##### 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,
2006 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 for the transition period from  to
 Commission file number 0-20488
 Psychiatric Solutions, Inc.
  DELAWARE
    
    23-2491707(State or Other Jurisdiction of Incorporation or
    
    (I.R.S. Employer Identification No.)Organization)
 840 Crescent Centre Drive, Suite 460
Franklin, TN 37067
 (615) 312-5700
 þ o
  þ o o
 o þ




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##### 



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




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,465
    
    
    $
    54,699Accounts receivable, less allowance for doubtful accounts of
$16,456 and $15,355, respectively
    
    
    157,264
    
    
    
    132,288Prepaids and other
    
    
    41,932
    
    
    
    53,473Total current assets
    
    
    209,661
    
    
    
    240,460Property and equipment, net of accumulated depreciation
    
    
    476,942
    
    
    
    378,163Cost in excess of net assets acquired
    
    
    603,944
    
    
    
    526,536Other assets
    
    
    27,401
    
    
    
    29,872Total assets
    
    $
    1,317,948
    
    
    $
    1,175,031LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,144
    
    
    $
    18,726Salaries and benefits payable
    
    
    52,516
    
    
    
    46,872Other accrued liabilities
    
    
    43,488
    
    
    
    34,363Current portion of long-term debt
    
    
    568
    
    
    
    325Total current liabilities
    
    
    115,716
    
    
    
    100,286Long-term debt, less current portion
    
    
    537,878
    
    
    
    482,064Deferred tax liability
    
    
    37,082
    
    
    
    32,151Other liabilities
    
    
    23,065
    
    
    
    20,818Total liabilities
    
    
    713,741
    
    
    
    635,319Stockholders equity:Common stock, $0.01 par value, 125,000 shares authorized;
53,247 and 52,430 issued and outstanding, respectively
    
    
    532
    
    
    
    524Additional paid-in capital
    
    
    517,178
    
    
    
    495,768Retained earnings
    
    
    86,497
    
    
    
    43,420Total stockholders equity
    
    
    604,207
    
    
    
    539,712Total liabilities and stockholders equity
    
    $
    1,317,948
    
    
    $
    1,175,031
  1




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##### Table of Contents



PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except for per share amounts)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    254,814
    
    
    $
    220,458
    
    
    $
    745,530
    
    
    $
    494,216Salaries, wages and employee benefits (including share-
based compensation of $2,059 and $10,449 for the three
and nine months ended September 30, 2006,
respectively)
    
    
    144,715
    
    
    
    121,583
    
    
    
    422,647
    
    
    
    269,602Professional fees
    
    
    24,209
    
    
    
    22,511
    
    
    
    71,210
    
    
    
    51,126Supplies
    
    
    14,577
    
    
    
    13,220
    
    
    
    43,008
    
    
    
    30,137Rentals and leases
    
    
    3,280
    
    
    
    3,381
    
    
    
    9,923
    
    
    
    8,042Other operating expenses
    
    
    23,214
    
    
    
    22,348
    
    
    
    70,883
    
    
    
    53,239Provision for doubtful accounts
    
    
    4,413
    
    
    
    4,954
    
    
    
    13,771
    
    
    
    10,267Depreciation and amortization
    
    
    5,234
    
    
    
    4,355
    
    
    
    14,846
    
    
    
    10,279Interest expense
    
    
    10,059
    
    
    
    11,377
    
    
    
    28,537
    
    
    
    18,192Loss on refinancing long-term debt
    
    
    
    
    
    
    14,881
    
    
    
    
    
    
    
    21,871229,701
    
    
    
    218,610
    
    
    
    674,825
    
    
    
    472,755Income from continuing operations
before income taxes
    
    
    25,113
    
    
    
    1,848
    
    
    
    70,705
    
    
    
    21,461Provision for income taxes
    
    
    9,543
    
    
    
    721
    
    
    
    26,868
    
    
    
    8,370Income from continuing operations
    
    
    15,570
    
    
    
    1,127
    
    
    
    43,837
    
    
    
    13,091(Loss) income from discontinued operations, net of
income tax benefit (provision) of $28, $(33), $465
and $(78) for the respective three and nine month
periods in 2006 and 2005
    
    
    (46
    )
    
    
    52
    
    
    
    (760
    )
    
    
    123Net income
    
    $
    15,524
    
    
    $
    1,179
    
    
    $
    43,077
    
    
    $
    13,214Basic earnings per share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.83
    
    
    $
    0.31(Loss)
income from discontinued operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.82
    
    
    $
    0.31Diluted earnings per share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.81
    
    
    $
    0.30(Loss)
income from discontinued operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.80
    
    
    $
    0.30Shares used in computing per share amounts:Basic
    
    
    53,114
    
    
    
    44,820
    
    
    
    52,849
    
    
    
    42,285Diluted
    
    
    54,266
    
    
    
    46,405
    
    
    
    54,077
    
    
    
    43,750
  2




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PSYCHIATRIC SOLUTIONS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 Nine Months Ended September 30,2006
    
    
    2005Operating activities:Net income
    
    $
    43,077
    
    
    $
    13,214Adjustments to reconcile net income to
net cash provided by continuing
operating activities:Depreciation and amortization
    
    
    14,846
    
    
    
    10,279Share-based compensation
    
    
    10,449
    
    
    
    Amortization of loan costs
    
    
    1,225
    
    
    
    818Loss on refinancing long-term debt
    
    
    
    
    
    
    21,871Loss (income) from discontinued operations, net of taxes
    
    
    760
    
    
    
    (123
    )Change in income tax assets and liabilities
    
    
    24,270
    
    
    
    1,715Changes in operating assets and liabilities,
net of effect of acquisitions:Accounts receivable
    
    
    (12,621
    )
    
    
    (9,801
    )Prepaids and other current assets
    
    
    (7,182
    )
    
    
    (3,868
    )Accounts payable
    
    
    (1,943
    )
    
    
    2,102Salaries and benefits payable
    
    
    4,878
    
    
    
    1,715Accrued liabilities and other liabilities
    
    
    1,401
    
    
    
    13,328Net cash provided by continuing operating activities
    
    
    79,160
    
    
    
    51,250Net cash provided by (used in) discontinued operating activities
    
    
    1,664
    
    
    
    (73
    )Net cash provided by operating activities
    
    
    80,824
    
    
    
    51,177Investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (167,065
    )
    
    
    (514,732
    )Capital purchases of leasehold improvements,
equipment and software
    
    
    (20,880
    )
    
    
    (14,285
    )Cash paid for investments in equity method investees
    
    
    
    
    
    
    (1,340
    )Other assets
    
    
    35
    
    
    
    1,013Net cash used in investing activities
    
    
    (187,910
    )
    
    
    (529,344
    )Financing activities:Issuances of long-term debt
    
    
    
    
    
    
    545,000Principal payments on long-term debt
    
    
    (274
    )
    
    
    (236,735
    )Net increase in revolving credit facility
    
    
    52,000
    
    
    
    Payment of loan and issuance costs
    
    
    (101
    )
    
    
    (13,294
    )Refinancing of long-term debt
    
    
    
    
    
    
    (15,398
    )Excess tax benefits from share-based payment arrangements
    
    
    5,771
    
    
    
    Proceeds from secondary offering of common stock,
net of issuance costs
    
    
    
    
    
    
    192,637Proceeds from issuance of common stock upon exercise
of stock options
    
    
    5,456
    
    
    
    2,615Net cash provided by financing activities
    
    
    62,852
    
    
    
    474,825Net decrease in cash
    
    
    (44,234
    )
    
    
    (3,342
    )Cash and cash equivalents at beginning of the period
    
    
    54,699
    
    
    
    33,451Cash and cash equivalents at end of the period
    
    $
    10,465
    
    
    $
    30,109Effect of Acquisitions:Assets acquired, net of cash acquired
    
    $
    182,056
    
    
    $
    623,000Cash paid for prior year acquisitions
    
    
    
    
    
    
    5,793Liabilities assumed
    
    
    (10,745
    )
    
    
    (49,296
    )Issuance of common stock used in acquisitions
    
    
    
    
    
    
    (64,765
    )Long-term debt assumed
    
    
    (4,246
    )
    
    
    Cash paid for acquisitions, net of cash acquired
    
    $
    167,065
    
    
    $
    514,732
  3




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##### Table of Contents



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




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Income from continuing operations
    
    $
    15,570
    
    
    $
    1,127
    
    
    $
    43,837
    
    
    $
    13,091(Loss) income from discontinued operations, net of taxes
    
    
    (46
    )
    
    
    52
    
    
    
    (760
    )
    
    
    123Net income
    
    $
    15,524
    
    
    $
    1,179
    
    
    $
    43,077
    
    
    $
    13,214Denominator:Weighted average shares outstanding for basic earnings per share
    
    
    53,114
    
    
    
    44,820
    
    
    
    52,849
    
    
    
    42,285Effects of dilutive stock options and warrants outstanding
    
    
    1,152
    
    
    
    1,585
    
    
    
    1,228
    
    
    
    1,465Shares used in computing diluted earnings per common share
    
    
    54,266
    
    
    
    46,405
    
    
    
    54,077
    
    
    
    43,750Basic earnings per share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.83
    
    
    $
    0.31(Loss) income from discontinued operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.82
    
    
    $
    0.31Diluted earnings per share:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.81
    
    
    $
    0.30(Loss) income from discontinued operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    $
    0.29
    
    
    $
    0.03
    
    
    $
    0.80
    
    
    $
    0.30
 4. Share-Based Compensation
 Share Based Payment Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees
   5




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net income
    
    $
    1,179
    
    
    $
    13,214Pro forma compensation expense from stock options, net of taxes
    
    
    979
    
    
    
    3,684Pro forma net income
    
    $
    200
    
    
    $
    9,530Basic earnings per share, as reported
    
    $
    0.03
    
    
    $
    0.31Diluted earnings per share, as reported
    
    $
    0.03
    
    
    $
    0.30Basic pro forma earnings per share
    
    $
    
    
    
    $
    0.23Diluted pro forma earnings per share
    
    $
    
    
    
    $
    0.22
    WeightedWeighted
    
    AverageNumber
    
    Average
    
    Remaining
    
    Aggregateof
    
    Exercise
    
    Contractual
    
    IntrinsicOptions
    
    Price
    
    Term (in years)
    
    ValueOutstanding at December 31, 2005
    
    
    4,472
    
    
    $
    13.01
    
    
    
    n/a
    
    
    
    n/aGranted
    
    
    2,104
    
    
    $
    32.74
    
    
    
    n/a
    
    
    
    n/aCanceled
    
    
    (86
    )
    
    $
    15.41
    
    
    
    n/a
    
    
    
    n/aExercised
    
    
    (763
    )
    
    $
    7.15
    
    
    
    n/a
    
    
    
    n/aOutstanding at September 30, 2006
    
    
    5,727
    
    
    $
    20.74
    
    
    
    8.3
    
    
    $
    76,471Exercisable at September 30, 2006
    
    
    2,215
    
    
    $
    14.79
    
    
    
    7.5
    
    
    $
    42,747
  6




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##### Table of Contents



Nine Months Ended September 30,2006
    
    2005Weighted average grant-date fair value of options
    
    $
    9.93
    
    
    $
    7.73Risk-free interest rate
    
    
    5
    %
    
    
    4
    %Expected volatility
    
    
    31
    %
    
    
    33
    %Expected term (in years)
    
    
    4
    
    
    
    5Dividend yield
    
    
    0
    %
    
    
    0
    %
     5. Mergers and Acquisitions
    6. Long-term debt
  September 30,
    
    
    December 31,2006
    
    
    2005Senior credit facility:Revolving line of credit facility, expiring on December 21, 2009
and bearing interest of 6.8% at September 30, 2006
    
    $
    52,000
    
    
    $
    Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest of 7.2% and 6.2% at September 30, 2006
and December 31, 2005, respectively
    
    
    200,000
    
    
    
    200,0007 3/4% Senior Subordinated Notes due July 15, 2015
    
    
    220,000
    
    
    
    220,00010 5/8% Senior Subordinated Notes due June 15, 2013
    
    
    38,681
    
    
    
    38,681Mortgage loans on facilities, maturing in 2036, 2037 and 2038
and bearing fixed interest rates of 5.65% to 7.6%
    
    
    27,134
    
    
    
    23,377Other
    
    
    631
    
    
    
    331538,446
    
    
    
    482,389Less current portion
    
    
    568
    
    
    
    325Long-term debt
    
    $
    537,878
    
    
    $
    482,064
 7




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##### Table of Contents



Senior Credit Facility
    7 3 / 4 % Notes
 3 4 3 4 5 8 5 8 3 4 3 4
 10 5 / 8 % Notes
 5 8 5 8 5 8
 5 8 5 8 5 8 3 4
 Mortgage Loans
  8




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##### Table of Contents



7. Income Taxes
  Recently Issued Accounting Pronouncement
 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
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    
    
    
    $
    3,317
    
    
    $
    2,086
    
    
    $
    11,869Salaries, wages and employee benefits
    
    
    3
    
    
    
    2,286
    
    
    
    1,589
    
    
    
    8,351Professional fees
    
    
    15
    
    
    
    140
    
    
    
    109
    
    
    
    672Supplies
    
    
    3
    
    
    
    330
    
    
    
    226
    
    
    
    1,026Rentals and leases
    
    
    2
    
    
    
    84
    
    
    
    100
    
    
    
    188Other operating expenses
    
    
    
    
    
    
    341
    
    
    
    428
    
    
    
    1,284Provision for doubtful accounts
    
    
    51
    
    
    
    8
    
    
    
    77
    
    
    
    39Depreciation and amortization
    
    
    
    
    
    
    28
    
    
    
    22
    
    
    
    64Interest expense
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    44Loss on sale of discontinued operation
    
    
    
    
    
    
    
    
    
    
    760
    
    
    
    74
    
    
    
    3,232
    
    
    
    3,311
    
    
    
    11,668(Loss) income from discontinued operations before income taxes
    
    
    (74
    )
    
    
    85
    
    
    
    (1,225
    )
    
    
    201(Benefit from) provision for income taxes
    
    
    (28
    )
    
    
    33
    
    
    
    (465
    )
    
    
    78(Loss) income from discontinued operations, net of taxes
    
    $
    (46
    )
    
    $
    52
    
    
    $
    (760
    )
    
    $
    123
 9. Disclosures About Reportable Segments
 Disclosures About Segments of an Enterprise and
Related Information
 9




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##### Table of Contents



Three Months Ended September 30, 2006
 Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    241,868
    
    
    $
    12,946
    
    
    $
    
    
    
    $
    254,814Adjusted EBITDA
    
    $
    48,048
    
    
    $
    2,277
    
    
    $
    (7,860
    )
    
    $
    42,465Interest expense
    
    
    1,217
    
    
    
    1
    
    
    
    8,841
    
    
    
    10,059Depreciation and amortization
    
    
    4,749
    
    
    
    173
    
    
    
    312
    
    
    
    5,234Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    9,543
    
    
    
    9,543Inter-segment expenses
    
    
    9,490
    
    
    
    506
    
    
    
    (9,996
    )
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    2,059
    
    
    
    2,059Income (loss) from
continuing operations
    
    $
    32,592
    
    
    $
    1,597
    
    
    $
    (18,619
    )
    
    $
    15,570Segment assets
    
    $
    1,221,368
    
    
    $
    29,481
    
    
    $
    67,099
    
    
    $
    1,317,948
 Nine Months Ended September 30, 2006
 Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    707,278
    
    
    $
    38,252
    
    
    $
    
    
    
    $
    745,530Adjusted EBITDA
    
    $
    139,118
    
    
    $
    6,647
    
    
    $
    (21,228
    )
    
    $
    124,537Interest expense
    
    
    10,315
    
    
    
    2
    
    
    
    18,220
    
    
    
    28,537Depreciation and amortization
    
    
    13,428
    
    
    
    514
    
    
    
    904
    
    
    
    14,846Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    26,868
    
    
    
    26,868Inter-segment expenses
    
    
    28,242
    
    
    
    1,575
    
    
    
    (29,817
    )
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    10,449
    
    
    
    10,449Income (loss) from
continuing operations
    
    $
    87,133
    
    
    $
    4,556
    
    
    $
    (47,852
    )
    
    $
    43,837Segment assets
    
    $
    1,221,368
    
    
    $
    29,481
    
    
    $
    67,099
    
    
    $
    1,317,948
 10




---



##### Table of Contents



Three Months Ended September 30, 2005
 Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    207,306
    
    
    $
    13,152
    
    
    $
    
    
    
    $
    220,458Adjusted EBITDA
    
    $
    36,113
    
    
    $
    2,602
    
    
    $
    (6,254
    )
    
    $
    32,461Interest expense
    
    
    8,281
    
    
    
    1
    
    
    
    3,095
    
    
    
    11,377Depreciation and amortization
    
    
    3,989
    
    
    
    168
    
    
    
    198
    
    
    
    4,355Provision for income taxes
    
    
    131
    
    
    
    
    
    
    
    590
    
    
    
    721Inter-segment expenses
    
    
    5,556
    
    
    
    1,096
    
    
    
    (6,652
    )
    
    
    Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    14,881
    
    
    
    14,881Total other expenses
    
    
    
    
    
    
    
    
    
    
    14,881
    
    
    
    14,881Income (loss) from continuing operations
    
    $
    18,156
    
    
    $
    1,337
    
    
    $
    (18,366
    )
    
    $
    1,127Segment assets
    
    $
    1,016,660
    
    
    $
    29,082
    
    
    $
    96,519
    
    
    $
    1,142,261
 Nine Months Ended September 30, 2005
 Owned andLeased
    
    
    Management
    
    
    CorporateFacilities
    
    
    Contracts
    
    
    and Other
    
    
    ConsolidatedRevenue
    
    $
    455,255
    
    
    $
    38,961
    
    
    $
    
    
    
    $
    494,216Adjusted EBITDA
    
    $
    79,966
    
    
    $
    7,566
    
    
    $
    (15,729
    )
    
    $
    71,803Interest expense
    
    
    24,942
    
    
    
    2
    
    
    
    (6,752
    )
    
    
    18,192Depreciation and amortization
    
    
    9,272
    
    
    
    509
    
    
    
    498
    
    
    
    10,279Provision for income taxes
    
    
    1,355
    
    
    
    
    
    
    
    7,015
    
    
    
    8,370Inter-segment expenses
    
    
    12,937
    
    
    
    2,219
    
    
    
    (15,156
    )
    
    
    Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    
    
    
    21,871
    
    
    
    21,871Total other expenses
    
    
    
    
    
    
    
    
    
    
    21,871
    
    
    
    21,871Income (loss) from continuing operations
    
    $
    31,460
    
    
    $
    4,836
    
    
    $
    (23,205
    )
    
    $
    13,091Segment assets
    
    $
    1,016,660
    
    
    $
    29,082
    
    
    $
    96,519
    
    
    $
    1,142,261
 10. Financial Information for the Company and Its Subsidiaries
  11




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##### Table of Contents



Condensed Consolidating Balance Sheet
As of September 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    (3,359
    )
    
    $
    13,824
    
    
    $
    
    
    
    $
    10,465Accounts receivable, net
    
    
    
    
    
    
    157,264
    
    
    
    
    
    
    
    
    
    
    
    157,264Prepaids and other
    
    
    
    
    
    
    36,076
    
    
    
    5,856
    
    
    
    
    
    
    
    41,932Total current assets
    
    
    
    
    
    
    189,981
    
    
    
    19,680
    
    
    
    
    
    
    
    209,661Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    448,232
    
    
    
    36,360
    
    
    
    (7,650
    )
    
    
    476,942Cost in excess of net assets acquired
    
    
    
    
    
    
    603,944
    
    
    
    
    
    
    
    
    
    
    
    603,944Investment in subsidiaries
    
    
    475,690
    
    
    
    
    
    
    
    
    
    
    
    (475,690
    )
    
    
    Other assets
    
    
    11,320
    
    
    
    12,604
    
    
    
    3,477
    
    
    
    
    
    
    
    27,401Total assets
    
    $
    487,010
    
    
    $
    1,254,761
    
    
    $
    59,517
    
    
    $
    (483,340
    )
    
    $
    1,317,948Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    19,144
    
    
    $
    
    
    
    $
    
    
    
    $
    19,144Salaries and benefits payable
    
    
    
    
    
    
    52,516
    
    
    
    
    
    
    
    
    
    
    
    52,516Other accrued liabilities
    
    
    9,819
    
    
    
    33,521
    
    
    
    3,626
    
    
    
    (3,478
    )
    
    
    43,488Current portion of long-term debt
    
    
    271
    
    
    
    
    
    
    
    297
    
    
    
    
    
    
    
    568Total current liabilities
    
    
    10,090
    
    
    
    105,181
    
    
    
    3,923
    
    
    
    (3,478
    )
    
    
    115,716Long-term debt, less current portion
    
    
    511,041
    
    
    
    
    
    
    
    26,837
    
    
    
    
    
    
    
    537,878Deferred tax liability
    
    
    
    
    
    
    37,082
    
    
    
    
    
    
    
    
    
    
    
    37,082Other liabilities
    
    
    685
    
    
    
    9,369
    
    
    
    13,011
    
    
    
    
    
    
    
    23,065Total liabilities
    
    
    521,816
    
    
    
    151,632
    
    
    
    43,771
    
    
    
    (3,478
    )
    
    
    713,741Stockholders (deficit) equity
    
    
    (34,806
    )
    
    
    1,103,129
    
    
    
    15,746
    
    
    
    (479,862
    )
    
    
    604,207Total liabilities and stockholders (deficit) equity
    
    $
    487,010
    
    
    $
    1,254,761
    
    
    $
    59,517
    
    
    $
    (483,340
    )
    
    $
    1,317,948
 Condensed Consolidating Balance Sheet
As of December 31, 2005
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsCurrent Assets:Cash and cash equivalents
    
    $
    
    
    
    $
    44,114
    
    
    $
    10,585
    
    
    $
    
    
    
    $
    54,699Accounts receivable, net
    
    
    
    
    
    
    132,288
    
    
    
    
    
    
    
    
    
    
    
    132,288Prepaids and other
    
    
    
    
    
    
    53,473
    
    
    
    
    
    
    
    
    
    
    
    53,473Total current assets
    
    
    
    
    
    
    229,875
    
    
    
    10,585
    
    
    
    
    
    
    
    240,460Property and equipment, net of accumulated depreciation
    
    
    
    
    
    
    356,817
    
    
    
    29,179
    
    
    
    (7,833
    )
    
    
    378,163Cost in excess of net assets acquired
    
    
    
    
    
    
    526,536
    
    
    
    
    
    
    
    
    
    
    
    526,536Investment in subsidiaries
    
    
    444,888
    
    
    
    
    
    
    
    
    
    
    
    (444,888
    )
    
    
    Other assets
    
    
    12,441
    
    
    
    14,016
    
    
    
    3,415
    
    
    
    
    
    
    
    29,872Total assets
    
    $
    457,329
    
    
    $
    1,127,244
    
    
    $
    43,179
    
    
    $
    (452,721
    )
    
    $
    1,175,031Current Liabilities:Accounts payable
    
    $
    
    
    
    $
    18,726
    
    
    $
    
    
    
    $
    
    
    
    $
    18,726Salaries and benefits payable
    
    
    
    
    
    
    46,872
    
    
    
    
    
    
    
    
    
    
    
    46,872Other accrued liabilities
    
    
    12,994
    
    
    
    21,056
    
    
    
    313
    
    
    
    
    
    
    
    34,363Current portion of long-term debt
    
    
    77
    
    
    
    
    
    
    
    248
    
    
    
    
    
    
    
    325Total current liabilities
    
    
    13,071
    
    
    
    86,654
    
    
    
    561
    
    
    
    
    
    
    
    100,286Long-term debt, less current portion
    
    
    458,935
    
    
    
    
    
    
    
    23,129
    
    
    
    
    
    
    
    482,064Deferred tax liability
    
    
    
    
    
    
    32,151
    
    
    
    
    
    
    
    
    
    
    
    32,151Other liabilities
    
    
    3,011
    
    
    
    9,544
    
    
    
    8,263
    
    
    
    
    
    
    
    20,818Total liabilities
    
    
    475,017
    
    
    
    128,349
    
    
    
    31,953
    
    
    
    
    
    
    
    635,319Stockholders (deficit) equity
    
    
    (17,688
    )
    
    
    998,895
    
    
    
    11,226
    
    
    
    (452,721
    )
    
    
    539,712Total liabilities and stockholders (deficit) equity
    
    $
    457,329
    
    
    $
    1,127,244
    
    
    $
    43,179
    
    
    $
    (452,721
    )
    
    $
    1,175,031
 12




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    254,814
    
    
    $
    2,863
    
    
    $
    (2,863
    )
    
    $
    254,814Salaries, wages and employee benefits
    
    
    
    
    
    
    144,715
    
    
    
    
    
    
    
    
    
    
    
    144,715Professional fees
    
    
    
    
    
    
    24,195
    
    
    
    14
    
    
    
    
    
    
    
    24,209Supplies
    
    
    
    
    
    
    14,576
    
    
    
    1
    
    
    
    
    
    
    
    14,577Rentals and leases
    
    
    
    
    
    
    3,280
    
    
    
    
    
    
    
    
    
    
    
    3,280Other operating expenses
    
    
    
    
    
    
    23,005
    
    
    
    1,976
    
    
    
    (1,767
    )
    
    
    23,214Provision for doubtful accounts
    
    
    
    
    
    
    4,413
    
    
    
    
    
    
    
    
    
    
    
    4,413Depreciation and amortization
    
    
    
    
    
    
    5,020
    
    
    
    275
    
    
    
    (61
    )
    
    
    5,234Interest expense
    
    
    9,773
    
    
    
    
    
    
    
    286
    
    
    
    
    
    
    
    10,0599,773
    
    
    
    219,204
    
    
    
    2,552
    
    
    
    (1,828
    )
    
    
    229,701(Loss) income from continuing operations
before
income taxes
    
    
    (9,773
    )
    
    
    35,610
    
    
    
    311
    
    
    
    (1,035
    )
    
    
    25,113(Benefit from) provision for income taxes
    
    
    (3,714
    )
    
    
    13,257
    
    
    
    
    
    
    
    
    
    
    
    9,543(Loss) income from continuing operations
    
    
    (6,059
    )
    
    
    22,353
    
    
    
    311
    
    
    
    (1,035
    )
    
    
    15,570Loss from discontinued operations, net
of taxes
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    (46
    )Net (loss) income
    
    $
    (6,059
    )
    
    $
    22,307
    
    
    $
    311
    
    
    $
    (1,035
    )
    
    $
    15,524
 Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    745,530
    
    
    $
    8,547
    
    
    $
    (8,547
    )
    
    $
    745,530Salaries, wages and employee benefits
    
    
    
    
    
    
    422,647
    
    
    
    
    
    
    
    
    
    
    
    422,647Professional fees
    
    
    
    
    
    
    71,122
    
    
    
    88
    
    
    
    
    
    
    
    71,210Supplies
    
    
    
    
    
    
    43,007
    
    
    
    1
    
    
    
    
    
    
    
    43,008Rentals and leases
    
    
    
    
    
    
    9,923
    
    
    
    
    
    
    
    
    
    
    
    9,923Other operating expenses
    
    
    
    
    
    
    70,081
    
    
    
    6,141
    
    
    
    (5,339
    )
    
    
    70,883Provision for doubtful accounts
    
    
    
    
    
    
    13,771
    
    
    
    
    
    
    
    
    
    
    
    13,771Depreciation and amortization
    
    
    
    
    
    
    14,215
    
    
    
    813
    
    
    
    (182
    )
    
    
    14,846Interest expense
    
    
    27,610
    
    
    
    
    
    
    
    927
    
    
    
    
    
    
    
    28,53727,610
    
    
    
    644,766
    
    
    
    7,970
    
    
    
    (5,521
    )
    
    
    674,825(Loss) income from continuing operations
before
income taxes
    
    
    (27,610
    )
    
    
    100,764
    
    
    
    577
    
    
    
    (3,026
    )
    
    
    70,705(Benefit from) provision for income taxes
    
    
    (10,492
    )
    
    
    37,243
    
    
    
    117
    
    
    
    
    
    
    
    26,868(Loss) income from continuing operations
    
    
    (17,118
    )
    
    
    63,521
    
    
    
    460
    
    
    
    (3,026
    )
    
    
    43,837Loss from discontinued operations, net
of taxes
    
    
    
    
    
    
    (760
    )
    
    
    
    
    
    
    
    
    
    
    (760
    )Net (loss) income
    
    $
    (17,118
    )
    
    $
    62,761
    
    
    $
    460
    
    
    $
    (3,026
    )
    
    $
    43,077
 13




---



##### Table of Contents



Condensed Consolidating Statement of Income
For the Three Months Ended September 30, 2005
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    220,458
    
    
    $
    3,663
    
    
    $
    (3,663
    )
    
    $
    220,458Salaries, wages and employee benefits
    
    
    
    
    
    
    121,583
    
    
    
    
    
    
    
    
    
    
    
    121,583Professional fees
    
    
    
    
    
    
    22,118
    
    
    
    393
    
    
    
    
    
    
    
    22,511Supplies
    
    
    
    
    
    
    13,220
    
    
    
    
    
    
    
    
    
    
    
    13,220Rentals and leases
    
    
    
    
    
    
    3,381
    
    
    
    
    
    
    
    
    
    
    
    3,381Other operating expenses
    
    
    
    
    
    
    22,246
    
    
    
    2,566
    
    
    
    (2,464
    )
    
    
    22,348Provision for doubtful accounts
    
    
    
    
    
    
    4,954
    
    
    
    
    
    
    
    
    
    
    
    4,954Depreciation and amortization
    
    
    
    
    
    
    4,171
    
    
    
    245
    
    
    
    (61
    )
    
    
    4,355Interest expense
    
    
    11,141
    
    
    
    
    
    
    
    236
    
    
    
    
    
    
    
    11,377Loss on refinancing long-term debt
    
    
    14,881
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,88126,022
    
    
    
    191,673
    
    
    
    3,440
    
    
    
    (2,525
    )
    
    
    218,610(Loss) income from continuing operations
before
income taxes
    
    
    (26,022
    )
    
    
    28,785
    
    
    
    223
    
    
    
    (1,138
    )
    
    
    1,848(Benefit from) provision for income taxes
    
    
    (10,149
    )
    
    
    10,870
    
    
    
    
    
    
    
    
    
    
    
    721(Loss) income from continuing operations
    
    
    (15,873
    )
    
    
    17,915
    
    
    
    223
    
    
    
    (1,138
    )
    
    
    1,127(Loss) income from discontinued
operations, net of taxes
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Net income
    
    $
    (15,873
    )
    
    $
    17,967
    
    
    $
    223
    
    
    $
    (1,138
    )
    
    $
    1,179
 Condensed Consolidating Statement of Income
For the Nine Months Ended September 30, 2005
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsRevenue
    
    $
    
    
    
    $
    494,216
    
    
    $
    7,831
    
    
    $
    (7,831
    )
    
    $
    494,216Salaries, wages and employee benefits
    
    
    
    
    
    
    269,602
    
    
    
    
    
    
    
    
    
    
    
    269,602Professional fees
    
    
    
    
    
    
    50,678
    
    
    
    448
    
    
    
    
    
    
    
    51,126Supplies
    
    
    
    
    
    
    30,137
    
    
    
    
    
    
    
    
    
    
    
    30,137Rentals and leases
    
    
    
    
    
    
    8,042
    
    
    
    
    
    
    
    
    
    
    
    8,042Other operating expenses
    
    
    
    
    
    
    52,449
    
    
    
    5,945
    
    
    
    (5,155
    )
    
    
    53,239Provision for doubtful accounts
    
    
    
    
    
    
    10,267
    
    
    
    
    
    
    
    
    
    
    
    10,267Depreciation and amortization
    
    
    
    
    
    
    9,725
    
    
    
    736
    
    
    
    (182
    )
    
    
    10,279Interest expense
    
    
    17,247
    
    
    
    
    
    
    
    945
    
    
    
    
    
    
    
    18,192Loss on refinancing of long-term debt
    
    
    21,871
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,87139,118
    
    
    
    430,900
    
    
    
    8,074
    
    
    
    (5,337
    )
    
    
    472,755(Loss) income from continuing operations
before
income taxes
    
    
    (39,118
    )
    
    
    63,316
    
    
    
    (243
    )
    
    
    (2,494
    )
    
    
    21,461(Benefit from) provision for income taxes
    
    
    (15,256
    )
    
    
    23,626
    
    
    
    
    
    
    
    
    
    
    
    8,370(Loss) income from continuing operations
    
    
    (23,862
    )
    
    
    39,690
    
    
    
    (243
    )
    
    
    (2,494
    )
    
    
    13,091(Loss) income from discontinued
operations, net of taxes
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    
    
    
    
    123Net income
    
    $
    (23,862
    )
    
    $
    39,813
    
    
    $
    (243
    )
    
    $
    (2,494
    )
    
    $
    13,214
 14




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2006
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    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
    
    
    
    
    
    
    14,215
    
    
    
    813
    
    
    
    (182
    )
    
    
    14,846Share-based compensation
    
    
    
    
    
    
    10,449
    
    
    
    
    
    
    
    
    
    
    
    10,449Amortization of loan costs
    
    
    1,192
    
    
    
    (1
    )
    
    
    34
    
    
    
    
    
    
    
    1,225Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    760
    
    
    
    
    
    
    
    
    
    
    
    760Change in income tax assets and liabilities
    
    
    
    
    
    
    24,270
    
    
    
    
    
    
    
    
    
    
    
    24,270Changes in operating assets and liabilities,
net of
effect of acquisitions:Accounts receivable
    
    
    
    
    
    
    (12,621
    )
    
    
    
    
    
    
    
    
    
    
    (12,621
    )Prepaids and other current assets
    
    
    
    
    
    
    (1,326
    )
    
    
    (5,856
    )
    
    
    
    
    
    
    (7,182
    )Accounts payable
    
    
    
    
    
    
    (1,943
    )
    
    
    
    
    
    
    
    
    
    
    (1,943
    )Salaries and benefits payable
    
    
    
    
    
    
    4,878
    
    
    
    
    
    
    
    
    
    
    
    4,878Accrued liabilities and other liabilities
    
    
    (3,447
    )
    
    
    (3,187
    )
    
    
    8,035
    
    
    
    
    
    
    
    1,401Net cash (used in) provided by continuing operating activities
    
    
    (19,373
    )
    
    
    98,255
    
    
    
    3,486
    
    
    
    (3,208
    )
    
    
    79,160Net cash provided by discontinued operating activities
    
    
    
    
    
    
    1,664
    
    
    
    
    
    
    
    
    
    
    
    1,664Net cash (used in) provided by operating activities
    
    
    (19,373
    )
    
    
    99,919
    
    
    
    3,486
    
    
    
    (3,208
    )
    
    
    80,824Investing 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 increase in cash
    
    
    
    
    
    
    (47,473
    )
    
    
    3,239
    
    
    
    
    
    
    
    (44,234
    )Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    44,114
    
    
    
    10,585
    
    
    
    
    
    
    
    54,699Cash and cash equivalents at end of year
    
    $
    
    
    
    $
    (3,359
    )
    
    $
    13,824
    
    
    $
    
    
    
    $
    10,465
 15




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##### Table of Contents



Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2005
(Unaudited, dollars in thousands)
 Combined
    
    
    
    
    
    
    
    
    
    
    TotalSubsidiary
    
    
    Combined Non-
    
    
    Consolidating
    
    
    ConsolidatedParent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Adjustments
    
    
    AmountsOperating ActivitiesNet (loss) income
    
    $
    (23,862
    )
    
    $
    39,813
    
    
    $
    (243
    )
    
    $
    (2,494
    )
    
    $
    13,214Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating
activities:Depreciation and amortization
    
    
    
    
    
    
    9,725
    
    
    
    736
    
    
    
    (182
    )
    
    
    10,279Amortization of loan costs
    
    
    783
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    818Loss on refinancing long-term debt
    
    
    21,871
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,871Income from
discontinued operations, net of taxes
    
    
    
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    (123
    )Change in income tax assets and liabilities
    
    
    
    
    
    
    1,715
    
    
    
    
    
    
    
    
    
    
    
    1,715Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (9,801
    )
    
    
    
    
    
    
    
    
    
    
    (9,801
    )Prepaids and other current assets
    
    
    
    
    
    
    (1,778
    )
    
    
    (2,090
    )
    
    
    
    
    
    
    (3,868
    )Accounts payable
    
    
    
    
    
    
    2,102
    
    
    
    
    
    
    
    
    
    
    
    2,102Salaries and benefits payable
    
    
    
    
    
    
    1,715
    
    
    
    
    
    
    
    
    
    
    
    1,715Accrued liabilities and other liabilities
    
    
    4,744
    
    
    
    323
    
    
    
    8,261
    
    
    
    
    
    
    
    13,328Net cash (used in) provided by continuing operating activities
    
    
    3,536
    
    
    
    43,691
    
    
    
    6,699
    
    
    
    (2,676
    )
    
    
    51,250Net cash provided by discontinued operating activities
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    (73
    )Net cash (used in) provided by operating activities
    
    
    3,536
    
    
    
    43,618
    
    
    
    6,699
    
    
    
    (2,676
    )
    
    
    51,177Investing Activities:Acquisitions, net of cash acquired
    
    
    (514,732
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (514,732
    )Capital purchases of property and equipment
    
    
    
    
    
    
    (14,285
    )
    
    
    
    
    
    
    
    
    
    
    (14,285
    )Investment in equity method investees
    
    
    (1,340
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,340
    )Other assets
    
    
    
    
    
    
    6,346
    
    
    
    (5,333
    )
    
    
    
    
    
    
    1,013Net used in investing activities
    
    
    (516,072
    )
    
    
    (7,939
    )
    
    
    (5,333
    )
    
    
    
    
    
    
    (529,344
    )Financing Activities:Issuances of long-term debt
    
    
    545,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    545,000Net principal payments on long-term debt
    
    
    (236,560
    )
    
    
    
    
    
    
    (175
    )
    
    
    
    
    
    
    (236,735
    )Net transfers to and from members
    
    
    37,536
    
    
    
    (40,212
    )
    
    
    
    
    
    
    2,676
    
    
    
    Payment of loan and issuance costs
    
    
    (13,294
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,294
    )Loss on refinancing long-term debt
    
    
    (15,398
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,398
    )Proceeds from issuance of common stock
    
    
    195,252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,252Net cash provided by (used in) financing activities
    
    
    512,536
    
    
    
    (40,212
    )
    
    
    (175
    )
    
    
    2,676
    
    
    
    474,825Net (decrease) increase in cash
    
    
    
    
    
    
    (4,533
    )
    
    
    1,191
    
    
    
    
    
    
    
    (3,342
    )Cash at beginning of year
    
    
    
    
    
    
    30,988
    
    
    
    2,463
    
    
    
    
    
    
    
    33,451Cash at end of year
    
    $
    
    
    
    $
    26,455
    
    
    $
    3,654
    
    
    $
    
    
    
    $
    30,109
 11.
Recently Issued Accounting Pronouncement
 Fair Value
Measurements.
 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.
 This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements include statements regarding the intent,
belief or current expectations of Psychiatric Solutions and its management. Such forward-looking
statements are not guarantees of future performance and involve risks and uncertainties that may
cause our actual results to differ materially from the results discussed in the forward-looking
statements. Risks and uncertainties that might cause such differences include but are not limited
to: (1) potential competition that alters or impedes our acquisition strategy by decreasing our
ability to acquire additional facilities on favorable terms; (2) our ability to complete the
acquisition of Alternative Behavioral Services, Inc. (ABS) and to successfully integrate the ABS
facilities; (3) our ability to integrate and improve the operations of acquired facilities
(including the ABS facilities to be acquired); (4) our ability to maintain favorable and continuing
relationships with physicians who use our facilities; (5) our ability to receive timely additional
financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs;
(6) risks inherent to the health care industry, including the impact of changes in regulation and
exposure to claims and legal actions by patients and others; (7) reductions in reimbursement rates
from federal and various state health care programs or managed care companies; (8) our ability to
comply with applicable licensure and accreditation requirements; (9) our ability to retain key
employees who are instrumental to our successful operations; (10) our ability to maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act; (11) our ability to
ensure confidential information is not inappropriately disclosed and that we are in compliance with
federal and state health information privacy standards; (12) 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; (13) our ability
to obtain adequate levels of general and professional liability insurance; and (14) those risks and
uncertainties described from time to time in our filings with the Securities and Exchange
Commission (the SEC). The forward-looking statements herein are qualified in their entirety by
the risk factors set forth in our filings with the SEC. A copy of our filings may be obtained from
the Public Reference Room of the SEC at 100 F Street, N.E.,, Washington, D.C. at prescribed rates.
 Overview
   Sources of Revenue
 Patient Service Revenue
  17




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##### Table of Contents



Management Contract Revenue
  Results of Operations
  For the Three Months Ended September 30,
    
    
    For the Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Revenue
    
    $
    254,814
    
    
    
    100.0
    %
    
    $
    220,458
    
    
    
    100.0
    %
    
    $
    745,530
    
    
    
    100.0
    %
    
    $
    494,216
    
    
    
    100.0
    %Salaries, wages, and employee benefits (including
share-based compensation of $2,059 and
$10,449
for the three months and nine months ended
September 30, 2006, respectively)
    
    
    144,715
    
    
    
    56.8
    %
    
    
    121,583
    
    
    
    55.1
    %
    
    
    422,647
    
    
    
    56.7
    %
    
    
    269,602
    
    
    
    54.6
    %Professional fees
    
    
    24,209
    
    
    
    9.5
    %
    
    
    22,511
    
    
    
    10.2
    %
    
    
    71,210
    
    
    
    9.6
    %
    
    
    51,126
    
    
    
    10.3
    %Supplies
    
    
    14,577
    
    
    
    5.7
    %
    
    
    13,220
    
    
    
    6.0
    %
    
    
    43,008
    
    
    
    5.8
    %
    
    
    30,137
    
    
    
    6.1
    %Provision for doubtful accounts
    
    
    4,413
    
    
    
    1.7
    %
    
    
    4,954
    
    
    
    2.2
    %
    
    
    13,771
    
    
    
    1.8
    %
    
    
    10,267
    
    
    
    2.1
    %Other operating expenses
    
    
    26,494
    
    
    
    10.4
    %
    
    
    25,729
    
    
    
    11.7
    %
    
    
    80,806
    
    
    
    10.8
    %
    
    
    61,281
    
    
    
    12.4
    %Depreciation and amortization
    
    
    5,234
    
    
    
    2.1
    %
    
    
    4,355
    
    
    
    2.0
    %
    
    
    14,846
    
    
    
    2.0
    %
    
    
    10,279
    
    
    
    2.1
    %Interest expense, net
    
    
    10,059
    
    
    
    3.9
    %
    
    
    11,377
    
    
    
    5.2
    %
    
    
    28,537
    
    
    
    3.8
    %
    
    
    18,192
    
    
    
    3.7
    %Other expenses:Loss on refinancing long-term debt
    
    
    
    
    
    
    
    %
    
    
    14,881
    
    
    
    6.8
    %
    
    
    
    
    
    
    
    
    
    
    21,871
    
    
    
    4.4
    %Income from continuing operations before
income taxes
    
    
    25,113
    
    
    
    9.9
    %
    
    
    1,848
    
    
    
    0.8
    %
    
    
    70,705
    
    
    
    9.5
    %
    
    
    21,461
    
    
    
    4.3
    %Provision for income taxes
    
    
    9,543
    
    
    
    3.8
    %
    
    
    721
    
    
    
    0.3
    %
    
    
    26,868
    
    
    
    3.6
    %
    
    
    8,370
    
    
    
    1.7
    %Income from continuing operations
    
    $
    15,570
    
    
    
    6.1
    %
    
    $
    1,127
    
    
    
    0.5
    %
    
    $
    43,837
    
    
    
    5.9
    %
    
    $
    13,091
    
    
    
    2.6
    %
 Three Months Ended September 30, 2006 Compared To Three Months Ended September 30, 2005
  Three Months Ended September 30,
    
    %2006
    
    2005
    
    ChangeTotal facility results:Revenue
    
    $
    241,868
    
    
    $
    207,306
    
    
    
    16.7
    %Number of facilities at period end
    
    
    64
    
    
    
    55
    
    
    
    16.4
    %Admissions
    
    
    26,357
    
    
    
    24,208
    
    
    
    8.9
    %Patient days
    
    
    462,691
    
    
    
    415,428
    
    
    
    11.4
    %Average length of stay
    
    
    17.6
    
    
    
    17.2
    
    
    
    2.3
    %Revenue per patient day
    
    $
    523
    
    
    $
    499
    
    
    
    4.8
    %Same-facility results:Revenue
    
    $
    222,992
    
    
    $
    207,306
    
    
    
    7.6
    %Number of facilities at period end
    
    
    55
    
    
    
    55
    
    
    
    0.0
    %Admissions
    
    
    24,425
    
    
    
    24,208
    
    
    
    0.9
    %Patient days
    
    
    427,163
    
    
    
    415,428
    
    
    
    2.8
    %Average length of stay
    
    
    17.5
    
    
    
    17.2
    
    
    
    1.7
    %Revenue per patient day
    
    $
    522
    
    
    $
    499
    
    
    
    4.6
    %
 Revenue
 18




---



##### Table of Contents



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




---



##### Table of Contents



Loss from discontinued operations, net of taxes
 Nine Months Ended September 30, 2006 Compared To Nine Months Ended September 30, 2005
  Nine Months Ended September 30,
    
    
    %2006
    
    
    2005
    
    
    ChangeTotal facility results:Revenue
    
    $
    707,278
    
    
    $
    455,255
    
    
    
    55.4
    %Number of facilities at period end
    
    
    64
    
    
    
    55
    
    
    
    16.4
    %Admissions
    
    
    79,655
    
    
    
    53,721
    
    
    
    48.3
    %Patient days
    
    
    1,364,947
    
    
    
    976,752
    
    
    
    39.7
    %Average length of stay
    
    
    17.1
    
    
    
    18.2
    
    
    
    -6.0
    %Revenue per patient day
    
    $
    518
    
    
    $
    466
    
    
    
    11.2
    %Same-facility results:Revenue
    
    $
    494,705
    
    
    $
    455,255
    
    
    
    8.7
    %Number of facilities at period end
    
    
    55
    
    
    
    55
    
    
    
    0.0
    %Admissions
    
    
    54,502
    
    
    
    53,721
    
    
    
    1.5
    %Patient days
    
    
    1,007,883
    
    
    
    976,752
    
    
    
    3.2
    %Average length of stay
    
    
    18.5
    
    
    
    18.2
    
    
    
    1.6
    %Revenue per patient day
    
    $
    491
    
    
    $
    466
    
    
    
    5.4
    %
 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
 Other expenses.
 Loss from discontinued operations, net of taxes
 Liquidity and Capital Resources
    21




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##### Table of Contents



Contractual Obligations
 Payments Due by Period (in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    

3-5 years
    
    
    5 yearsLong-term debt (1):Senior Credit Facility:Revolving line of credit facility, expiring on December 21, 2009
and bearing interest
of 6.8% at September
30, 2006
    
    $
    52,000
    
    
    $
    
    
    
    $
    
    
    
    $
    52,000
    
    
    $
    Senior Secured Term Loan Facility, expiring on July 1, 2012
and bearing interest
of 7.2% at September
30, 2006
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,0007 3/4% Senior Subordinated Notes due July 15, 2015
    
    
    220,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,00010 5/8% Senior Subordinated Notes due June 15, 2013
    
    
    38,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,681Mortgage loans on facilities, maturing in 2036, 2037 and 2038
bearing fixed interest rates of 5.65% to 7.60%
    
    
    27,134
    
    
    
    297
    
    
    
    651
    
    
    
    733
    
    
    
    25,453537,815
    
    
    
    297
    
    
    
    651
    
    
    
    52,733
    
    
    
    484,134Lease and other obligations
    
    
    46,642
    
    
    
    9,237
    
    
    
    14,262
    
    
    
    6,980
    
    
    
    16,163Total contractual obligations
    
    $
    584,457
    
    
    $
    9,534
    
    
    $
    14,913
    
    
    $
    59,713
    
    
    $
    500,297
 
 (1)
    
    Excludes capital lease and other obligations of $631,000, which are included in lease and other obligations. 3 4 5 8
 22




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##### Table of Contents



3 4 5 8
 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



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
  
 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).
 24




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##### Table of Contents



ExhibitNumber
    
    Description3.3
    
    Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Psychiatric
Solutions, Inc., filed with the Delaware Secretary
of State on March 21, 2003 (incorporated by
reference to Appendix A of the Companys Definitive
Proxy Statement, filed on January 22, 2003).3.4
    
    Certificate of Amendment to Amended and Restated
Certificate of Incorporation of Psychiatric
Solutions, Inc., filed with the Delaware Secretary
of State on December 15, 2005 (incorporated by
reference to Exhibit 3.4 to the Companys Annual
Report on Form 10-K for the fiscal year ended
December 31, 2005).3.5
    
    Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Companys Annual
Report on Form 10-K for the fiscal year ended April
30, 1997).4.1
    
    Reference is made to Exhibits 3.1 through 3.5.4.2
    
    Common Stock Specimen Certificate (incorporated by
reference to Exhibit 4.2 to the Companys Annual Report
on Form 10-K for the fiscal year ended December 31,
2002).4.3
    
    Indenture, dated as of June 30, 2003, among Psychiatric
Solutions, Inc., the Guarantors named therein and
Wachovia Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.10 to the
Companys Registration Statement on Form S-4, filed on
July 30, 2003 (Registration No. 333-107453) (the 2003
S-4)).4.4
    
    Form of Notes (included in Exhibit 4.3).4.5
    
    Purchase Agreement, dated as of June 19, 2003, among
Psychiatric Solutions, Inc., the Guarantors named
therein, Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Jefferies & Company,
Inc. (incorporated by reference to Exhibit 4.12 to the
2003 S-4).4.6
    
    Indenture, dated as of July 6, 2005, by and among
Psychiatric Solutions, Inc., the Guarantors named
therein and Wachovia Bank, National Association, as
Trustee (incorporated by reference to Exhibit 4.1 to
the Companys Current Report on Form 8-K, filed July 8,
2005).4.7
    
    Form of Notes (included in Exhibit 4.6).4.8
    
    Purchase Agreement, dated as of June 30, 2005, among
Psychiatric Solutions, Inc., the Guarantors named
therein, Citigroup Global Markets Inc. on behalf of
Banc of America Securities LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, J.P. Morgan Securities
Inc. and Lehman Brothers Inc. (incorporated by
reference to Exhibit 4.3 to the Companys Current
Report on Form 8-K, filed on July 8, 2005).4.9
    
    Exchange and Registration Rights Agreement, dated as of
July 6, 2005, among Psychiatric Solutions, Inc., the
subsidiary guarantors from time to time party thereto,
and Citigroup Global Markets Inc. on behalf of Banc of
America Securities LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, J.P. Morgan Securities Inc. and
Lehman Brothers Inc. (incorporated by reference to
Exhibit 4.4 to the Companys Current Report on Form
8-K, filed on July 8, 2005).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 25




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##### Table of Contents



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