##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the quarterly
period ended June 30, 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
(State or Other Jurisdiction of Incorporation or 
Organization)
    
    23-2491707
(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



TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (Unaudited)
    
    
    1Condensed Consolidated Statements of Income for the three and six month periods ended June
30, 2007 and 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the six month periods ended June 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
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 6. Exhibits
    
    
    25Exhibit 31.1Exhibit 31.2Exhibit 32.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements.
 PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,845
    
    
    $
    18,572Accounts receivable, less allowance for doubtful accounts
of $32,047 and $18,672, respectively
    
    
    239,579
    
    
    
    179,050Prepaids and other
    
    
    60,490
    
    
    
    45,364Total current assets
    
    
    327,914
    
    
    
    242,986Property and equipment, net of accumulated depreciation
    
    
    666,167
    
    
    
    539,758Cost in excess of net assets acquired
    
    
    1,101,405
    
    
    
    760,268Other assets
    
    
    44,134
    
    
    
    37,910Total assets
    
    $
    2,139,620
    
    
    $
    1,580,922LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    29,394
    
    
    $
    25,222Salaries and benefits payable
    
    
    73,930
    
    
    
    66,236Other accrued liabilities
    
    
    61,484
    
    
    
    45,855Current portion of long-term debt
    
    
    4,966
    
    
    
    2,386Total current liabilities
    
    
    169,774
    
    
    
    139,699Long-term debt, less current portion
    
    
    1,197,950
    
    
    
    740,921Deferred tax liability
    
    
    49,109
    
    
    
    44,924Other liabilities
    
    
    30,718
    
    
    
    27,599Total liabilities
    
    
    1,447,551
    
    
    
    953,143Minority interest
    
    
    4,120
    
    
    
    Stockholders equity:Common stock, $0.01 par value, 125,000 shares authorized;
54,326 and 53,421 issued and
outstanding, respectively
    
    
    543
    
    
    
    534Additional paid-in capital
    
    
    551,155
    
    
    
    523,193Retained earnings
    
    
    136,251
    
    
    
    104,052Total stockholders equity
    
    
    687,949
    
    
    
    627,779Total liabilities and stockholders equity
    
    $
    2,139,620
    
    
    $
    1,580,922
  1




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PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except for per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    354,126
    
    
    $
    247,237
    
    
    $
    676,564
    
    
    $
    488,838Salaries, wages and employee benefits (including
share-based compensation of $3,910, $2,136,
$7,583 and $8,390 for the respective three and six
month periods 2007 and 2006)
    
    
    195,100
    
    
    
    137,367
    
    
    
    375,235
    
    
    
    276,570Professional fees
    
    
    35,164
    
    
    
    24,164
    
    
    
    66,064
    
    
    
    46,755Supplies
    
    
    19,581
    
    
    
    14,315
    
    
    
    37,925
    
    
    
    28,272Rentals and leases
    
    
    5,015
    
    
    
    3,286
    
    
    
    9,644
    
    
    
    6,632Other operating expenses
    
    
    34,962
    
    
    
    23,782
    
    
    
    66,509
    
    
    
    47,390Provision for doubtful accounts
    
    
    7,275
    
    
    
    4,596
    
    
    
    13,939
    
    
    
    9,355Depreciation and amortization
    
    
    7,256
    
    
    
    4,838
    
    
    
    13,512
    
    
    
    9,551Interest expense
    
    
    17,030
    
    
    
    9,124
    
    
    
    31,416
    
    
    
    18,332Loss on refinancing of long-term debt
    
    
    8,179
    
    
    
    
    
    
    
    8,179
    
    
    
    329,562
    
    
    
    221,472
    
    
    
    622,423
    
    
    
    442,857Income from continuing operations
before income taxes
    
    
    24,564
    
    
    
    25,765
    
    
    
    54,141
    
    
    
    45,981Provision for income taxes
    
    
    9,298
    
    
    
    9,791
    
    
    
    20,626
    
    
    
    17,473Income from continuing operations
    
    
    15,266
    
    
    
    15,974
    
    
    
    33,515
    
    
    
    28,508Loss from discontinued operations, net of income
tax benefit of $402, $376, $478 and $585 for the
respective three and six month periods 2007
and 2006
    
    
    (659
    )
    
    
    (613
    )
    
    
    (783
    )
    
    
    (955
    )Net income
    
    $
    14,607
    
    
    $
    15,361
    
    
    $
    32,732
    
    
    $
    27,553Basic earnings per share:Income from continuing operations
    
    $
    0.28
    
    
    $
    0.30
    
    
    $
    0.62
    
    
    $
    0.54Loss from discontinued operations,
net of taxes
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Net income
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    0.61
    
    
    $
    0.52Diluted earnings per share:Income from continuing operations
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    0.60
    
    
    $
    0.53Loss from discontinued operations,
net of taxes
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Net income
    
    $
    0.26
    
    
    $
    0.28
    
    
    $
    0.59
    
    
    $
    0.51Shares used in computing per share amounts:Basic
    
    
    54,104
    
    
    
    52,913
    
    
    
    53,955
    
    
    
    52,715Diluted
    
    
    55,372
    
    
    
    54,070
    
    
    
    55,305
    
    
    
    53,981
  2




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PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Six Months Ended June 30,2007
    
    
    2006Operating activities:Net income
    
    $
    32,732
    
    
    $
    27,553Adjustments to reconcile net income to
net cash provided by continuing
operating activities:Depreciation and amortization
    
    
    13,512
    
    
    
    9,551Share-based compensation
    
    
    7,583
    
    
    
    8,390Loss on refinancing of long-term debt
    
    
    8,179
    
    
    
    Amortization of loan costs and bond premium
    
    
    1,038
    
    
    
    811Loss from discontinued operations
    
    
    783
    
    
    
    955Change in income tax assets and liabilities
    
    
    (716
    )
    
    
    16,283Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    (15,431
    )
    
    
    (8,335
    )Prepaids and other current assets
    
    
    (1,359
    )
    
    
    (6,129
    )Accounts payable
    
    
    (5,562
    )
    
    
    (1,415
    )Salaries and benefits payable
    
    
    (4,600
    )
    
    
    280Accrued liabilities and other liabilities
    
    
    6,234
    
    
    
    1,961Net cash provided by continuing operating activities
    
    
    42,393
    
    
    
    49,905Net cash (used in) provided by discontinued operating activities
    
    
    (159
    )
    
    
    1,942Net cash provided by operating activities
    
    
    42,234
    
    
    
    51,847Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (452,361
    )
    
    
    (44,471
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    (28,929
    )
    
    
    (13,123
    )Other assets
    
    
    (744
    )
    
    
    (317
    )Net cash used in investing activities
    
    
    (482,034
    )
    
    
    (57,911
    )Financing activities:Borrowings on long-term debt
    
    
    481,875
    
    
    
    Principal payments on long-term debt
    
    
    (39,918
    )
    
    
    (180
    )Net increase in revolving credit facility borrowings
    
    
    9,000
    
    
    
    Payment of loan and stock issuance costs
    
    
    (6,173
    )
    
    
    (40
    )Costs to refinance long-term debt
    
    
    (7,127
    )
    
    
    Excess tax benefits from share-based payment arrangements
    
    
    3,566
    
    
    
    4,248Proceeds from issuance of common stock upon exercise
of stock options
    
    
    7,850
    
    
    
    3,600Net cash provided by financing activities
    
    
    449,073
    
    
    
    7,628Net increase in cash
    
    
    9,273
    
    
    
    1,564Cash and cash equivalents at beginning of the period
    
    
    18,572
    
    
    
    54,699Cash and cash equivalents at end of the period
    
    $
    27,845
    
    
    $
    56,263Effect of Acquisitions:Assets acquired, net of cash acquired
    
    $
    513,674
    
    
    $
    54,164Liabilities assumed
    
    
    (43,609
    )
    
    
    (5,730
    )Long-term debt assumed
    
    
    (8,704
    )
    
    
    (3,963
    )Common stock issued
    
    
    (9,000
    )
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    452,361
    
    
    $
    44,471
  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
  4




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Income from continuing operations
    
    $
    15,266
    
    
    $
    15,974
    
    
    $
    33,515
    
    
    $
    28,508Loss from discontinued operations, net of taxes
    
    
    (659
    )
    
    
    (613
    )
    
    
    (783
    )
    
    
    (955
    )Net income
    
    $
    14,607
    
    
    $
    15,361
    
    
    $
    32,732
    
    
    $
    27,553Denominator:Weighted average shares outstanding for basic earnings
per share
    
    
    54,104
    
    
    
    52,913
    
    
    
    53,955
    
    
    
    52,715Effects of dilutive stock options and restricted stock
outstanding
    
    
    1,268
    
    
    
    1,157
    
    
    
    1,350
    
    
    
    1,266Shares used in computing diluted earnings per common share
    
    
    55,372
    
    
    
    54,070
    
    
    
    55,305
    
    
    
    53,981Basic earnings per share:Income from continuing operations
    
    $
    0.28
    
    
    $
    0.30
    
    
    $
    0.62
    
    
    $
    0.54Loss from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )$
    0.27
    
    
    $
    0.29
    
    
    $
    0.61
    
    
    $
    0.52Diluted earnings per share:Income from continuing operations
    
    $
    0.27
    
    
    $
    0.29
    
    
    $
    0.60
    
    
    $
    0.53Loss from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )$
    0.26
    
    
    $
    0.28
    
    
    $
    0.59
    
    
    $
    0.51
 4. Share-Based Compensation
      5. Mergers and Acquisitions
  5




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5 8 3 4
   For the three months
    
    For the six monthsended June 30,
    
    ended June 30,2007
    
    2006
    
    2007
    
    2006Revenue
    
    $
    401,565
    
    
    $
    322,590
    
    
    $
    798,480
    
    
    $
    634,521Net income
    
    $
    13,951
    
    
    $
    16,801
    
    
    $
    33,769
    
    
    $
    28,755Earnings per common share, basic
    
    $
    0.26
    
    
    $
    0.32
    
    
    $
    0.63
    
    
    $
    0.55Earnings per common share, diluted
    
    $
    0.25
    
    
    $
    0.31
    
    
    $
    0.61
    
    
    $
    0.53
  6. Long-term debt
  June 30,
    
    
    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
June 30, 2007
and December 31, 2006, respectively
    
    $
    110,000
    
    
    $
    101,000Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest of 7.1% at June 30, 2007
and December 31, 2006, respectively
    
    
    574,250
    
    
    
    350,0007 3/4% Senior Subordinated Notes
    
    
    476,823
    
    
    
    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%
    
    
    33,861
    
    
    
    27,062Other
    
    
    7,948
    
    
    
    6,5641,202,916
    
    
    
    743,307Less current portion
    
    
    4,966
    
    
    
    2,386Long-term debt
    
    $
    1,197,950
    
    
    $
    740,921
 Senior Credit Facility
 5 8
 6




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7 3 / 4 % Notes
 3 4 3 4 3 4 5 8 3 4 3 4 3 4 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
  7




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8. Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets
  8




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    853
    
    
    $
    1,427
    
    
    $
    2,133
    
    
    $
    3,984Operating
expenses
    
    
    1,147
    
    
    
    1,656
    
    
    
    2,627
    
    
    
    4,764Loss on disposal
    
    
    767
    
    
    
    760
    
    
    
    767
    
    
    
    7601,914
    
    
    
    2,416
    
    
    
    3,394
    
    
    
    5,524Loss from discontinued operations before
income taxes
    
    
    (1,061
    )
    
    
    (989
    )
    
    
    (1,261
    )
    
    
    (1,540
    )Benefit from income taxes
    
    
    (402
    )
    
    
    (376
    )
    
    
    (478
    )
    
    
    (585
    )Loss from discontinued operations, net of taxes
    
    $
    (659
    )
    
    $
    (613
    )
    
    $
    (783
    )
    
    $
    (955
    )
 9. Disclosures About Reportable Segments
 Disclosures About Segments of an Enterprise and
Related Information
  9




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Three Months Ended June 30, 2007
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    326,839
    
    
    $
    27,287
    
    
    $
    
    
    
    $
    354,126Adjusted EBITDA
    
    $
    64,548
    
    
    $
    5,685
    
    
    $
    (9,294
    )
    
    $
    60,939Interest expense
    
    
    6,564
    
    
    
    (6
    )
    
    
    10,472
    
    
    
    17,030Depreciation and amortization
    
    
    6,608
    
    
    
    284
    
    
    
    364
    
    
    
    7,256Provision for income taxes
    
    
    2
    
    
    
    
    
    
    
    9,296
    
    
    
    9,298Inter-segment expenses
    
    
    13,219
    
    
    
    1,219
    
    
    
    (14,438
    )
    
    
    Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    8,179
    
    
    
    8,179Share-based compensation
    
    
    
    
    
    
    
    
    
    
    3,910
    
    
    
    3,910Total other expenses
    
    
    
    
    
    
    
    
    
    
    12,089
    
    
    
    12,089Income (loss) from continuing operations
    
    $
    38,155
    
    
    $
    4,188
    
    
    $
    (27,077
    )
    
    $
    15,266Total assets
    
    $
    1,960,322
    
    
    $
    88,508
    
    
    $
    90,790
    
    
    $
    2,139,620
 Three Months Ended June 30, 2006
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    234,487
    
    
    $
    12,750
    
    
    $
    
    
    
    $
    247,237Adjusted EBITDA
    
    $
    46,300
    
    
    $
    2,225
    
    
    $
    (6,662
    )
    
    $
    41,863Interest expense
    
    
    4,966
    
    
    
    1
    
    
    
    4,157
    
    
    
    9,124Depreciation and amortization
    
    
    4,385
    
    
    
    170
    
    
    
    283
    
    
    
    4,838Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    9,791
    
    
    
    9,791Inter-segment expenses
    
    
    9,322
    
    
    
    533
    
    
    
    (9,855
    )
    
    
    Other expenses:Share-based compensation
    
    
    
    
    
    
    
    
    
    
    2,136
    
    
    
    2,136Total other expenses
    
    
    
    
    
    
    
    
    
    
    2,136
    
    
    
    2,136Income (loss) from continuing operations
    
    $
    27,627
    
    
    $
    1,521
    
    
    $
    (13,174
    )
    
    $
    15,974Total assets
    
    $
    1,083,382
    
    
    $
    29,192
    
    
    $
    123,893
    
    
    $
    1,236,467
 10




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Six Months Ended June 30, 2007
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    632,004
    
    
    $
    44,560
    
    
    $
    
    
    
    $
    676,564Adjusted EBITDA
    
    $
    125,533
    
    
    $
    8,118
    
    
    $
    (18,820
    )
    
    $
    114,831Interest expense
    
    
    15,590
    
    
    
    (10
    )
    
    
    15,836
    
    
    
    31,416Depreciation and amortization
    
    
    12,334
    
    
    
    470
    
    
    
    708
    
    
    
    13,512Provision for income taxes
    
    
    2
    
    
    
    
    
    
    
    20,624
    
    
    
    20,626Inter-segment expenses
    
    
    24,521
    
    
    
    2,007
    
    
    
    (26,528
    )
    
    
    Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    8,179
    
    
    
    8,179Share-based compensation
    
    
    
    
    
    
    
    
    
    
    7,583
    
    
    
    7,583Total other expenses
    
    
    
    
    
    
    
    
    
    
    15,762
    
    
    
    15,762Income (loss) from continuing operations
    
    $
    73,086
    
    
    $
    5,651
    
    
    $
    (45,222
    )
    
    $
    33,515Total assets
    
    $
    1,960,322
    
    
    $
    88,508
    
    
    $
    90,790
    
    
    $
    2,139,620
 Six Months Ended June 30, 2006
 Owned andLeasedFacilities
    
    
    Other
    
    
    Corporate
    
    
    ConsolidatedRevenue
    
    $
    463,532
    
    
    $
    25,306
    
    
    $
    
    
    
    $
    488,838Adjusted EBITDA
    
    $
    91,252
    
    
    $
    4,369
    
    
    $
    (13,367
    )
    
    $
    82,254Interest expense
    
    
    8,951
    
    
    
    2
    
    
    
    9,379
    
    
    
    18,332Depreciation and amortization
    
    
    8,619
    
    
    
    341
    
    
    
    591
    
    
    
    9,551Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    17,473
    
    
    
    17,473Inter-segment expenses
    
    
    18,638
    
    
    
    1,068
    
    
    
    (19,706
    )
    
    
    Other expenses:Share-based compensation
    
    
    
    
    
    
    
    
    
    
    8,390
    
    
    
    8,390Total other expenses
    
    
    
    
    
    
    
    
    
    
    8,390
    
    
    
    8,390Income (loss) from continuing operations
    
    $
    55,044
    
    
    $
    2,958
    
    
    $
    (29,494
    )
    
    $
    28,508Total assets
    
    $
    1,083,382
    
    
    $
    29,192
    
    
    $
    123,893
    
    
    $
    1,236,467
 10. Financial Information for the Company and Its Subsidiaries
  11




---



##### Table of Contents



Condensed Consolidating Balance Sheet
As of June 30, 2007
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    8,559
    
    
    $
    19,286
    
    
    $
    
    
    
    $
    27,845Accounts receivable, net
    
    
    
    
    
    
    230,854
    
    
    
    8,725
    
    
    
    
    
    
    
    239,579Prepaids and other
    
    
    
    
    
    
    51,174
    
    
    
    16,616
    
    
    
    (7,300
    )
    
    
    60,490Total current assets
    
    
    
    
    
    
    290,587
    
    
    
    44,627
    
    
    
    (7,300
    )
    
    
    327,914Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    621,552
    
    
    
    52,083
    
    
    
    (7,468
    )
    
    
    666,167Cost in excess of net assets acquired
    
    
    
    
    
    
    1,101,405
    
    
    
    
    
    
    
    
    
    
    
    1,101,405Investment in subsidiaries
    
    
    1,111,798
    
    
    
    
    
    
    
    18,254
    
    
    
    (1,130,052
    )
    
    
    Other assets
    
    
    16,377
    
    
    
    23,177
    
    
    
    4,580
    
    
    
    
    
    
    
    44,134Total assets
    
    $
    1,128,175
    
    
    $
    2,036,721
    
    
    $
    119,544
    
    
    $
    (1,144,820
    )
    
    $
    2,139,620Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    27,991
    
    
    $
    1,403
    
    
    $
    
    
    
    $
    29,394Salaries and benefits payable
    
    
    
    
    
    
    72,397
    
    
    
    1,533
    
    
    
    
    
    
    
    73,930Other accrued liabilities
    
    
    24,169
    
    
    
    35,990
    
    
    
    8,625
    
    
    
    (7,300
    )
    
    
    61,484Current portion of long-term debt
    
    
    4,581
    
    
    
    
    
    
    
    385
    
    
    
    
    
    
    
    4,966Total current liabilities
    
    
    28,750
    
    
    
    136,378
    
    
    
    11,946
    
    
    
    (7,300
    )
    
    
    169,774Long-term debt, less current portion
    
    
    1,164,475
    
    
    
    
    
    
    
    33,475
    
    
    
    
    
    
    
    1,197,950Deferred tax liability
    
    
    
    
    
    
    49,109
    
    
    
    
    
    
    
    
    
    
    
    49,109Other liabilities
    
    
    876
    
    
    
    1,150
    
    
    
    29,521
    
    
    
    (829
    )
    
    
    30,718Total liabilities
    
    
    1,194,101
    
    
    
    186,637
    
    
    
    74,942
    
    
    
    (8,129
    )
    
    
    1,447,551Minority Interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,120
    
    
    
    4,120Stockholders (deficit) equity:Total stockholders (deficit) equity
    
    
    (65,926
    )
    
    
    1,850,084
    
    
    
    44,602
    
    
    
    (1,140,811
    )
    
    
    687,949Total liabilities and stockholders (deficit) equity
    
    $
    1,128,175
    
    
    $
    2,036,721
    
    
    $
    119,544
    
    
    $
    (1,144,820
    )
    
    $
    2,139,620
 Condensed Consolidating Balance Sheet
As of December 31, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-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
    )
    
    
    953,143Stockholders (deficit) equity:Total stockholders (deficit) equity
    
    
    (41,726
    )
    
    
    1,336,757
    
    
    
    20,604
    
    
    
    (687,856
    )
    
    
    627,779Total liabilities and stockholders (deficit) equity
    
    $
    694,205
    
    
    $
    1,517,740
    
    
    $
    58,423
    
    
    $
    (689,446
    )
    
    $
    1,580,922
 12




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2007
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    354,126
    
    
    $
    8,521
    
    
    $
    (8,521
    )
    
    $
    354,126Salaries, wages and employee benefits
    
    
    
    
    
    
    192,995
    
    
    
    2,105
    
    
    
    
    
    
    
    195,100Professional fees
    
    
    
    
    
    
    34,616
    
    
    
    548
    
    
    
    
    
    
    
    35,164Supplies
    
    
    
    
    
    
    19,373
    
    
    
    208
    
    
    
    
    
    
    
    19,581Rentals and leases
    
    
    
    
    
    
    4,983
    
    
    
    32
    
    
    
    
    
    
    
    5,015Other operating expenses
    
    
    
    
    
    
    34,417
    
    
    
    3,840
    
    
    
    (3,295
    )
    
    
    34,962Provision for doubtful accounts
    
    
    
    
    
    
    6,989
    
    
    
    286
    
    
    
    
    
    
    
    7,275Depreciation and amortization
    
    
    
    
    
    
    6,936
    
    
    
    381
    
    
    
    (61
    )
    
    
    7,256Interest expense
    
    
    16,760
    
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    17,030Loss on refinancing of long-term debt
    
    
    8,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,17924,939
    
    
    
    300,309
    
    
    
    7,670
    
    
    
    (3,356
    )
    
    
    329,562(Loss) income from continuing operations before
income taxes
    
    
    (24,939
    )
    
    
    53,817
    
    
    
    851
    
    
    
    (5,165
    )
    
    
    24,564(Benefit from) provision for income taxes
    
    
    (9,427
    )
    
    
    18,725
    
    
    
    
    
    
    
    
    
    
    
    9,298(Loss) income from continuing operations
    
    
    (15,512
    )
    
    
    35,092
    
    
    
    851
    
    
    
    (5,165
    )
    
    
    15,266Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (659
    )
    
    
    
    
    
    
    
    
    
    
    (659
    )Net (loss) income
    
    $
    (15,512
    )
    
    $
    34,433
    
    
    $
    851
    
    
    $
    (5,165
    )
    
    $
    14,607
 Condensed Consolidating Statement of Income
For the Three Months Ended June 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    247,237
    
    
    $
    2,863
    
    
    $
    (2,863
    )
    
    $
    247,237Salaries, wages and employee benefits
    
    
    
    
    
    
    137,367
    
    
    
    
    
    
    
    
    
    
    
    137,367Professional fees
    
    
    
    
    
    
    24,138
    
    
    
    26
    
    
    
    
    
    
    
    24,164Supplies
    
    
    
    
    
    
    14,315
    
    
    
    
    
    
    
    
    
    
    
    14,315Rentals and leases
    
    
    
    
    
    
    3,286
    
    
    
    
    
    
    
    
    
    
    
    3,286Other operating expenses
    
    
    
    
    
    
    23,740
    
    
    
    1,822
    
    
    
    (1,780
    )
    
    
    23,782Provision for doubtful accounts
    
    
    
    
    
    
    4,596
    
    
    
    
    
    
    
    
    
    
    
    4,596Depreciation and amortization
    
    
    
    
    
    
    4,624
    
    
    
    275
    
    
    
    (61
    )
    
    
    4,838Interest expense
    
    
    8,799
    
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    9,1248,799
    
    
    
    212,066
    
    
    
    2,448
    
    
    
    (1,841
    )
    
    
    221,472(Loss) income from continuing operations before
income taxes
    
    
    (8,799
    )
    
    
    35,171
    
    
    
    415
    
    
    
    (1,022
    )
    
    
    25,765(Benefit from) provision for income taxes
    
    
    (3,344
    )
    
    
    13,135
    
    
    
    
    
    
    
    
    
    
    
    9,791(Loss) income from continuing operations
    
    
    (5,455
    )
    
    
    22,036
    
    
    
    415
    
    
    
    (1,022
    )
    
    
    15,974Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (613
    )
    
    
    
    
    
    
    
    
    
    
    (613
    )Net (loss) income
    
    $
    (5,455
    )
    
    $
    21,423
    
    
    $
    415
    
    
    $
    (1,022
    )
    
    $
    15,361
 13




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2007
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    676,564
    
    
    $
    13,055
    
    
    $
    (13,055
    )
    
    $
    676,564Salaries, wages and employee benefits
    
    
    
    
    
    
    373,130
    
    
    
    2,105
    
    
    
    
    
    
    
    375,235Professional fees
    
    
    
    
    
    
    65,518
    
    
    
    546
    
    
    
    
    
    
    
    66,064Supplies
    
    
    
    
    
    
    37,717
    
    
    
    208
    
    
    
    
    
    
    
    37,925Rentals and leases
    
    
    
    
    
    
    9,612
    
    
    
    32
    
    
    
    
    
    
    
    9,644Other operating expenses
    
    
    
    
    
    
    65,571
    
    
    
    7,588
    
    
    
    (6,650
    )
    
    
    66,509Provision for doubtful accounts
    
    
    
    
    
    
    13,653
    
    
    
    286
    
    
    
    
    
    
    
    13,939Depreciation and amortization
    
    
    
    
    
    
    12,978
    
    
    
    656
    
    
    
    (122
    )
    
    
    13,512Interest expense
    
    
    30,917
    
    
    
    
    
    
    
    499
    
    
    
    
    
    
    
    31,416Loss on refinancing long-term debt
    
    
    8,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,17939,096
    
    
    
    578,179
    
    
    
    11,920
    
    
    
    (6,772
    )
    
    
    622,423(Loss) income from continuing operations before
income taxes
    
    
    (39,096
    )
    
    
    98,385
    
    
    
    1,135
    
    
    
    (6,283
    )
    
    
    54,141(Benefit from) provision for income taxes
    
    
    (14,896
    )
    
    
    35,522
    
    
    
    
    
    
    
    
    
    
    
    20,626(Loss) income from continuing operations
    
    
    (24,200
    )
    
    
    62,863
    
    
    
    1,135
    
    
    
    (6,283
    )
    
    
    33,515Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (783
    )
    
    
    
    
    
    
    
    
    
    
    (783
    )Net (loss) income
    
    $
    (24,200
    )
    
    $
    62,080
    
    
    $
    1,135
    
    
    $
    (6,283
    )
    
    $
    32,732
 Condensed Consolidating Statement of Income
For the Six Months Ended June 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    488,838
    
    
    $
    5,684
    
    
    $
    (5,684
    )
    
    $
    488,838Salaries, wages and employee benefits
    
    
    
    
    
    
    276,570
    
    
    
    
    
    
    
    
    
    
    
    276,570Professional fees
    
    
    
    
    
    
    46,681
    
    
    
    74
    
    
    
    
    
    
    
    46,755Supplies
    
    
    
    
    
    
    28,272
    
    
    
    
    
    
    
    
    
    
    
    28,272Rentals and leases
    
    
    
    
    
    
    6,632
    
    
    
    
    
    
    
    
    
    
    
    6,632Other operating expenses
    
    
    
    
    
    
    46,797
    
    
    
    4,165
    
    
    
    (3,572
    )
    
    
    47,390Provision for doubtful accounts
    
    
    
    
    
    
    9,355
    
    
    
    
    
    
    
    
    
    
    
    9,355Depreciation and amortization
    
    
    
    
    
    
    9,135
    
    
    
    538
    
    
    
    (122
    )
    
    
    9,551Interest expense
    
    
    17,691
    
    
    
    
    
    
    
    641
    
    
    
    
    
    
    
    18,33217,691
    
    
    
    423,442
    
    
    
    5,418
    
    
    
    (3,694
    )
    
    
    442,857(Loss) income from continuing operations before
income taxes
    
    
    (17,691
    )
    
    
    65,396
    
    
    
    266
    
    
    
    (1,990
    )
    
    
    45,981(Benefit from) provision for income taxes
    
    
    (6,723
    )
    
    
    24,079
    
    
    
    117
    
    
    
    
    
    
    
    17,473(Loss) income from continuing operations
    
    
    (10,968
    )
    
    
    41,317
    
    
    
    149
    
    
    
    (1,990
    )
    
    
    28,508Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (955
    )
    
    
    
    
    
    
    
    
    
    
    (955
    )Net (loss) income
    
    $
    (10,968
    )
    
    $
    40,362
    
    
    $
    149
    
    
    $
    (1,990
    )
    
    $
    27,553
 14




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2007
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsOperating activities:Net (loss) income
    
    $
    (24,200
    )
    
    $
    62,080
    
    
    $
    1,135
    
    
    $
    (6,283
    )
    
    $
    32,732Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    12,978
    
    
    
    656
    
    
    
    (122
    )
    
    
    13,512Share-based compensation
    
    
    
    
    
    
    7,583
    
    
    
    
    
    
    
    
    
    
    
    7,583Amortization of loan costs and bond premium
    
    
    1,016
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    1,038Loss on refinancing of long-term debt
    
    
    8,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,179Loss from discontinued operations
    
    
    
    
    
    
    783
    
    
    
    
    
    
    
    
    
    
    
    783Change in income tax assets and liabilities
    
    
    
    
    
    
    (716
    )
    
    
    
    
    
    
    
    
    
    
    (716
    )Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (14,727
    )
    
    
    (704
    )
    
    
    
    
    
    
    (15,431
    )Prepaids and other current assets
    
    
    
    
    
    
    6,024
    
    
    
    (14,683
    )
    
    
    7,300
    
    
    
    (1,359
    )Accounts payable
    
    
    
    
    
    
    (5,415
    )
    
    
    (147
    )
    
    
    
    
    
    
    (5,562
    )Salaries and benefits payable
    
    
    
    
    
    
    (4,739
    )
    
    
    139
    
    
    
    
    
    
    
    (4,600
    )Accrued liabilities and other liabilities
    
    
    10,916
    
    
    
    (11,890
    )
    
    
    14,508
    
    
    
    (7,300
    )
    
    
    6,234Net cash (used in) provided by continuing operating activities
    
    
    (4,089
    )
    
    
    51,961
    
    
    
    926
    
    
    
    (6,405
    )
    
    
    42,393Net cash used in discontinued operating activities
    
    
    
    
    
    
    (159
    )
    
    
    
    
    
    
    
    
    
    
    (159
    )Net cash (used in) provided by operating activities
    
    
    (4,089
    )
    
    
    51,802
    
    
    
    926
    
    
    
    (6,405
    )
    
    
    42,234Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (452,361
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (452,361
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    
    
    
    
    (28,769
    )
    
    
    (160
    )
    
    
    
    
    
    
    (28,929
    )Other assets
    
    
    
    
    
    
    (707
    )
    
    
    (37
    )
    
    
    
    
    
    
    (744
    )Net cash used in investing activities
    
    
    (452,361
    )
    
    
    (29,476
    )
    
    
    (197
    )
    
    
    
    
    
    
    (482,034
    )Financing activities:Borrowings on long-term debt
    
    
    481,875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481,875Principal payments on long-term debt
    
    
    (39,763
    )
    
    
    
    
    
    
    (155
    )
    
    
    
    
    
    
    (39,918
    )Net transfers to and from members
    
    
    7,222
    
    
    
    (14,916
    )
    
    
    1,289
    
    
    
    6,405
    
    
    
    Net increase in revolving credit facility
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000Payment of loan and issuance costs
    
    
    (6,173
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,173
    )Refinancing of long-term debt
    
    
    (7,127
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,127
    )Excess tax benefits from share-based payment arrangements
    
    
    3,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,566Proceeds from issuance of common stock upon exercise of
stock options
    
    
    7,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,850Net cash provided by (used in) financing activities
    
    
    456,450
    
    
    
    (14,916
    )
    
    
    1,134
    
    
    
    6,405
    
    
    
    449,073Net increase in cash
    
    
    
    
    
    
    7,410
    
    
    
    1,863
    
    
    
    
    
    
    
    9,273Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,149
    
    
    
    17,423
    
    
    
    
    
    
    
    18,572Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    8,559
    
    
    $
    19,286
    
    
    $
    
    
    
    $
    27,845
 15




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2006
(Dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Non-Guarantors
    
    
    Adjustments
    
    
    AmountsOperating activities:Net (loss) income
    
    $
    (10,968
    )
    
    $
    40,362
    
    
    $
    149
    
    
    $
    (1,990
    )
    
    $
    27,553Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    9,135
    
    
    
    538
    
    
    
    (122
    )
    
    
    9,551Share-based compensation
    
    
    
    
    
    
    8,390
    
    
    
    
    
    
    
    
    
    
    
    8,390Amortization of loan costs
    
    
    789
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    811Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    955
    
    
    
    
    
    
    
    
    
    
    
    955Change in income tax assets and liabilities
    
    
    
    
    
    
    16,283
    
    
    
    
    
    
    
    
    
    
    
    16,283Changes in operating assets and liabilities, net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (8,335
    )
    
    
    
    
    
    
    
    
    
    
    (8,335
    )Prepaids and other current assets
    
    
    
    
    
    
    711
    
    
    
    (6,840
    )
    
    
    
    
    
    
    (6,129
    )Accounts payable
    
    
    
    
    
    
    (1,415
    )
    
    
    
    
    
    
    
    
    
    
    (1,415
    )Salaries and benefits payable
    
    
    
    
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    280Accrued liabilities and other liabilities
    
    
    (1,047
    )
    
    
    (4,660
    )
    
    
    7,668
    
    
    
    
    
    
    
    1,961Net cash (used in) provided by continuing operating activities
    
    
    (11,226
    )
    
    
    61,706
    
    
    
    1,537
    
    
    
    (2,112
    )
    
    
    49,905Net cash provided by discontinued operating activities
    
    
    
    
    
    
    1,942
    
    
    
    
    
    
    
    
    
    
    
    1,942Net cash (used in) provided by operating activities
    
    
    (11,226
    )
    
    
    63,648
    
    
    
    1,537
    
    
    
    (2,112
    )
    
    
    51,847Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (44,471
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,471
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    
    
    
    
    (13,123
    )
    
    
    
    
    
    
    
    
    
    
    (13,123
    )Other assets
    
    
    
    
    
    
    (511
    )
    
    
    194
    
    
    
    
    
    
    
    (317
    )Net cash (used in) provided by investing activities
    
    
    (44,471
    )
    
    
    (13,634
    )
    
    
    194
    
    
    
    
    
    
    
    (57,911
    )Financing activities:Principal payments on long-term debt
    
    
    (46
    )
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    (180
    )Net transfers to and from members
    
    
    47,935
    
    
    
    (49,807
    )
    
    
    (240
    )
    
    
    2,112
    
    
    
    Payment of loan and issuance costs
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )Excess tax benefits from share-based payment arrangements
    
    
    4,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,248Proceeds from issuance of common stock upon exercise of
stock options
    
    
    3,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,600Net cash provided by (used in) financing activities
    
    
    55,697
    
    
    
    (49,807
    )
    
    
    (374
    )
    
    
    2,112
    
    
    
    7,628Net increase in cash
    
    
    
    
    
    
    207
    
    
    
    1,357
    
    
    
    
    
    
    
    1,564Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    44,114
    
    
    
    10,585
    
    
    
    
    
    
    
    54,699Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    44,321
    
    
    $
    11,942
    
    
    $
    
    
    
    $
    56,263
 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
 16




---



##### 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.
 (the SEC)
   
    
    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; and
    
    those risks and uncertainties described from time to time in our filings with the SEC.
   Overview
  5 8 5 8
 17




---



##### Table of Contents



3 4  3 4
  Sources of Revenue
 Patient Service Revenue
  Other Revenue
  Results of Operations
  For the Three Months Ended June 30,
    
    
    For the Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenue
    
    $
    354,126
    
    
    
    100.0
    %
    
    $
    247,237
    
    
    
    100.0
    %
    
    $
    676,564
    
    
    
    100.0
    %
    
    $
    488,838
    
    
    
    100.0
    %Salaries, wages, and employee benefits (including
share-based compensation
of $3,910, $2,136,
$7,583,
and $8,390 for the
respecitve three and six
month
periods in 2007 and 2006)
    
    
    195,100
    
    
    
    55.1
    %
    
    
    137,367
    
    
    
    55.5
    %
    
    
    375,235
    
    
    
    55.4
    %
    
    
    276,570
    
    
    
    56.6
    %Professional fees
    
    
    35,164
    
    
    
    9.9
    %
    
    
    24,164
    
    
    
    9.8
    %
    
    
    66,064
    
    
    
    9.8
    %
    
    
    46,755
    
    
    
    9.6
    %Supplies
    
    
    19,581
    
    
    
    5.5
    %
    
    
    14,315
    
    
    
    5.8
    %
    
    
    37,925
    
    
    
    5.6
    %
    
    
    28,272
    
    
    
    5.8
    %Provision for doubtful accounts
    
    
    7,275
    
    
    
    2.1
    %
    
    
    4,596
    
    
    
    1.9
    %
    
    
    13,939
    
    
    
    2.1
    %
    
    
    9,355
    
    
    
    1.9
    %Other operating expenses
    
    
    39,977
    
    
    
    11.3
    %
    
    
    27,068
    
    
    
    10.9
    %
    
    
    76,153
    
    
    
    11.3
    %
    
    
    54,022
    
    
    
    11.0
    %Depreciation and amortization
    
    
    7,256
    
    
    
    2.1
    %
    
    
    4,838
    
    
    
    2.0
    %
    
    
    13,512
    
    
    
    2.0
    %
    
    
    9,551
    
    
    
    1.9
    %Interest expense, net
    
    
    17,030
    
    
    
    4.8
    %
    
    
    9,124
    
    
    
    3.7
    %
    
    
    31,416
    
    
    
    4.6
    %
    
    
    18,332
    
    
    
    3.8
    %Loss on refinancing long-term debt
    
    
    8,179
    
    
    
    2.3
    %
    
    
    
    
    
    
    0.0
    %
    
    
    8,179
    
    
    
    1.2
    %
    
    
    
    
    
    
    0.0
    %Income from continuing operations before
income taxes
    
    
    24,564
    
    
    
    6.9
    %
    
    
    25,765
    
    
    
    10.4
    %
    
    
    54,141
    
    
    
    8.0
    %
    
    
    45,981
    
    
    
    9.4
    %Provision for income taxes
    
    
    9,298
    
    
    
    2.6
    %
    
    
    9,791
    
    
    
    3.9
    %
    
    
    20,626
    
    
    
    3.0
    %
    
    
    17,473
    
    
    
    3.6
    %Income from continuing operations
    
    $
    15,266
    
    
    
    4.3
    %
    
    $
    15,974
    
    
    
    6.5
    %
    
    $
    33,515
    
    
    
    5.0
    %
    
    $
    28,508
    
    
    
    5.8
    %
 Three Months Ended June 30, 2007 Compared To Three Months Ended June 30, 2006
  18




---



##### Table of Contents



Three Months Ended June 30,
    
    %2007
    
    2006
    
    ChangeTotal facility results:Revenue
    
    $
    326,839
    
    
    $
    234,487
    
    
    
    39.4
    %Number of facilities at period end
    
    
    89
    
    
    
    58
    
    
    
    53.4
    %Admissions
    
    
    34,409
    
    
    
    26,296
    
    
    
    30.9
    %Patient days
    
    
    592,159
    
    
    
    452,840
    
    
    
    30.8
    %Average length of stay
    
    
    17.2
    
    
    
    17.2
    
    
    
    0.0
    %Revenue per patient day
    
    $
    552
    
    
    $
    518
    
    
    
    6.6
    %Same-facility results:Revenue
    
    $
    246,965
    
    
    $
    230,892
    
    
    
    7.0
    %Number of facilities at period end
    
    
    58
    
    
    
    58
    
    
    
    0.0
    %Admissions
    
    
    27,474
    
    
    
    26,215
    
    
    
    4.8
    %Patient days
    
    
    453,663
    
    
    
    443,481
    
    
    
    2.3
    %Average length of stay
    
    
    16.5
    
    
    
    16.9
    
    
    
    -2.4
    %Revenue per patient day
    
    $
    544
    
    
    $
    521
    
    
    
    4.4
    %
 Revenue
 Salaries, wages and employee benefits
 Professional fees
 Supplies.
 Provision for doubtful accounts
 Other operating expenses
 19




---



##### Table of Contents



Depreciation and amortization
 Interest expense, net 5 8
 Loss on refinancing of long-term debt. 5 8 3 4  5 8 5 8
 Loss from discontinued operations, net of taxes
 Six Months Ended June 30, 2007 Compared To Six Months Ended June 30, 2006
  Six Months Ended June 30,
    
    %2007
    
    2006
    
    ChangeTotal facility results:Revenue
    
    $
    632,004
    
    
    $
    463,532
    
    
    
    36.3
    %Number of facilities at period end
    
    
    89
    
    
    
    58
    
    
    
    53.4
    %Admissions
    
    
    66,859
    
    
    
    53,208
    
    
    
    25.7
    %Patient days
    
    
    1,145,535
    
    
    
    896,620
    
    
    
    27.8
    %Average length of stay
    
    
    17.1
    
    
    
    16.9
    
    
    
    1.2
    %Revenue per patient day
    
    $
    552
    
    
    $
    517
    
    
    
    6.8
    %Same-facility results:Revenue
    
    $
    485,223
    
    
    $
    456,739
    
    
    
    6.2
    %Number of facilities at period end
    
    
    58
    
    
    
    58
    
    
    
    0.0
    %Admissions
    
    
    54,702
    
    
    
    53,057
    
    
    
    3.1
    %Patient days
    
    
    893,264
    
    
    
    879,006
    
    
    
    1.6
    %Average length of stay
    
    
    16.3
    
    
    
    16.6
    
    
    
    -1.8
    %Revenue per patient day
    
    $
    543
    
    
    $
    520
    
    
    
    4.4
    %
 Revenue
 Salaries, wages and employee benefits
 20




---



##### Table of Contents



Professional fees
 Supplies.
 Provision for doubtful accounts
 Other operating expenses
 Depreciation and amortization
 Interest expense, net 5 8
 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
   21




---



##### Table of Contents



3 4 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 6.6% and 6.7% at June 30, 2007
and December 31, 2006, respectively
    
    $
    110,000
    
    
    $
    
    
    
    $
    110,000
    
    
    $
    
    
    
    $
    Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest of 7.1% at June 30, 2007
and December 31, 2006, respectively
    
    
    574,250
    
    
    
    3,750
    
    
    
    7,500
    
    
    
    7,500
    
    
    
    555,5007 3/4% Senior Subordinated Notes due July 15, 2015
    
    
    476,823
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    476,82310 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%
    
    
    33,861
    
    
    
    385
    
    
    
    846
    
    
    
    958
    
    
    
    31,6721,194,968
    
    
    
    4,135
    
    
    
    118,346
    
    
    
    8,458
    
    
    
    1,064,029Lease and other obligations
    
    
    75,482
    
    
    
    15,156
    
    
    
    21,838
    
    
    
    12,179
    
    
    
    26,309Total contractual obligations
    
    $
    1,270,450
    
    
    $
    19,291
    
    
    $
    140,184
    
    
    $
    20,637
    
    
    $
    1,090,338
 
 (1)
    
    Excludes capital lease and other obligations of $7.9 million, which are included in lease and other obligations. 3 4 3 4 5 8
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Critical Accounting Policies
  Allowance for Doubtful Accounts
    Allowances for Contractual Discounts
  Professional and General Liability
  Income Taxes
  23




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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 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  24




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Item 4. Submission of Matters to a Vote of Security Holders.
  (1)
    
    The stockholders elected William F. Carpenter III, Mark P. Clein and Richard D. Gore as
Class II directors of the Company. The votes were as follows:
 William F.
Carpenter IIIVotes cast for
    
    
    47,986,594Votes withheld
    
    
    1,350,403Mark P.
CleinVotes cast for
    
    
    25,688,806Votes withheld
    
    
    23,648,191Richard D.
GoreVotes cast for
    
    
    46,263,075Votes withheld
    
    
    3,073,922
 (2)
    
    The stockholders ratified the appointment of Ernst & Young LLP as our independent
registered public accounting firm for the fiscal year ending December 31, 2007. The votes
were as follows:
 Votes cast for
    
    
    49,091,770Votes cast against
    
    
    222,811Abstentions
    
    
    22,416
 
 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)).4.4
    
    Form of Notes (included in Exhibit 4.3).
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##### Table of Contents



ExhibitNumber
    
    Description4.5
    
    Indenture, dated as of July 6, 2005, by and among
Psychiatric Solutions, Inc., the Guarantors named
therein and Wachovia Bank, National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed July 8,
2006).4.6
    
    Form of Notes (included in Exhibit 4.5).4.7
    
    Thirty-Fifth Supplemental Indenture, dated as of May 21,
2007, by and among Psychiatric Solutions, Inc., the
Guarantors named therein and U.S. Bank National
Association, as Trustee (incorporated by reference to
Exhibit 4 to the Companys Current Report on Form 8-K,
filed May 22, 2007).4.8
    
    Purchase Agreement, dated as of May 24, 2007, among
Psychiatric Solutions, Inc., the subsidiaries named as
guarantors thereto, and Citigroup Global Markets Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
as representatives of the initial purchasers named
therein (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed May 25,
2007).4.9
    
    Seventeenth Supplemental Indenture, dated as of May 31,
2007, among Psychiatric Solutions, Inc., the
subsidiaries of Psychiatric Solutions, Inc. party
thereto as guarantors and U.S. Bank National
Association, as Trustee (incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K,
filed June 1, 2007).4.10
    
    Exchange and Registration Rights Agreement, dated as of
May 31, 2007, among Psychiatric Solutions, Inc., the
subsidiaries of Psychiatric Solutions, Inc. party
thereto as guarantors, and Citigroup Global Markets
Inc., Merrill, Lynch, Pierce, Fenner & Smith
Incorporated, Banc of America Securities LLC, and J.P.
Morgan Securities Inc. (incorporated by reference to
Exhibit 4.3 to the Companys Current Report on Form 8-K,
filed June 1, 2007).10.1
    
    Employment Agreement, dated May 10, 2007, between Joey
A. Jacobs and Psychiatric Solutions, Inc. (incorporated
by reference to Exhibit 10 to the Companys Current
Report on Form 8-K, filed May 15, 2007).10.2
    
    Amendment No. 2 to Second Amended and Restated Credit
Agreement, dated as of December 1, 2006, by and among
Psychiatric Solutions, Inc., BHC Holdings, Inc., Premier
Behavioral Solutions, Inc., Alternative Behavioral
Services, Inc., Horizon Health Corporation, ABS LINCS
PR, Inc., First Hospital Panamericano, Inc., FHCHS of
Puerto Rico, Inc., First Corrections  Puerto-Rico,
Inc., the subsidiaries of Psychiatric Solutions, Inc.
party thereto as guarantors, Citicorp North America,
Inc., as term loan facility administrative agent, Bank
of America, N.A., as revolving credit facility
administrative agent, Citigroup Global Markets Inc. and
Merrill, Lynch, Pierce, Fenner & Smith Incorporated, as
joint lead arrangers and joint book-running managers
(incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K, filed June 1,
2007).31.1*
    
    Certification of the Chief Executive Officer of
Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2*
    
    Certification of the Chief Accounting Officer of
Psychiatric Solutions, Inc. Pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1*
    
    Certifications of the Chief Executive Officer and Chief
Accounting Officer of Psychiatric Solutions, Inc.
Pursuant to Rule 13a-14(b) of the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 
 *
    
    Filed herewith 26




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SIGNATURES
  Psychiatric Solutions, Inc.By:
    /s/ Jack E. PolsonJack E. PolsonExecutive Vice President, Chief
Accounting Officer  27