respectively
    
    
    546
    
    
    
    534Additional paid-in capital
    
    
    562,159
    
    
    
    523,193Retained earnings
    
    
    156,576
    
    
    
    104,052Total stockholders equity
    
    
    719,281
    
    
    
    627,779Total liabilities and stockholders equity
    
    $
    2,169,311
    
    
    $
    1,580,922
  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 September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    402,021
    
    
    $
    253,696
    
    
    $
    1,078,585
    
    
    $
    742,534Salaries, wages and employee benefits (including
share-based compensation of $4,423, $2,059,
$12,006 and $10,449 for the respective three and
nine month periods in 2007 and 2006)
    
    
    223,902
    
    
    
    143,920
    
    
    
    599,137
    
    
    
    420,490Professional fees
    
    
    40,565
    
    
    
    24,072
    
    
    
    106,629
    
    
    
    70,827Supplies
    
    
    21,820
    
    
    
    14,494
    
    
    
    59,745
    
    
    
    42,766Rentals and leases
    
    
    5,747
    
    
    
    3,274
    
    
    
    15,391
    
    
    
    9,906Other operating expenses
    
    
    38,517
    
    
    
    23,038
    
    
    
    105,026
    
    
    
    70,428Provision for doubtful accounts
    
    
    7,019
    
    
    
    4,401
    
    
    
    20,958
    
    
    
    13,756Depreciation and amortization
    
    
    8,525
    
    
    
    5,194
    
    
    
    22,037
    
    
    
    14,745Interest expense
    
    
    22,253
    
    
    
    10,059
    
    
    
    53,669
    
    
    
    28,537Loss on refinancing of long-term debt
    
    
    
    
    
    
    
    
    
    
    8,179
    
    
    
    368,348
    
    
    
    228,452
    
    
    
    990,771
    
    
    
    671,455Income from continuing operations
before income taxes
    
    
    33,673
    
    
    
    25,244
    
    
    
    87,814
    
    
    
    71,079Provision for income taxes
    
    
    12,831
    
    
    
    9,593
    
    
    
    33,457
    
    
    
    27,010Income from continuing operations
    
    
    20,842
    
    
    
    15,651
    
    
    
    54,357
    
    
    
    44,069Loss from discontinued operations, net of income
tax benefit of $322, $78, $800 and $608 for the
respective three and nine month periods in 2007
and 2006
    
    
    (517
    )
    
    
    (127
    )
    
    
    (1,300
    )
    
    
    (992
    )Net income
    
    $
    20,325
    
    
    $
    15,524
    
    
    $
    53,057
    
    
    $
    43,077Basic earnings per share:Income from continuing operations
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    1.00
    
    
    $
    0.83Loss from discontinued operations,
net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )Net income
    
    $
    0.37
    
    
    $
    0.29
    
    
    $
    0.98
    
    
    $
    0.82Diluted earnings per share:Income from continuing operations
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.98
    
    
    $
    0.81Loss from discontinued operations,
net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )Net income
    
    $
    0.37
    
    
    $
    0.29
    
    
    $
    0.96
    
    
    $
    0.80Shares used in computing per share amounts:Basic
    
    
    54,278
    
    
    
    53,114
    
    
    
    54,064
    
    
    
    52,849Diluted
    
    
    55,415
    
    
    
    54,266
    
    
    
    55,343
    
    
    
    54,077
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PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Nine Months Ended September 30,2007
    
    
    2006Operating activities:Net income
    
    $
    53,057
    
    
    $
    43,077Adjustments to reconcile net income to net cash provided by continuing
operating activities:Depreciation and amortization
    
    
    22,037
    
    
    
    14,745Share-based compensation
    
    
    12,006
    
    
    
    10,449Loss on refinancing of long-term debt
    
    
    8,179
    
    
    
    Amortization of loan costs and bond premium
    
    
    1,591
    
    
    
    1,225Loss from discontinued operations
    
    
    1,300
    
    
    
    992Change in income tax assets and liabilities
    
    
    8,219
    
    
    
    24,270Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    (18,557
    )
    
    
    (11,721
    )Prepaids and other current assets
    
    
    648
    
    
    
    (3,685
    )Accounts payable
    
    
    (6,784
    )
    
    
    (2,038
    )Salaries and benefits payable
    
    
    (766
    )
    
    
    4,740Accrued liabilities and other liabilities
    
    
    297
    
    
    
    1,416Net cash provided by continuing operating activities
    
    
    81,227
    
    
    
    83,470Net cash used in discontinued operating activities
    
    
    (493
    )
    
    
    (2,677
    )Net cash provided by operating activities
    
    
    80,734
    
    
    
    80,793Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (462,729
    )
    
    
    (167,065
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    (48,361
    )
    
    
    (20,880
    )Other assets
    
    
    (750
    )
    
    
    35Net cash used in investing activities
    
    
    (511,840
    )
    
    
    (187,910
    )Financing activities:Borrowings on long-term debt
    
    
    481,875
    
    
    
    Principal payments on long-term debt
    
    
    (40,220
    )
    
    
    (274
    )Net (decrease) increase in revolving credit facility borrowings
    
    
    (11,000
    )
    
    
    52,000Payment of loan and stock issuance costs
    
    
    (6,603
    )
    
    
    (101
    )Costs to refinance long-term debt
    
    
    (7,127
    )
    
    
    Excess tax benefits from share-based payment arrangements
    
    
    4,072
    
    
    
    5,771Proceeds from issuance of common stock upon exercise
of stock options
    
    
    13,935
    
    
    
    5,456Net cash provided by financing activities
    
    
    434,932
    
    
    
    62,852Net increase (decrease) in cash
    
    
    3,826
    
    
    
    (44,265
    )Cash and cash equivalents at beginning of the period
    
    
    18,572
    
    
    
    54,699Cash and cash equivalents at end of the period
    
    $
    22,398
    
    
    $
    10,434Effect of Acquisitions:Assets acquired, net of cash acquired
    
    $
    533,084
    
    
    $
    182,056Liabilities assumed
    
    
    (52,653
    )
    
    
    (10,745
    )Long-term debt assumed
    
    
    (8,702
    )
    
    
    (4,246
    )Common stock issued
    
    
    (9,000
    )
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    462,729
    
    
    $
    167,065
  3




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1. Recent Developments
 5 8 5 8 3 4  3 4  5 8 5 8
 2. Basis of Presentation
  3. Earnings Per Share
 Earnings per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Income from continuing operations
    
    $
    20,842
    
    
    $
    15,651
    
    
    $
    54,357
    
    
    $
    44,069Loss from discontinued operations, net of taxes
    
    
    (517
    )
    
    
    (127
    )
    
    
    (1,300
    )
    
    
    (992
    )Net income
    
    $
    20,325
    
    
    $
    15,524
    
    
    $
    53,057
    
    
    $
    43,077Denominator:Weighted average shares outstanding for basic earnings
per share
    
    
    54,278
    
    
    
    53,114
    
    
    
    54,064
    
    
    
    52,849Effects of dilutive stock options and restricted stock
outstanding
    
    
    1,137
    
    
    
    1,152
    
    
    
    1,279
    
    
    
    1,228Shares used in computing diluted earnings per common share
    
    
    55,415
    
    
    
    54,266
    
    
    
    55,343
    
    
    
    54,077Basic earnings per share:Income from continuing operations
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    1.00
    
    
    $
    0.83Loss from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )$
    0.37
    
    
    $
    0.29
    
    
    $
    0.98
    
    
    $
    0.82Diluted earnings per share:Income from continuing operations
    
    $
    0.38
    
    
    $
    0.29
    
    
    $
    0.98
    
    
    $
    0.81Loss from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )$
    0.37
    
    
    $
    0.29
    
    
    $
    0.96
    
    
    $
    0.80
 4




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4. Share-Based Compensation
      5. Mergers and Acquisitions
  5 8 3 4
   Three MonthsEnded
    
    Nine MonthsSeptember 30,
    
    Ended September 30,2006
    
    2007
    
    2006Revenue
    
    $
    328,519
    
    
    $
    1,200,501
    
    
    $
    963,040Net income
    
    $
    16,762
    
    
    $
    54,233
    
    
    $
    45,427Earnings per common share, basic
    
    $
    0.32
    
    
    $
    1.00
    
    
    $
    0.86Earnings per common share, diluted
    
    $
    0.31
    
    
    $
    0.98
    
    
    $
    0.84
  5




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##### Table of Contents



6. Long-term debt
  September 30,
    
    
    December 31,2007
    
    
    2006Senior credit facility:Revolving line of credit facility, expiring on December 21, 2009
and bearing interest of 6.7% at September 30, 2007
and December 31, 2006
    
    $
    90,000
    
    
    $
    101,000Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 7.2% and 7.1% at September 30, 2007
and December 31, 2006, respectively
    
    
    574,250
    
    
    
    350,0007 3/4% Senior Subordinated Notes
    
    
    476,667
    
    
    
    220,00010 5/8% Senior Subordinated Notes
    
    
    34
    
    
    
    38,681Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6%
    
    
    33,766
    
    
    
    27,062Other
    
    
    7,739
    
    
    
    6,5641,182,456
    
    
    
    743,307Less current portion
    
    
    5,903
    
    
    
    2,386Long-term debt
    
    $
    1,176,553
    
    
    $
    740,921
 Senior Credit Facility
 5 8
   7 3 / 4 % Notes
 3 4 3 4 5 8 3 4 3 4 3 4 3 4
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3 4
 10 5 / 8 % Notes
 3 4 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    177
    
    
    $
    1,098
    
    
    $
    2,310
    
    
    $
    5,082Operating expenses
    
    
    1,016
    
    
    
    1,303
    
    
    
    3,643
    
    
    
    5,922Loss on disposal
    
    
    
    
    
    
    
    
    
    
    767
    
    
    
    7601,016
    
    
    
    1,303
    
    
    
    4,410
    
    
    
    6,682Loss from discontinued operations before income taxes
    
    
    (839
    )
    
    
    (205
    )
    
    
    (2,100
    )
    
    
    (1,600
    )Benefit from income taxes
    
    
    (322
    )
    
    
    (78
    )
    
    
    (800
    )
    
    
    (608
    )Loss from discontinued operations, net of taxes
    
    $
    (517
    )
    
    $
    (127
    )
    
    $
    (1,300
    )
    
    $
    (992
    )
 9. Disclosures About Reportable Segments
 Disclosures About Segments of an Enterprise and
Related Information
  8




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Three Months Ended September 30, 2007
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    359,295
    
    
    $
    42,726
    
    
    $
    
    
    
    $
    402,021Adjusted EBITDA
    
    $
    71,142
    
    
    $
    7,299
    
    
    $
    (9,567
    )
    
    $
    68,874Interest expense
    
    
    7,630
    
    
    
    (7
    )
    
    
    14,630
    
    
    
    22,253Depreciation and amortization
    
    
    7,265
    
    
    
    895
    
    
    
    365
    
    
    
    8,525Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    12,831
    
    
    
    12,831Inter-segment expenses
    
    
    14,768
    
    
    
    2,530
    
    
    
    (17,298
    )
    
    
    Other expenses:Share-based compensation
    
    
    
    
    
    
    
    
    
    
    4,423
    
    
    
    4,423Total other expenses
    
    
    
    
    
    
    
    
    
    
    4,423
    
    
    
    4,423Income (loss) from continuing operations
    
    $
    41,479
    
    
    $
    3,881
    
    
    $
    (24,518
    )
    
    $
    20,842Total assets
    
    $
    1,967,533
    
    
    $
    109,703
    
    
    $
    92,075
    
    
    $
    2,169,311
 Nine Months Ended September 30, 2007
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    991,299
    
    
    $
    87,286
    
    
    $
    
    
    
    $
    1,078,585Adjusted EBITDA
    
    $
    196,672
    
    
    $
    15,418
    
    
    $
    (28,385
    )
    
    $
    183,705Interest expense
    
    
    23,220
    
    
    
    (17
    )
    
    
    30,466
    
    
    
    53,669Depreciation and amortization
    
    
    19,599
    
    
    
    1,365
    
    
    
    1,073
    
    
    
    22,037Provision for income taxes
    
    
    2
    
    
    
    
    
    
    
    33,455
    
    
    
    33,457Inter-segment expenses
    
    
    39,289
    
    
    
    4,537
    
    
    
    (43,826
    )
    
    
    Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    8,179
    
    
    
    8,179Share-based compensation
    
    
    
    
    
    
    
    
    
    
    12,006
    
    
    
    12,006Total other expenses
    
    
    
    
    
    
    
    
    
    
    20,185
    
    
    
    20,185Income (loss) from continuing operations
    
    $
    114,562
    
    
    $
    9,533
    
    
    $
    (69,738
    )
    
    $
    54,357Total assets
    
    $
    1,967,533
    
    
    $
    109,703
    
    
    $
    92,075
    
    
    $
    2,169,311
 Three Months Ended September 30, 2006
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    240,749
    
    
    $
    12,947
    
    
    $
    
    
    
    $
    253,696Adjusted EBITDA
    
    $
    48,139
    
    
    $
    2,278
    
    
    $
    (7,861
    )
    
    $
    42,556Interest expense
    
    
    1,363
    
    
    
    1
    
    
    
    8,695
    
    
    
    10,059Depreciation and amortization
    
    
    4,708
    
    
    
    174
    
    
    
    312
    
    
    
    5,194Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    9,593
    
    
    
    9,593Inter-segment expenses
    
    
    9,434
    
    
    
    506
    
    
    
    (9,940
    )
    
    
    Other expenses:Share-based compensation
    
    
    
    
    
    
    
    
    
    
    2,059
    
    
    
    2,059Total other expenses
    
    
    
    
    
    
    
    
    
    
    2,059
    
    
    
    2,059Income (loss) from continuing operations
    
    $
    32,634
    
    
    $
    1,597
    
    
    $
    (18,580
    )
    
    $
    15,651Total assets
    
    $
    1,214,680
    
    
    $
    29,481
    
    
    $
    73,570
    
    
    $
    1,317,731
 9




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##### Table of Contents



Nine Months Ended September 30, 2006
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    704,282
    
    
    $
    38,252
    
    
    $
    
    
    
    $
    742,534Adjusted EBITDA
    
    $
    139,391
    
    
    $
    6,647
    
    
    $
    (21,228
    )
    
    $
    124,810Interest expense
    
    
    10,315
    
    
    
    2
    
    
    
    18,220
    
    
    
    28,537Depreciation and amortization
    
    
    13,327
    
    
    
    514
    
    
    
    904
    
    
    
    14,745Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    27,010
    
    
    
    27,010Inter-segment expenses
    
    
    28,071
    
    
    
    1,575
    
    
    
    (29,646
    )
    
    
    Other expenses:Share-based compensation
    
    
    
    
    
    
    
    
    
    
    10,449
    
    
    
    10,449Total other expenses
    
    
    
    
    
    
    
    
    
    
    10,449
    
    
    
    10,449Income (loss) from continuing operations
    
    $
    87,678
    
    
    $
    4,556
    
    
    $
    (48,165
    )
    
    $
    44,069Total assets
    
    $
    1,214,680
    
    
    $
    29,481
    
    
    $
    73,570
    
    
    $
    1,317,731
 10. Financial Information for the Company and Its Subsidiaries
  Condensed Consolidating Balance Sheet
As of September 30, 2007
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    1,985
    
    
    $
    20,413
    
    
    $
    
    
    
    $
    22,398Accounts receivable, net
    
    
    
    
    
    
    233,876
    
    
    
    7,962
    
    
    
    
    
    
    
    241,838Prepaids and other
    
    
    
    
    
    
    59,249
    
    
    
    11,961
    
    
    
    (2,494
    )
    
    
    68,716Total current assets
    
    
    
    
    
    
    295,110
    
    
    
    40,336
    
    
    
    (2,494
    )
    
    
    332,952Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    630,006
    
    
    
    57,942
    
    
    
    (7,407
    )
    
    
    680,541Cost in excess of net assets acquired
    
    
    
    
    
    
    1,089,053
    
    
    
    
    
    
    
    
    
    
    
    1,089,053Investment in subsidiaries
    
    
    1,079,524
    
    
    
    
    
    
    
    
    
    
    
    (1,079,524
    )
    
    
    Other assets
    
    
    16,101
    
    
    
    46,400
    
    
    
    4,264
    
    
    
    
    
    
    
    66,765Total assets
    
    $
    1,095,625
    
    
    $
    2,060,569
    
    
    $
    102,542
    
    
    $
    (1,089,425
    )
    
    $
    2,169,311Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    28,227
    
    
    $
    1,449
    
    
    $
    
    
    
    $
    29,676Salaries and benefits payable
    
    
    
    
    
    
    78,810
    
    
    
    1,180
    
    
    
    
    
    
    
    79,990Other accrued liabilities
    
    
    20,794
    
    
    
    47,522
    
    
    
    5,845
    
    
    
    (2,494
    )
    
    
    71,667Current portion of long-term debt
    
    
    5,512
    
    
    
    
    
    
    
    391
    
    
    
    
    
    
    
    5,903Total current liabilities
    
    
    26,306
    
    
    
    154,559
    
    
    
    8,865
    
    
    
    (2,494
    )
    
    
    187,236Long-term debt, less current portion
    
    
    1,143,178
    
    
    
    
    
    
    
    33,375
    
    
    
    
    
    
    
    1,176,553Deferred tax liability
    
    
    
    
    
    
    53,650
    
    
    
    
    
    
    
    
    
    
    
    53,650Other liabilities
    
    
    5,630
    
    
    
    10,141
    
    
    
    12,376
    
    
    
    11
    
    
    
    28,158Total liabilities
    
    
    1,175,114
    
    
    
    218,350
    
    
    
    54,616
    
    
    
    (2,483
    )
    
    
    1,445,597Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,433
    
    
    
    4,433Total stockholders (deficit) equity
    
    
    (79,489
    )
    
    
    1,842,219
    
    
    
    47,926
    
    
    
    (1,091,375
    )
    
    
    719,281Total liabilities and stockholders (deficit) equity
    
    $
    1,095,625
    
    
    $
    2,060,569
    
    
    $
    102,542
    
    
    $
    (1,089,425
    )
    
    $
    2,169,311
 10




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##### Table of Contents



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
    
    $
    
    
    
    $
    1,149
    
    
    $
    17,423
    
    
    $
    
    
    
    $
    18,572Accounts receivable, net
    
    
    
    
    
    
    179,050
    
    
    
    
    
    
    
    
    
    
    
    179,050Prepaids and other
    
    
    
    
    
    
    44,154
    
    
    
    1,210
    
    
    
    
    
    
    
    45,364Total current assets
    
    
    
    
    
    
    224,353
    
    
    
    18,633
    
    
    
    
    
    
    
    242,986Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    511,263
    
    
    
    36,085
    
    
    
    (7,590
    )
    
    
    539,758Cost in excess of net assets acquired
    
    
    
    
    
    
    760,268
    
    
    
    
    
    
    
    
    
    
    
    760,268Investment in subsidiaries
    
    
    681,856
    
    
    
    
    
    
    
    
    
    
    
    (681,856
    )
    
    
    Other assets
    
    
    12,349
    
    
    
    21,856
    
    
    
    3,705
    
    
    
    
    
    
    
    37,910Total assets
    
    $
    694,205
    
    
    $
    1,517,740
    
    
    $
    58,423
    
    
    $
    (689,446
    )
    
    $
    1,580,922Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    25,222
    
    
    $
    
    
    
    $
    
    
    
    $
    25,222Salaries and benefits payable
    
    
    
    
    
    
    66,236
    
    
    
    
    
    
    
    
    
    
    
    66,236Other 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
    
    
    
    123,919
    
    
    
    2,039
    
    
    
    (1,590
    )
    
    
    139,699Long-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
    
    
    
    180,983
    
    
    
    37,819
    
    
    
    (1,590
    )
    
    
    953,143Total stockholders (deficit) equity
    
    
    (41,726
    )
    
    
    1,336,757
    
    
    
    20,604
    
    
    
    (687,856
    )
    
    
    627,779Total liabilities and stockholders (deficit) equity
    
    $
    694,205
    
    
    $
    1,517,740
    
    
    $
    58,423
    
    
    $
    (689,446
    )
    
    $
    1,580,922
 Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2007
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    402,021
    
    
    $
    12,588
    
    
    $
    (12,588
    )
    
    $
    402,021Salaries, wages and employee benefits
    
    
    
    
    
    
    217,303
    
    
    
    6,599
    
    
    
    
    
    
    
    223,902Professional fees
    
    
    
    
    
    
    38,830
    
    
    
    1,735
    
    
    
    
    
    
    
    40,565Supplies
    
    
    
    
    
    
    21,295
    
    
    
    525
    
    
    
    
    
    
    
    21,820Rentals and leases
    
    
    
    
    
    
    5,535
    
    
    
    212
    
    
    
    
    
    
    
    5,747Other operating expenses
    
    
    
    
    
    
    36,788
    
    
    
    (1,677
    )
    
    
    3,406
    
    
    
    38,517Provision for doubtful accounts
    
    
    
    
    
    
    6,769
    
    
    
    250
    
    
    
    
    
    
    
    7,019Depreciation and amortization
    
    
    
    
    
    
    7,956
    
    
    
    630
    
    
    
    (61
    )
    
    
    8,525Interest expense
    
    
    21,910
    
    
    
    
    
    
    
    343
    
    
    
    
    
    
    
    22,25321,910
    
    
    
    334,476
    
    
    
    8,617
    
    
    
    3,345
    
    
    
    368,348(Loss) income from continuing operations before
income taxes
    
    
    (21,910
    )
    
    
    67,545
    
    
    
    3,971
    
    
    
    (15,933
    )
    
    
    33,673(Benefit from) provision for income taxes
    
    
    (8,348
    )
    
    
    21,179
    
    
    
    
    
    
    
    
    
    
    
    12,831(Loss) income from continuing operations
    
    
    (13,562
    )
    
    
    46,366
    
    
    
    3,971
    
    
    
    (15,933
    )
    
    
    20,842Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (517
    )
    
    
    
    
    
    
    
    
    
    
    (517
    )Net (loss) income
    
    $
    (13,562
    )
    
    $
    45,849
    
    
    $
    3,971
    
    
    $
    (15,933
    )
    
    $
    20,325
 11




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    253,696
    
    
    $
    2,863
    
    
    $
    (2,863
    )
    
    $
    253,696Salaries, wages and employee benefits
    
    
    
    
    
    
    143,920
    
    
    
    
    
    
    
    
    
    
    
    143,920Professional fees
    
    
    
    
    
    
    24,058
    
    
    
    14
    
    
    
    
    
    
    
    24,072Supplies
    
    
    
    
    
    
    14,493
    
    
    
    1
    
    
    
    
    
    
    
    14,494Rentals and leases
    
    
    
    
    
    
    3,274
    
    
    
    
    
    
    
    
    
    
    
    3,274Other operating expenses
    
    
    
    
    
    
    22,829
    
    
    
    1,976
    
    
    
    (1,767
    )
    
    
    23,038Provision for doubtful accounts
    
    
    
    
    
    
    4,401
    
    
    
    
    
    
    
    
    
    
    
    4,401Depreciation and amortization
    
    
    
    
    
    
    4,980
    
    
    
    275
    
    
    
    (61
    )
    
    
    5,194Interest expense
    
    
    9,773
    
    
    
    
    
    
    
    286
    
    
    
    
    
    
    
    10,0599,773
    
    
    
    217,955
    
    
    
    2,552
    
    
    
    (1,828
    )
    
    
    228,452(Loss) income from continuing operations before
income taxes
    
    
    (9,773
    )
    
    
    35,741
    
    
    
    311
    
    
    
    (1,035
    )
    
    
    25,244(Benefit from) provision for income taxes
    
    
    (3,714
    )
    
    
    13,307
    
    
    
    
    
    
    
    
    
    
    
    9,593(Loss) income from continuing operations
    
    
    (6,059
    )
    
    
    22,434
    
    
    
    311
    
    
    
    (1,035
    )
    
    
    15,651Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (127
    )
    
    
    
    
    
    
    
    
    
    
    (127
    )Net (loss) income
    
    $
    (6,059
    )
    
    $
    22,307
    
    
    $
    311
    
    
    $
    (1,035
    )
    
    $
    15,524
 Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2007
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    1,078,585
    
    
    $
    25,587
    
    
    $
    (25,587
    )
    
    $
    1,078,585Salaries, wages and employee benefits
    
    
    
    
    
    
    590,466
    
    
    
    8,671
    
    
    
    
    
    
    
    599,137Professional fees
    
    
    
    
    
    
    104,348
    
    
    
    2,281
    
    
    
    
    
    
    
    106,629Supplies
    
    
    
    
    
    
    59,012
    
    
    
    733
    
    
    
    
    
    
    
    59,745Rentals and leases
    
    
    
    
    
    
    15,147
    
    
    
    244
    
    
    
    
    
    
    
    15,391Other operating expenses
    
    
    
    
    
    
    102,360
    
    
    
    5,910
    
    
    
    (3,244
    )
    
    
    105,026Provision for doubtful accounts
    
    
    
    
    
    
    20,423
    
    
    
    535
    
    
    
    
    
    
    
    20,958Depreciation and amortization
    
    
    
    
    
    
    20,933
    
    
    
    1,286
    
    
    
    (182
    )
    
    
    22,037Interest expense
    
    
    52,827
    
    
    
    
    
    
    
    842
    
    
    
    
    
    
    
    53,669Loss on refinancing long-term debt
    
    
    8,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,17961,006
    
    
    
    912,689
    
    
    
    20,502
    
    
    
    (3,426
    )
    
    
    990,771(Loss) income from continuing operations before
income taxes
    
    
    (61,006
    )
    
    
    165,896
    
    
    
    5,085
    
    
    
    (22,161
    )
    
    
    87,814(Benefit from) provision for income taxes
    
    
    (23,243
    )
    
    
    56,700
    
    
    
    
    
    
    
    
    
    
    
    33,457(Loss) income from continuing operations
    
    
    (37,763
    )
    
    
    109,196
    
    
    
    5,085
    
    
    
    (22,161
    )
    
    
    54,357Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (1,300
    )
    
    
    
    
    
    
    
    
    
    
    (1,300
    )Net (loss) income
    
    $
    (37,763
    )
    
    $
    107,896
    
    
    $
    5,085
    
    
    $
    (22,161
    )
    
    $
    53,057
 12




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    742,534
    
    
    $
    8,547
    
    
    $
    (8,547
    )
    
    $
    742,534Salaries, wages and employee benefits
    
    
    
    
    
    
    420,490
    
    
    
    
    
    
    
    
    
    
    
    420,490Professional fees
    
    
    
    
    
    
    70,739
    
    
    
    88
    
    
    
    
    
    
    
    70,827Supplies
    
    
    
    
    
    
    42,765
    
    
    
    1
    
    
    
    
    
    
    
    42,766Rentals and leases
    
    
    
    
    
    
    9,906
    
    
    
    
    
    
    
    
    
    
    
    9,906Other operating expenses
    
    
    
    
    
    
    69,626
    
    
    
    6,141
    
    
    
    (5,339
    )
    
    
    70,428Provision for doubtful accounts
    
    
    
    
    
    
    13,756
    
    
    
    
    
    
    
    
    
    
    
    13,756Depreciation and amortization
    
    
    
    
    
    
    14,114
    
    
    
    813
    
    
    
    (182
    )
    
    
    14,745Interest expense
    
    
    27,610
    
    
    
    
    
    
    
    927
    
    
    
    
    
    
    
    28,53727,610
    
    
    
    641,396
    
    
    
    7,970
    
    
    
    (5,521
    )
    
    
    671,455(Loss) income from continuing operations before
income taxes
    
    
    (27,610
    )
    
    
    101,138
    
    
    
    577
    
    
    
    (3,026
    )
    
    
    71,079(Benefit from) provision for income taxes
    
    
    (10,492
    )
    
    
    37,385
    
    
    
    117
    
    
    
    
    
    
    
    27,010(Loss) income from continuing operations
    
    
    (17,118
    )
    
    
    63,753
    
    
    
    460
    
    
    
    (3,026
    )
    
    
    44,069Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (992
    )
    
    
    
    
    
    
    
    
    
    
    (992
    )Net (loss) income
    
    $
    (17,118
    )
    
    $
    62,761
    
    
    $
    460
    
    
    $
    (3,026
    )
    
    $
    43,077
 13




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2007
(Dollars in thousands)
 CombinedSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    Total ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsOperating activities:Net (loss) income
    
    $
    (37,763
    )
    
    $
    107,896
    
    
    $
    5,085
    
    
    $
    (22,161
    )
    
    $
    53,057Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating
activities:Depreciation and amortization
    
    
    
    
    
    
    20,933
    
    
    
    1,286
    
    
    
    (182
    )
    
    
    22,037Share-based compensation
    
    
    
    
    
    
    12,006
    
    
    
    
    
    
    
    
    
    
    
    12,006Loss on refinancing of long-term debt
    
    
    8,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,179Amortization of loan costs and bond premium
    
    
    1,557
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    1,591Loss from discontinued operations
    
    
    
    
    
    
    1,300
    
    
    
    
    
    
    
    
    
    
    
    1,300Change in income tax assets and liabilities
    
    
    
    
    
    
    8,219
    
    
    
    
    
    
    
    
    
    
    
    8,219Changes in operating assets and liabilities,
net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (18,616
    )
    
    
    59
    
    
    
    
    
    
    
    (18,557
    )Prepaids and other current assets
    
    
    
    
    
    
    8,182
    
    
    
    (10,028
    )
    
    
    2,494
    
    
    
    648Accounts payable
    
    
    
    
    
    
    (6,683
    )
    
    
    (101
    )
    
    
    
    
    
    
    (6,784
    )Salaries and benefits payable
    
    
    
    
    
    
    (552
    )
    
    
    (214
    )
    
    
    
    
    
    
    (766
    )Accrued liabilities and other liabilities
    
    
    7,860
    
    
    
    (11,589
    )
    
    
    6,520
    
    
    
    (2,494
    )
    
    
    297Net cash (used in) provided by continuing operating activities
    
    
    (20,167
    )
    
    
    121,096
    
    
    
    2,641
    
    
    
    (22,343
    )
    
    
    81,227Net cash used in discontinued operating activities
    
    
    
    
    
    
    (493
    )
    
    
    
    
    
    
    
    
    
    
    (493
    )Net cash (used in) provided by operating activities
    
    
    (20,167
    )
    
    
    120,603
    
    
    
    2,641
    
    
    
    (22,343
    )
    
    
    80,734Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (462,729
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (462,729
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    
    
    
    
    (48,030
    )
    
    
    (331
    )
    
    
    
    
    
    
    (48,361
    )Other assets
    
    
    
    
    
    
    (1,016
    )
    
    
    266
    
    
    
    
    
    
    
    (750
    )Net cash used in investing activities
    
    
    (462,729
    )
    
    
    (49,046
    )
    
    
    (65
    )
    
    
    
    
    
    
    (511,840
    )Financing activities:Borrowings on long-term debt
    
    
    481,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481,875Principal payments on long-term debt
    
    
    (39,971
    )
    
    
    
    
    
    
    (249
    )
    
    
    
    
    
    
    (40,220
    )Net transfers to and from members
    
    
    47,715
    
    
    
    (70,721
    )
    
    
    663
    
    
    
    22,343
    
    
    
    Net decrease in revolving credit facility
    
    
    (11,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,000
    )Payment of loan and issuance costs
    
    
    (6,603
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,603
    )Costs to refinance long-term debt
    
    
    (7,127
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,127
    )Excess tax benefits from share-based payment arrangements
    
    
    4,072
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,072Proceeds from issuance of common stock upon exercise of
stock options
    
    
    13,935
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,935Net cash provided by (used in) financing activities
    
    
    482,896
    
    
    
    (70,721
    )
    
    
    414
    
    
    
    22,343
    
    
    
    434,932Net increase in cash
    
    
    
    
    
    
    836
    
    
    
    2,990
    
    
    
    
    
    
    
    3,826Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,149
    
    
    
    17,423
    
    
    
    
    
    
    
    18,572Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    1,985
    
    
    $
    20,413
    
    
    $
    
    
    
    $
    22,398
 14




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2006
(Dollars in thousands)
 CombinedSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    Total ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsOperating activities:Net (loss) income
    
    $
    (17,118
    )
    
    $
    62,761
    
    
    $
    460
    
    
    $
    (3,026
    )
    
    $
    43,077Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    14,114
    
    
    
    813
    
    
    
    (182
    )
    
    
    14,745Share-based compensation
    
    
    
    
    
    
    10,449
    
    
    
    
    
    
    
    
    
    
    
    10,449Amortization of loan costs
    
    
    1,192
    
    
    
    (1
    )
    
    
    34
    
    
    
    
    
    
    
    1,225Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    992
    
    
    
    
    
    
    
    
    
    
    
    992Change in income tax assets and liabilities
    
    
    
    
    
    
    24,270
    
    
    
    
    
    
    
    
    
    
    
    24,270Changes in operating assets and liabilities,
net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (11,721
    )
    
    
    
    
    
    
    
    
    
    
    (11,721
    )Prepaids and other current assets
    
    
    
    
    
    
    2,171
    
    
    
    (5,856
    )
    
    
    
    
    
    
    (3,685
    )Accounts payable
    
    
    
    
    
    
    (2,038
    )
    
    
    
    
    
    
    
    
    
    
    (2,038
    )Salaries and benefits payable
    
    
    
    
    
    
    4,740
    
    
    
    
    
    
    
    
    
    
    
    4,740Accrued liabilities and other liabilities
    
    
    (3,447
    )
    
    
    (3,172
    )
    
    
    8,035
    
    
    
    
    
    
    
    1,416Net cash (used in) provided by continuing operating activities
    
    
    (19,373
    )
    
    
    102,565
    
    
    
    3,486
    
    
    
    (3,208
    )
    
    
    83,470Net cash
used in discontinued operating activities
    
    
    
    
    
    
    (2,677
    )
    
    
    
    
    
    
    
    
    
    
    (2,677
    )Net cash (used in) provided by operating activities
    
    
    (19,373
    )
    
    
    99,888
    
    
    
    3,486
    
    
    
    (3,208
    )
    
    
    80,793Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (167,065
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (167,065
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    
    
    
    
    (20,880
    )
    
    
    
    
    
    
    
    
    
    
    (20,880
    )Other assets
    
    
    
    
    
    
    (176
    )
    
    
    211
    
    
    
    
    
    
    
    35Net cash (used in) provided by investing activities
    
    
    (167,065
    )
    
    
    (21,056
    )
    
    
    211
    
    
    
    
    
    
    
    (187,910
    )Financing activities:Principal payments on long-term debt
    
    
    (68
    )
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    (274
    )Net increase in revolving credit facility
    
    
    52,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,000Net transfers to and from members
    
    
    123,380
    
    
    
    (126,336
    )
    
    
    (252
    )
    
    
    3,208
    
    
    
    Payment of loan and issuance costs
    
    
    (101
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101
    )Excess tax benefits from share-based payment arrangements
    
    
    5,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,771Proceeds from issuance of common stock upon exercise of
stock options
    
    
    5,456
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,456Net cash provided by (used in) financing activities
    
    
    186,438
    
    
    
    (126,336
    )
    
    
    (458
    )
    
    
    3,208
    
    
    
    62,852Net
(decrease) increase in cash
    
    
    
    
    
    
    (47,504
    )
    
    
    3,239
    
    
    
    
    
    
    
    (44,265
    )Cash and
cash equivalents at beginning of period
    
    
    
    
    
    
    44,114
    
    
    
    10,585
    
    
    
    
    
    
    
    54,699Cash and
cash equivalents at end of period
    
    $
    
    
    
    $
    (3,390
    )
    
    $
    13,824
    
    
    $
    
    
    
    $
    10,434
 11.
Recently Issued Accounting Pronouncements
 Fair Value Measurements.
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FASB Statement No. 115
 15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements.
    
    
    our ability to successfully integrate the operations of Horizon Health Corporation (Horizon Health);
    
    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;
    
    risks inherent to the health care industry, including the impact of unforeseen changes in regulation 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;
    
    those risks and uncertainties described from time to time in our filings with the SEC; and
    
    future trends for pricing, margins, revenue and profitability that remain difficult to predict in the industries that we serve.
  Overview
  5 8
 16




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##### Table of Contents



5 8 3 4  3 4
  Sources of Revenue
 Patient Service Revenue
  Other Revenue
  Results of Operations
  For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenue
    
    $
    402,021
    
    
    
    100.0
    %
    
    $
    253,696
    
    
    
    100.0
    %
    
    $
    1,078,585
    
    
    
    100.0
    %
    
    $
    742,534
    
    
    
    100.0
    %Salaries, wages and employee
benefits (including
share-based compensation of
$4,423, $2,059, $12,006
and $10,449 for the respective
three and nine month
periods in 2007 and
2006)
    
    
    223,902
    
    
    
    55.7
    %
    
    
    143,920
    
    
    
    56.7
    %
    
    
    599,137
    
    
    
    55.6
    %
    
    
    420,490
    
    
    
    56.6
    %Professional fees
    
    
    40,565
    
    
    
    10.1
    %
    
    
    24,072
    
    
    
    9.5
    %
    
    
    106,629
    
    
    
    9.9
    %
    
    
    70,827
    
    
    
    9.5
    %Supplies
    
    
    21,820
    
    
    
    5.4
    %
    
    
    14,494
    
    
    
    5.7
    %
    
    
    59,745
    
    
    
    5.5
    %
    
    
    42,766
    
    
    
    5.8
    %Provision for doubtful accounts
    
    
    7,019
    
    
    
    1.8
    %
    
    
    4,401
    
    
    
    1.7
    %
    
    
    20,958
    
    
    
    1.9
    %
    
    
    13,756
    
    
    
    1.9
    %Other operating expenses
    
    
    44,264
    
    
    
    11.0
    %
    
    
    26,312
    
    
    
    10.4
    %
    
    
    120,417
    
    
    
    11.2
    %
    
    
    80,334
    
    
    
    10.8
    %Depreciation and amortization
    
    
    8,525
    
    
    
    2.1
    %
    
    
    5,194
    
    
    
    2.0
    %
    
    
    22,037
    
    
    
    2.0
    %
    
    
    14,745
    
    
    
    2.0
    %Interest expense, net
    
    
    22,253
    
    
    
    5.5
    %
    
    
    10,059
    
    
    
    4.0
    %
    
    
    53,669
    
    
    
    5.0
    %
    
    
    28,537
    
    
    
    3.8
    %Loss on refinancing long-term debt
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    8,179
    
    
    
    0.8
    %
    
    
    
    
    
    
    0.0
    %Income from continuing operations before
income taxes
    
    
    33,673
    
    
    
    8.4
    %
    
    
    25,244
    
    
    
    10.0
    %
    
    
    87,814
    
    
    
    8.1
    %
    
    
    71,079
    
    
    
    9.6
    %Provision for income taxes
    
    
    12,831
    
    
    
    3.2
    %
    
    
    9,593
    
    
    
    3.8
    %
    
    
    33,457
    
    
    
    3.1
    %
    
    
    27,010
    
    
    
    3.7
    %Income from continuing operations
    
    $
    20,842
    
    
    
    5.2
    %
    
    $
    15,651
    
    
    
    6.2
    %
    
    $
    54,357
    
    
    
    5.0
    %
    
    $
    44,069
    
    
    
    5.9
    %
 17




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##### Table of Contents



Three Months Ended September 30, 2007 Compared To Three Months Ended September 30, 2006
  Three Months Ended September 30,
    
    %2007
    
    2006
    
    ChangeTotal facility results:Revenue
    
    $
    359,295
    
    
    $
    240,749
    
    
    
    49.2
    %Number of facilities at period end
    
    
    90
    
    
    
    63
    
    
    
    42.9
    %Admissions
    
    
    36,749
    
    
    
    26,250
    
    
    
    40.0
    %Patient days
    
    
    642,650
    
    
    
    459,518
    
    
    
    39.9
    %Average length of stay
    
    
    17.5
    
    
    
    17.5
    
    
    
    0.0
    %Revenue per patient day
    
    $
    559
    
    
    $
    524
    
    
    
    6.7
    %Same-facility results:Revenue
    
    $
    254,680
    
    
    $
    235,171
    
    
    
    8.3
    %Number of facilities at period end
    
    
    61
    
    
    
    61
    
    
    
    0.0
    %Admissions
    
    
    25,888
    
    
    
    25,738
    
    
    
    0.6
    %Patient days
    
    
    454,129
    
    
    
    447,533
    
    
    
    1.5
    %Average length of stay
    
    
    17.5
    
    
    
    17.4
    
    
    
    0.6
    %Revenue per patient day
    
    $
    561
    
    
    $
    525
    
    
    
    6.9
    %
 Revenue
 Salaries, wages and employee benefits
 Professional fees
 Supplies.
 Provision for doubtful accounts
 18




---



##### Table of Contents



Other operating expenses
 Depreciation and amortization
 Interest expense, net
 Loss from discontinued operations, net of taxes
 Nine Months Ended September 30, 2007 Compared To Nine Months Ended September 30, 2006
  Nine Months Ended September 30,
    
    %2007
    
    2006
    
    ChangeTotal facility results:Revenue
    
    $
    991,299
    
    
    $
    704,282
    
    
    
    40.8
    %Number of facilities at period end
    
    
    90
    
    
    
    63
    
    
    
    42.9
    %Admissions
    
    
    103,608
    
    
    
    79,458
    
    
    
    30.4
    %Patient days
    
    
    1,788,185
    
    
    
    1,356,138
    
    
    
    31.9
    %Average length of stay
    
    
    17.3
    
    
    
    17.1
    
    
    
    1.2
    %Revenue per patient day
    
    $
    554
    
    
    $
    519
    
    
    
    6.7
    %Same-facility results:Revenue
    
    $
    736,222
    
    
    $
    688,222
    
    
    
    7.0
    %Number of facilities at period end
    
    
    61
    
    
    
    61
    
    
    
    0.0
    %Admissions
    
    
    79,846
    
    
    
    77,887
    
    
    
    2.5
    %Patient days
    
    
    1,341,105
    
    
    
    1,320,133
    
    
    
    1.6
    %Average length of stay
    
    
    16.8
    
    
    
    16.9
    
    
    
    -0.6
    %Revenue per patient day
    
    $
    549
    
    
    $
    521
    
    
    
    5.4
    %
 Revenue
 Salaries, wages and employee benefits
 19




---



##### Table of Contents



Professional fees
 Supplies.
 Provision for doubtful accounts
 Other operating expenses
 Depreciation and amortization
 Interest expense, net
 Loss on refinancing of long-term debt. 5 8 3 4  5 8 5 8
 Loss from discontinued operations, net of taxes
 Liquidity and Capital Resources
  20




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##### Table of Contents



3 4 5 8
  5 8
  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 6.7% at September 30, 2007
and December 31, 2006
    
    
    90,000
    
    
    $
    
    
    
    $
    90,000
    
    
    $
    
    
    
    $
    Senior secured term loan facility, expiring on July 1, 2012
and bearing interest of 7.2% and 7.1% at September 30, 2007
and December 31, 2006, respectively
    
    
    574,250
    
    
    
    4,688
    
    
    
    7,500
    
    
    
    7,500
    
    
    
    554,5627 3/4% Senior Subordinated Notes due July 15, 2015
    
    
    476,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    476,66710 5/8% Senior Subordinated Notes due June 15, 2013
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.7% to 7.6%
    
    
    33,766
    
    
    
    391
    
    
    
    859
    
    
    
    973
    
    
    
    31,5431,174,717
    
    
    
    5,079
    
    
    
    98,359
    
    
    
    8,473
    
    
    
    1,062,806Lease and other obligations
    
    
    88,835
    
    
    
    16,767
    
    
    
    26,587
    
    
    
    15,436
    
    
    
    30,045Total contractual obligations
    
    $
    1,263,552
    
    
    $
    21,846
    
    
    $
    124,946
    
    
    $
    23,909
    
    
    $
    1,092,851
 
 (1)
    
    Excludes capital lease and other obligations of $7.7 million, which are included in lease and other obligations. 21




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##### Table of Contents



3 4 3 4 5 8
 Critical Accounting Policies
  Allowance for Doubtful Accounts
    Allowances for Contractual Discounts
  Professional and General Liability
  Income Taxes
  22




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##### Table of Contents



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.
  
 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 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).
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ExhibitNumber
    
    Description3.4
    
    
    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).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 24




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