CRC Health CORP - FORM 10-K

Attached files

file	filename
EX-10.1F - SECOND AMENDED AND RESTATED CREDIT AGREEMENT - CRC Health CORP	dex101f.htm
EX-10.1E - SECOND AMENDMENT AGREEMENT - CRC Health CORP	dex101e.htm
EX-10.20 - EMPLOYMENT AGREEMENT - CRC Health CORP	dex1020.htm
EX-12 - STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - CRC Health CORP	dex12.htm
EX-21 - SUBSIDIARIES OF CRC HEALTH CORPORATION - CRC Health CORP	dex21.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PEO - CRC Health CORP	dex311.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - CRC Health CORP	dex321.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PFO AND PAO - CRC Health CORP	dex312.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF PFO AND PAO - CRC Health CORP	dex322.htm
EX-10.21 - FORM OF 2010 SENIOR EXECUTIVE OPTION AGREEMENT - CRC Health CORP	dex1021.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2010

¨	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 333-135172

CRC HEALTH CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		73-1650429
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

20400 Stevens Creek Boulevard, Suite 600, Cupertino, California		95014
(Address of principal executive offices)		(Zip code)

(877) 272-8668

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The Company is privately held. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.

The total number of shares of the registrant’s common stock, par value of $0.001 per share, outstanding as of March 30, 2011 was 1,000.

Documents incorporated by reference: exhibits as indicated herein

CRC HEALTH CORPORATION

INDEX


		Page
	PART I
Item 1.	Business		3
Item 1A.	Risk Factors		14
Item 1B.	Unresolved Staff Comments		26
Item 2.	Properties		27
Item 3.	Legal Proceedings		29
Item 4.	Reserved		29

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		30
Item 6.	Selected Financial Data		30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 7A.	Quantitative and Qualitative Disclosure about Market Risk		50
Item 8.	Financial Statements and Supplementary Data		51
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures		105
Item 9A.	Controls and Procedures		105
Item 9B.	Other Information		106

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		107
Item 11.	Executive Compensation		110
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		121
Item 13.	Certain Relationships and Related Transactions, and Director Independence		124
Item 14.	Principal Accountant Fees and Services		125

	PART IV
Item 15.	Exhibits, Financial Statements Schedules		127
Signatures			134

Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this Annual Report, includes or may include “forward-looking statements.” All statements included herein, other than statements of historical fact, may constitute forward-looking statements. In some cases you can identify forward-looking statements by terminology such as “may,” “should” or “could.” Generally, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similar expressions identify forward-looking statements. Although CRC Health Corporation (“CRC”) believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, among others, the following factors: changes in government reimbursement for CRC’s services; our substantial indebtedness; changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulation; attempts by local residents to force our closure or relocation; the potentially difficult, unsuccessful or costly integration of recently acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment programs; the possibility that commercial payors for CRC’s services may undertake future cost containment initiatives; the limited number of national suppliers of methadone used in CRC’s outpatient treatment clinics; the failure to maintain established relationships or cultivate new relationships with patient referral sources; shortages in qualified healthcare workers; natural disasters such as hurricanes, earthquakes and floods; competition that limits CRC’s ability to grow; the potentially costly implementation of new information systems to comply with federal and state initiatives relating to patient privacy, security of medical information and electronic transactions; the potentially costly implementation of accounting and other management systems and resources in response to financial reporting and other requirements; the loss of key members of CRC’s management; claims asserted against CRC or lack of adequate available insurance; and certain restrictive covenants in CRC’s debt documents and other risks that are described herein, including but not limited to the items discussed in “Risk Factors” in Item 1A of Part I of this Annual Report, and that are otherwise described from time to time in CRC’s Securities and Exchange Commission filings after this Annual Report. CRC assumes no obligation and does not intend to update these forward-looking statements.

PART I

ITEM 1.

Business

Overview

We are a leading provider of substance abuse treatment services and youth treatment services in the United States. We also provide treatment services for other addiction diseases and behavioral disorders such as eating disorders. We deliver our services through our two divisions, our recovery division and our healthy living division. Our recovery division provides substance abuse and behavioral disorder treatment services through our residential treatment facilities and outpatient treatment clinics. Our healthy living division provides therapeutic educational programs for underachieving young people through residential schools and wilderness programs. Our healthy living division also provides treatment services through its adolescent and adult weight management programs and its eating disorder facilities. As of December 31, 2010, our recovery division operated 104 treatment facilities in 21 states and treated approximately 28,000 patients per day, which we believe makes us the largest and most geographically diversified for-profit provider of substance abuse treatment. As of December 31, 2010, our healthy living division operated 42 programs in 14 states and two foreign countries. During the 2010 calendar year, the healthy living division enrolled approximately 4,800 students.

All references in this report to the “Company,” “we,” “our,” and “us” mean, unless the context indicates otherwise, CRC Health Corporation and its subsidiaries on a consolidated basis.

Industry Overview

Addiction Disorders

Addiction is a chronic disease that adversely affects the lives of millions of Americans. One of the most common and serious addictions is substance abuse, which encompasses the abuse of alcohol and drugs. Without treatment, substance abuse can lead to depression, problems at home or work, and in some cases, physical injury or death. In 2003, expenditures for treatment of substance abuse in the United States totaled $21.0 billion and is projected to increase to $35.0 billion in 2014 (U.S. Department of Health and Human Services). In 2008, 23.1 million persons aged 12 or older needed treatment for an illicit drug or alcohol abuse problem (9.2% of persons aged 12 or older in the U.S.). Of these, 2.3 million (9.9% of those who needed treatment) received treatment at a specialty facility. Thus, 20.8 million persons (8.3% of the population aged 12 or older) needed treatment for an illicit drug or alcohol use problem but did not receive treatment at a specialty substance abuse facility in 2008 (2008 National Survey on Drug and Health sponsored by the Substance Abuse and Mental Health Services Administration). Furthermore, there is increasing recognition by private and public payors that failure to deliver early treatment for substance abuse and other behavioral issues generally results in higher acute-care hospital costs and can compound the negative effects of these issues over time. Treatment providers for the large and growing behavioral healthcare market, at both the adult and adolescent levels, are highly fragmented, with services to the adult population provided by almost 14,000 facilities of which only 29% are operated by for-profit organizations (2007 National Survey on Substance Abuse Treatment Services sponsored by the Substance Abuse and Mental Health Services Administration), and with services to the adolescent population provided primarily by single-site competitors and a handful of competitors of significantly lesser size. Due in part to the regulatory and land use hurdles of opening new substance abuse treatment facilities, we believe that supply of residential substance abuse treatment and therapeutic education services is constrained in the United States as evidenced by high industry-wide utilization rates.

Addiction is a complex, neurologically based, lifelong disease. While the initial behavior of addiction manifests itself through conscious choices, such behavior can develop into a long-term neurological disorder. There is no uniform treatment protocol for all substance abuse patients. Effective treatment includes a combination of medical, psychological and social treatment programs. These programs may be provided in residential and outpatient treatment facilities.

Adolescent Behavioral Disorders

According to the 2008 National Survey on Drug Use and Health (NSDUH), in 2005 and 2006, an estimated 8.7 million (34.5%) youths aged 12 to 17 reported that they engaged in at least one delinquent behavior in the past year, and from the 2008 NSDUH report “Major Depressive Episode among Youths Aged 12 to 17 in the U.S.: 2004 to 2006”, approximately 2.1 million adolescents, or 8.5% of the population had at least one major depressive episode. While the majority of adolescents successfully cope with these issues on their own, there are a growing number of adolescents who need help and support to successfully transition to a productive adulthood. Other developmental challenges faced by adolescents include learning disabilities, such as attention deficit hyperactivity disorder and obesity. According to the National Resource Center on Attention Deficit Hyperactivity Disorder, this condition affects 3% to 7% of school-age children, who in relation to their peers have higher rates of psychiatric and behavioral disorders. The National Health and Nutrition Examination Survey reports that approximately 16% of the population between the ages of 6 and 19 are overweight.

Historically, treatment options for struggling or underachieving youth were limited to counseling or placement in a highly structured hospital setting. More recently, however, parents, health professionals and public officials have been increasingly turning to the preventative care that can be provided by therapeutic education programs designed to modify adolescent behavior and assist the transition to a successful and productive adulthood. Therapeutic education programs offer individualized curricula that combine counseling, education and therapeutic treatment in residential and outdoor locations that provide a stable environment for students and provide measurable benefits to adolescents who have not benefited from counseling alone.

Eating Disorders

Other related behavioral disorders that may be effectively treated through a combination of medical, psychological and social treatment programs include obesity and eating disorders. Eating disorders, such as anorexia nervosa, bulimia nervosa, and other forms of disordered eating such as binge eating and compulsive overeating that may lead to obesity represent large underserved treatment markets. These segments are highly fragmented with no national provider.

As many as 10 million people suffered from an eating disorder such as anorexia or bulimia in 2005. For females between fifteen to twenty-four years old who suffer from anorexia nervosa, the mortality rate associated with the illness is twelve times higher than the death rate of all other causes of death. It is estimated that 2 million people in the U.S. suffer from an eating disorder (excluding obesity) at any point in time. Only 10% of those who need treatment receive treatment and only 35% of those who get treatment receive treatment in an appropriate program or at the appropriate level of care.

Overweight and obesity is a significant health issue in the United States. In 2004, the U.S. Centers for Disease Control and Prevention ranked obesity as the number one health threat facing America. It is estimated that in 2005 approximately 37% of the adult population was overweight, 32% of the adult population was obese and 4.8% was morbidly obese. Overweight is defined as having a body mass index (BMI) of 25.0 to 29.9, obesity is defined as having a BMI of 30 or greater and morbid or extreme obesity is defined as a BMI of 40 or higher. Obesity increases a person’s risk for developing several serious obesity-related health conditions such as cardiovascular disease, hypertension, thyroid disease and diabetes.

Our Business

We deliver our services through our recovery and healthy living divisions. Performance of our two reportable segments (recovery division and healthy living division) is evaluated based on profit or loss from operations (“segment profit”).

Recovery division

Our recovery division provides treatment services both on an inpatient and outpatient basis to patients suffering from chronic addiction diseases and related behavioral disorders. We operated 30 inpatient facilities and 20 outpatient and 54 comprehensive treatment clinics in 21 states as of December 31, 2010. The majority of our treatment services are provided to patients who abuse addictive substances such as alcohol, illicit drugs or opiates, including prescription drugs. Some of our facilities also treat other addictions and behavioral disorders such as chronic pain, sexual compulsivity, compulsive gambling, mood disorders and emotional trauma.

All of our treatment facilities and clinics are accredited by either the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”) or Commission on Accreditation of Rehabilitation Facilities (“CARF”), making them eligible for reimbursement by third party payors, with the exception of portions of Sober Living by the Sea and our four State of Washington treatment clinics. Our State of Washington treatment clinics are accredited by the State of Washington Division of Behavioral Health and Recovery.

The goal of the recovery division is to provide the appropriate level of treatment to an individual no matter where they are in the lifecycle of their disease in order to restore the individual to a healthier, more productive life, free from dependence on illicit substances and destructive behaviors. Our treatment facilities provide a number of different treatment services such as assessment, detoxification, medication assisted treatment, counseling, education, lectures and group therapy. We assess and evaluate the medical, psychological and emotional needs of the patient and address these needs in the treatment process. Following this assessment, an individualized treatment program is designed to provide a foundation for a lifelong recovery process. Many modalities are used in our treatment programs to support the individual, including the twelve step philosophy, cognitive/behavioral therapies, supportive therapies and continuing care.

Our treatment facilities deliver care at various levels of intensity, which allows us to provide the appropriate services depending on the needs of the individual. We treat medically stable adult and adolescent patients. Upon admission, a patient enters an appropriate stage in our continuum of care depending on the patient’s diagnosis, the level and acuity of the disease and related treatment requirements. The patient may enter into one of a number of different levels of treatment depending on the patient’s needs such as detoxification, inpatient residential, day treatment, extended care or outpatient.

Inpatient/Residential Treatment. We operated 30 residential facilities in 11 states. On average, our residential facilities have been operating for over 20 years. We have established strong relationships with referral sources and have longstanding ties to the local community and an extensive network of former patients and their families. Our residential treatment services are provided in a peaceful setting that is removed from the pressures, pace and temptations of a patient’s everyday life. Our inpatient facilities house and care for patients over an extended period (22 days on average) and typically treat patients from a broadly defined regional market. As of December 31, 2010, we had 2,054 available beds in our residential and extended care facilities and treated approximately 1,600 patients per day.

We provide three basic levels of residential treatment depending on the severity of the patient’s addiction and/or disorder. Patients with the most debilitating dependencies are typically placed into inpatient treatment, in which the patient resides at a treatment facility. If a patient’s condition is less severe, he or she will be offered day treatment, which allows the patient to return home in the evening. The least intensive service is where the patient visits the facility for just a few hours a week to attend counseling/group sessions.

Following primary treatment, our extended care programs are typically inpatient facilities which allow clients to develop healthy and appropriate living skills while remaining in a safe and nurturing residential environment. Clients are supported in their recovery by a semi-structured living environment that allows them to begin the process of employment or to pursue educational goals and to take personal responsibility for their recovery. The structure of this treatment phase is monitored by a primary therapist who works with each client to integrate recovery skills and build a foundation of sobriety and a strong support system. Length of stay will vary depending on the client’s needs with a minimum stay of 30 days and could be up to one year if needed.

Outpatient and Intensive Outpatient Services. We provide outpatient substance abuse services at 20 treatment clinics in 6 states. Our clinics, which typically range in size from 3,000 to 7,000 square feet, are generally located within light commercial districts.

Our comprehensive treatment clinics specialize in detoxification and recovery through medication-assisted therapy, counseling, and support services, as well as “Maintenance to Abstinence” programs for individuals who are addicted to opiates but have been using for a relatively short period of time. As of December 31, 2010, our comprehensive treatment clinics treated on average approximately 26,500 patients on a daily basis. We provide comprehensive treatment services at 54 treatment clinics in 15 states. During 2010, substantially all of our comprehensive treatment clinic services were provided to individuals addicted to heroin and other opiates, including prescription analgesics. In 2010, 28 comprehensive treatment clinics were certified to provide at least one additional comprehensive outpatient substance abuse treatment service, which we refer to as our COSAT services. COSAT services broaden the array of services offered at our clinics and increase our potential patient base by providing services to individuals with problems with all drugs and alcohol, not just opiates. An individual treatment plan is developed for each patient providing manageable goals and objectives to assist in the recovery process.

Substantially all of our patients addicted to heroin and other opiates are treated with methadone, but a small percentage of our patients are treated with other medications such as buprenorphine. Patients usually visit an outpatient treatment facility once a day in order to receive their medication. During the beginning of their treatment program, patients receive weekly counseling and as they successfully progress in the treatment protocol, they continue to receive counseling each month. This mandatory minimum duration of counseling may

vary from state to state. Following the initial administration of medication, patients go through an induction phase where medication dosage is systematically modified until an appropriate dosage is reached. As patients progress with treatment and meet certain goals in their individualized treatment plan and certain federal criteria related to time in treatment, they become eligible for up to 30 days of take-home doses of medication, eliminating the need for daily visits to the clinic. The length of treatment differs from patient to patient, but typically ranges from one to three years.

Other Services. Several other related behavioral diseases, in addition to substance abuse, represent large underserved markets to which our residential treatment services may be provided. The treatment model used at our residential facilities to treat substance abuse can also be applied to treat other compulsive behaviors such as trauma and abuse, chronic pain and sexual addiction/compulsivity, which a number of our facilities treat.

Referral Base and Marketing. We receive a large number of patient referrals generated from our several thousand referral sources. Patients are referred to our treatment facilities through a number of different sources, including healthcare practitioners, public programs, other treatment facilities, managed care organizations, unions, emergency departments, judicial officials, social workers, police departments and word of mouth from previously treated patients and their families, among others. We devote significant resources to establishing strong relationships with a broad array of potential referral sources at the local and national level. No single referral source resulted in a significant portion of our revenues.

We engage in local marketing and direct-to-consumer internet marketing, coordinate intra-facility referrals and develop programs and content targeted at key referral sources on a national basis. Our National Resource Center (“NRC”) is a centralized call center located at our corporate headquarters that responds to inquiries from our online marketing efforts and facilitates cross-referrals.

Payor Mix. We generate our revenues from three primary sources: self payors, commercial payors such as managed care organizations, and government programs. We believe our strong relationships with third party payors and our industry experience allow us to obtain new contracts for new and acquired facilities which creates an opportunity to increase the number of patients that we treat.

Staffing and Local Management Structure. Our residential facilities are managed by an executive director experienced in substance abuse treatment services. Our executive directors have, on average, over 24 years of experience in healthcare and over ten years tenure at the treatment center they currently manage. The executive director is supported by a facility staff that consists of physicians, nurses, counselors, marketing professionals, reimbursement specialists, and administrative and facility maintenance employees. Our comprehensive treatment clinics are typically run by a clinic director experienced in substance abuse treatment services. A clinic director is supported by a staff that consists of a medical director, nurses, counselors and administrative employees.

Healthy living division

Our healthy living division provides a wide variety of therapeutic educational programs for adolescents through settings and solutions that match individual needs with the appropriate learning and therapeutic environment. Additionally, our healthy living division provides treatment services for eating disorders and obesity, each of which may be effectively treated through a combination of medical, psychological and social treatment programs.

Adolescent Services. We operated 24 programs in 8 states as of December 31, 2010, with services ranging from short-term intervention programs to longer-term residential treatment. Our programs are offered in boarding schools, residential treatment centers, outdoor experiential programs and summer camps. These programs exist at the intersection of education and therapy for adolescents who have demonstrated behavioral or learning challenges that are interfering with their performance in school and in life such as substance abuse, academic underachievement, anger and aggressive behavior, family conflict, special learning needs and depression. Since most of the targeted customer base for these programs faces a

wide range of interrelated academic, emotional and behavioral disorders, our ability to offer a seamless continuum of care for a multitude of problems is an important competitive differentiator for us. All of our residential programs and approximately one half of our outdoor programs are accredited by an educational accreditation program, such as the Southern Association of Colleges and Schools (SACS). We are also in the process of pursuing CARF accreditation for a number of our adolescent programs.

Adolescent Residential Programs. We operated 17 residential programs in 7 states as of December 31, 2010. These programs are typically operated in traditional boarding school environments where a unique plan is crafted for each student that combines group therapy, individual counseling and specialized therapeutic experiences, such as equine therapy, which are designed to build the student’s personal and emotional skills. We treat both adolescents and young adults in our residential programs. Our residential programs provide a range of services. Our programs focus primarily on therapeutic programming and a strong peer environment to help students overcome self-defeating behaviors and acquire and practice positive behaviors. In addition, we have a number of programs that are tailored to students with attention deficit hyperactivity disorder, learning disabilities or acute emotional issues, and offer structured education in an intimate academic environment that emphasizes personalized student attention and development of organizational and social skills. Parent seminars and family resolution conferences play an important role in building mutually respectful and responsible relationships and preparing the student to face the real world challenges they face upon completion of the program. Each of our residential programs follows an accredited middle school, high school or college preparatory curriculum over a length of stay ranging from one to 16 months with an average duration of approximately eight months. Admissions are accepted year-round, subject to capacity, and campus sizes range from 17-132 students at both single gender and co-ed campuses.

Adolescent Outdoor Programs. We operated 7 outdoor programs in 4 states as of December 31, 2010. Outdoor programs emphasize student exposure to, and interaction with, natural environments and are based on either a base camp format, where students are housed in fixed structures between camping expeditions, or an expedition-only format. These programs are designed for adolescents and/or young adults who have typically undergone an acute personal crisis and require immediate intervention in a short-term, high-impact therapeutic program that emphasizes experiential learning and individualized counseling as a catalyst for positive behavioral change. Students enrolled in an outdoor program experience the challenges of living and working together in the outdoors as a means of identifying and working through internal conflicts and emotional obstacles that have kept them from responding to parental efforts, schools and prior treatment. In some cases, academic credit is offered upon completion of the program.

Payor Mix. Substantially all of our revenues are from self payors.

Adolescent Staffing and Local Management Structure. A typical youth treatment program is managed by an executive director experienced in education or other clinical areas, and many of our executive directors hold post-graduate degrees. Our executive directors have on average over 17 years of experience in education/healthcare and over seven years tenure at the treatment center they currently manage. The executive director is supported by a staff that consists of therapists, clinical professionals, teachers, counselors, field staff, admissions, finance and operational personnel as well as administrative and maintenance employees.

Adolescent Online Services. As part of a student’s participation in one of our youth treatment programs, we utilize a “parent check-in” website that provides parents with updated progress reports, pictures and school event information. This website is designed to allow families to participate in the student’s progress at the program, and assist with the eventual transition of the student back to home life upon completion of the program.

Eating Disorder Treatment and Weight Management Services

Eating Disorder Treatment. We operated 3 residential eating disorder facilities/programs in 3 states as of December 31, 2010. The total number of beds as of December 31, 2010 was 36. Our residential facilities are located in home-like settings with scenic and peaceful surroundings and provide individuals with a variety of treatment options focusing on their individual needs. The full range of services includes residential inpatient, day program and intensive outpatient treatment for anorexia nervosa, bulimia nervosa, binge eating and related disorders. All of our residential facilities are accredited by CARF, making them eligible for reimbursement by third party payors.

Weight Management Programs. We operate a number of different types of weight loss programs for adults and adolescents. Recognizing that weight loss management is a complex behavioral and biological struggle, our comprehensive and intensive weight management programs provide people with the necessary tools, decision-making skills and behavioral strategies to control weight permanently.

Structure House, our residential weight loss facility for adults offers a behavioral approach to weight loss and healthy lifestyle change. As of December 31, 2010, this facility had 94 available beds. Emphasizing a medically sound approach to healthy living, Structure House provides individual nutrition counseling, behavioral workshops, exercise and individual sessions with a psychologist to empower participants and teach them how to integrate healthy eating principles into their daily lives.

We operate two year-round residential weight loss schools and eleven summer weight loss camps in eight states, Canada and the United Kingdom for adolescents. These programs are intended for the growing number of obese adolescents for whom traditional weight loss methods have been unsuccessful. Our year-round weight loss schools are the first therapeutic boarding schools in the United States specifically designed for obese adolescents and young adults, and feature a full academic program in addition to a therapeutic weight loss program. The residential schools, as well as our summer weight loss camps, employ scientific weight loss methods that are designed to maximize long-term behavioral change as a catalyst to substantial and sustained weight loss. These programs include intensive cognitive-behavioral therapy, a low fat, low energy density diet, high physical activity and an integrated nutritional and academic educational program. By participating in a research-based diet and activity management program, and intensive training on the skill sets and behaviors necessary for weight control, students are returned to a normal weight and learn to change to a wide range of behaviors, starting with diet and activity, but including self-esteem, mood, affect and outlook.

Referral Base and Marketing. Patients are referred to our eating disorder treatment and weight management facilities through a number of different sources, including healthcare practitioners, public programs, other treatment facilities, managed care organizations and emergency departments. We receive a large number of weight loss patient referrals generated from our web sites and the public relations efforts of our marketing staff. We devote significant resources to establishing strong relationships with a broad array of potential referral sources at the local and national level. No single referral source resulted in a significant portion of our revenues.

We engage in local marketing and direct-to-consumer internet marketing, coordinate intra-facility referrals and develop programs and content targeted at key referral sources on a national basis. Our NRC responds to inquiries from our online marketing efforts and facilitates cross-referrals.

Payor Mix. For our weight management business, we generate our revenues primarily from self payors. We also receive revenues for our eating disorder services from commercial payors. We believe our strong relationships with third party payors and our industry experience allow us to obtain and increase the number of new contracts for our eating disorder business which will provide us with an opportunity to increase the number of patients that we treat.

Staffing and Local Management Structure. A typical eating disorder or adult weight management residential facility is managed by an executive director experienced in treatment services. Our executive directors have, on average, over 10 years of experience in healthcare. The executive director

is supported by a facility staff that consists of physicians, nurses, counselors, marketing professionals, reimbursement specialists, and administrative and facility maintenance employees. Our adolescent weight management programs are managed by an executive director experienced in education or other clinical areas, and many of our executive directors hold post-graduate degrees. The executive director is supported by a staff that consists of therapists, clinical professionals, teachers, counselors, field staff, admissions, finance and operational personnel as well as administrative and maintenance employees.

Competition

Treatment providers for the large and growing substance abuse treatment market are highly fragmented, with services being provided by over 13,000 different facilities of which approximately only 29% are operated by for-profit organizations. The primary competitive factors in the substance abuse treatment industry include the quality of programs and services, charges for programs and services, geographic proximity to the patients served, brand and marketing awareness and the overall responsiveness to the needs of patients, families and payors. Our recovery division competes against an array of local competitors, both private and governmental, hospital-based and free standing and for-profit and non-profit facilities. Most of our residential facilities compete within local or regional markets. Sierra Tucson, Life Healing Center and Bayside Marin, three of our residential treatment facilities for addiction and other behavioral disorders compete in both national and international markets with other nationally known substance abuse treatment facilities such as the Betty Ford Clinic and Hazelden.

Providers of adolescent treatment services are also highly fragmented with services being provided by over 500 different facilities. Our adolescent division competes with a large number of single-site businesses that lack our name recognition and management resources, as well as a handful of larger companies who have divisions that provide youth treatment programs, such as the youth programs of Universal Health Services, Second Nature and Three Springs.

The eating disorder market is highly fragmented with no national player that offers the full continuum of care. Our eating disorder programs for anorexia and bulimia primarily compete against private and non-profit treatment programs. Our weight management programs compete primarily against surgical alternatives, such as bariatric surgery, support programs that offer diet foods and meal replacement and various weight loss camps.

Technology Infrastructure

We utilize computer systems for billing, general ledger and all corporate accounting. As of December 31, 2010, we expect to invest $5.0 million over the next 24 months to finalize implementation of a company-wide customer relationship management system, to expand our data centers, and to continue our investment, initiated in 2007, for the implementation of a comprehensive and fully integrated system encompassing clinical, marketing, regulatory, financial and management reporting systems.

Regulatory Matters

Overview

Healthcare providers are regulated extensively at the federal, state and local levels. In order to operate our business and obtain reimbursement from third party payors, we must obtain and maintain a variety of state and federal licenses, permits and certifications, and accreditations. We must also comply with numerous other laws and regulations applicable to the conduct of business by healthcare providers. Our facilities are also subject to periodic on-site inspections by the agencies that regulate and accredit them in order to determine our compliance with applicable requirements.

The laws and regulations that affect healthcare providers are complex, change frequently and require that we regularly review our organization and operations and make changes as necessary to comply with the new rules. Significant public attention has focused in recent years on the healthcare industry, directing attention not only to

the conduct of industry participants but also to the cost of healthcare services. In recent years, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry. The ongoing investigations relate to, among other things, various referral practices, cost reporting, billing practices, credit balances, physician ownership and joint ventures involving hospitals and other health care providers. We expect that healthcare costs and other factors will continue to encourage both the development of new laws and increased enforcement activity.

Licensure, Accreditation and Certification

All of our recovery division treatment facilities must be licensed under applicable state laws. Licensing requirements typically vary significantly by state and by the services provided. Licensure requirements generally relate to the provider’s qualifications, the adequacy of care and other matters, including: its equipment, personnel, staff-to-patient ratios, operating policies and procedures, fire prevention, maintenance of adequate records, rate-setting and compliance with building codes and environmental protection laws. In addition, all of our facilities that handle and dispense controlled substances are required to register with the U.S. Drug Enforcement Administration (DEA), and are required to abide by DEA regulations regarding such controlled substances. The DEA also requires that our comprehensive treatment clinics be certified by the Substance Abuse and Mental Health Services Administration (SAMHSA), in order to provide opiate treatment. In addition, our treatment facilities that participate in government healthcare payment programs such as Medicaid must apply to the appropriate government agency and be certified to participate in the program.

Most of our residential and comprehensive treatment clinics must obtain and maintain accreditation from private agencies. JCAHO and CARF are private organizations that have accreditation programs for a broad spectrum of healthcare facilities. These accreditation programs are intended generally to improve the quality, safety, outcomes and value of healthcare services provided by accredited facilities. CARF accredits behavioral health organizations providing mental health and alcohol and drug use and addiction services, as well as opiate treatment programs, and many other types of programs. JCAHO accredits a broad variety of healthcare organizations, including hospitals, behavioral health organizations, nursing and long-term care facilities, ambulatory care centers, laboratories and managed care networks and others, including three of our youth treatment programs. Accreditation by JCAHO, CARF or one of the educational accreditation organizations that recognize our youth treatment programs requires an initial application and completion of on-site surveys demonstrating compliance with accreditation requirements. Accreditation is typically granted for a specified period, typically ranging from one to three years, and renewals of accreditation generally require completion of a renewal application and an on-site renewal survey. Accreditation is generally a requirement for participation in government and private healthcare payment programs. In addition, certain federal and state licensing agencies require that providers be accredited.

Our healthy living, adolescent treatment programs and adolescent weight management programs must comply with state and local laws that vary based on the locations in which they operate. A typical adolescent youth services or adolescent weight management program will be subject to licensure by the state department of education or health services, as well as local land use and health and safety laws. In addition, approximately eighty percent of our youth treatment programs are accredited by an educational accreditation program, such as the Southern Association of Colleges and Schools (SACS) and approximately eighty percent are accredited by either CARF or Joint Commission. A number of our youth programs within our healthy living division maintain federal land use permits for their outdoor education and ranching activities.

Our eating disorder facilities within the healthy living division are subject to licensure by the state department of health services. In addition, the facilities and programs that are accredited must comply with the guidelines of the applicable accrediting agencies.

We believe that all of our facilities and programs are in substantial compliance with current applicable federal, state and local licensure and certification requirements. In addition, we believe that all are in compliance with the standards of the agencies, including JCAHO and CARF, which have accredited them. Periodically,

federal, state and accreditation regulatory organizations conduct surveys of our facilities and may find from time to time that a facility is out of compliance with certain requirements. Upon receipt of any such finding, the facility timely submits a plan of correction and corrects any cited deficiencies.

Fraud, Abuse and Self-Referral Laws

Many of our facilities in our recovery division must comply with a number of laws and regulations because such facilities participate in government healthcare payment programs such as Medicare and Medicaid. The anti-kickback provision of the Social Security Act, or the anti-kickback statute, prohibits certain offers, payments or receipt of remuneration in return for referring patients covered by federal healthcare payment programs or purchasing, leasing, ordering or arranging for or recommending any services, good, item or facility for which payment may be made under a federal healthcare program. As a result, dealings by facilities that participate in such government programs with referring physicians and other referral sources, including employment contracts, independent contractor agreements, professional service agreements, joint venture agreements and medical director agreements, are all subject to the anti-kickback statute. The anti-kickback statute has been interpreted broadly by federal regulators and certain courts to prohibit the payment of anything of value if even one purpose of the payment is to influence the referral of Medicare or Medicaid business. Violations of the anti-kickback statute may be punished by criminal or civil penalties, exclusion from federal and state healthcare programs, imprisonment and damages up to three times the total dollar amount involved. The Office of Inspector General (OIG) of the Department of Health and Human Services is responsible for identifying fraud and abuse activities in government programs. The OIG has published regulations describing activities and business relationships that would be deemed not to violate the anti-kickback statute, known as “safe harbor” regulations. We use our best efforts to comply with applicable safe harbors.

Sections 1877 and 1903(s) of the Social Security Act, commonly known as the “Stark Law,” prohibit referrals for designated health services by physicians under the Medicare and Medicaid programs to any entity in which the physician has an ownership or compensation arrangement, unless an exception applies, and prohibits the entity from billing for such services rendered pursuant to any prohibited referrals. These types of referrals are commonly known as “self referrals.” There are exceptions for customary financial arrangements between physicians and facilities, including employment contracts, personal services agreements, leases and recruitment agreements that meet specific standards. We use our best efforts to structure our financial arrangements with physicians to comply with the statutory exceptions included in the Stark Law and related regulations. Sanctions for violating the Stark Law include required repayment to governmental payors of amounts received for services resulting from prohibited referrals, civil monetary penalties, assessments equal to three times the dollar value of each service rendered for an impermissible referral (in lieu of repayment) and exclusion from the Medicare and Medicaid programs.

A number of states have laws comparable to the anti-kickback statute and the Stark Law. These state laws may be more stringent than the federal rules and apply regardless of whether the healthcare services involved are paid for under a federal health care program.

The Federal False Claims Act

The federal False Claims Act prohibits healthcare providers from knowingly submitting false claims for payment under a federal healthcare payment program. There are many potential bases for liability under the federal False Claims Act, including claims submitted pursuant to a referral found to violate the Stark Law or the anti-kickback statute. Although liability under the federal False Claims Act arises when an entity “knowingly” submits a false claim for reimbursement to the federal government, the federal False Claims Act defines the term “knowingly” broadly. Civil liability under the federal False Claims Act can be up to three times the actual damages sustained by the government plus civil penalties for each false claim. From time to time, companies in the healthcare industry, including us, may be subject to actions under the federal False Claims Act.

Individuals may also bring an action on behalf of the government under the “whistleblower” or “qui tam” provisions of the federal False Claims Act. Because qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of which we are not aware. These provisions allow for the private party that identified the violation to receive a portion of the sums the provider is required to pay. This whistleblower structure has encouraged some private companies to go into the business of detecting and reporting potential fraud and abuse.

Privacy and Security Requirements

There are numerous federal and state regulations addressing patient information privacy and security concerns. In particular, the federal regulations issued under the Drug Abuse Prevention, Treatment and the Rehabilitation Act of 1979 and Health Insurance Portability and Accountability Act of 1996 (HIPAA) contain provisions that:

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protect individual privacy by limiting the uses and disclosures of patient information;

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create new rights for patients regarding their health information, such as access rights and the right to amend certain aspects of their health information;

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require the implementation of security safeguards to ensure the confidentiality, integrity and availability of individually identifiable health information in electronic form;

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prescribe specific transaction formats and data code sets for certain electronic healthcare transactions; and

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require establishment of standard unique health identifiers for individuals, employers, health plans and healthcare providers to be used in connection with standard electronic transactions no later than May 23, 2007.

In 2007, we implemented computer systems to comply with the transaction and code set requirements to correspond to the requirements of our trading partners. We have adopted privacy policies in accordance with HIPAA requirements. We believe that we are in compliance with certain security regulations under HIPAA but have not yet conducted a full HIPAA audit to ensure compliance. Under HIPAA, a violation of these regulations could result in civil money penalties of $100 per incident, up to a maximum of $25,000 per person per year per standard. HIPAA also provides for criminal penalties of up to $50,000 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100,000 and five years in prison for obtaining protected health information under false pretenses and up to $250,000 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm.

In addition, many states impose requirements regarding the confidentiality and security of healthcare information, as well as regarding the permitted uses of that information, and many of these state laws are more restrictive than the federal rules. For example, some states impose laws governing the use and disclosure of health information pertaining to substance abuse issues that are more stringent than the rules that apply to healthcare information generally. As public attention is drawn to the issues of the privacy and security of medical information, states may revise or expand their laws concerning the use and disclosure of health information, or may adopt new laws addressing these subjects. Failure to comply with these laws could expose us to criminal and civil liability, as well as requiring us to restructure certain of our operations.

Health Planning and Certificates of Need

The construction of new healthcare facilities, the expansion of existing facilities, the transfer or change of ownership of existing facilities and the addition of new beds, services or equipment may be subject to state laws that require prior approval by state regulatory agencies under certificate of need laws. These laws generally require that a state agency determine the public need for construction or acquisition of facilities or the addition of

new services. Review of certificates of need and other healthcare planning initiatives may be lengthy and may require public hearings. Violations of these state laws may result in the imposition of civil sanctions or revocation of a facility’s license. The states in which we operate that have certificate of need laws include Indiana, West Virginia and North Carolina.

Local Land Use and Zoning

Municipal and other local governments also may regulate our treatment programs. Many of our facilities must comply with zoning and land use requirements in order to operate. For example, local zoning authorities regulate not only the physical properties of a health facility, such as its height and size, but also the location and activities of the facility. In addition, community or political objections to the placement of treatment facilities can result in delays in the land use permit process, and may prevent the operation of facilities in certain areas.

Corporate Practice of Medicine and Fee Splitting

Some states have laws that prohibit business entities, including corporations or other business organizations that own healthcare facilities, from employing physicians. Some states also have adopted laws that prohibit direct and indirect payments or fee-splitting arrangements between physicians and such business entities. These laws vary from state to state, are often difficult to interpret and have seldom been interpreted by the courts or regulatory agencies. We use our best efforts to comply with the relevant state laws. Sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties upon both the physician and the business entity and rescission of business arrangements.

Employees

As of December 31, 2010, we employed approximately 4,417 people throughout the United States. Approximately 4,042 of our employees are full-time and the remaining approximately 375 are part-time employees. There were approximately 2,823 employees in our recovery division and 1,428 employees in our healthy living division. The remaining approximately 166 employees are in corporate management, administration and other services.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge, on our website at http://www.crchealth.com/investor-relations.php, as soon as reasonably practicable after CRC electronically files such reports with, or furnishes those reports to, the Securities and Exchange Commission.

We included the certifications of the CEO and the CFO of CRC required by Section 302 of the Sarbanes-Oxley Act of 2002 and related rules, relating to the quality of our public disclosure, in this Annual Report on Form 10-K as Exhibits 31.1 and 31.2.

ITEM 1A.

Risk Factors

Set forth below and elsewhere in this annual report and in other documents we have filed and will file with the SEC are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report.

Business Risks

Unfavorable economic conditions have and could continue to negatively impact our revenues.

Economic conditions have negatively impacted our revenues. If the economic downturn continues or deteriorates further or if other adverse economic conditions arise such as inflation, it could have a material adverse effect on our business. Tightening credit markets, depressed consumer spending and higher unemployment rates continue to pressure many industries. Substantially all of the revenue from our healthy living division and certain residential treatment facilities such as Sierra Tucson and our extended care facilities is derived from private-pay funding. In addition, a substantial portion of our revenue from our comprehensive substance abuse treatment clinics is from self-payors. In 2010 and 2009, we experienced a significant decrease in admissions and average length of stay in our healthy living division as a result of declining economic conditions and the inability of families to access the credit markets to fund tuition. A sustained downturn in the U.S. economy has, and could continue to, restrain the ability of our patients and the families of our students to pay for our services in all of our divisions. Other risks that we face as a result of general economic weakness include potential declines in the population covered by health insurance and patient decisions to postpone care. Moreover, reduced revenues as a result of a softening economy may also reduce our working capital and interfere with our long-term business strategy.

Although inflation has not previously or currently had a material impact on our results of operations, our industry is very labor intensive and salaries and benefits are subject to inflationary pressures. Some of our facilities are experiencing the effects of the tight labor market for certain skilled professionals, including a shortage of qualified counselors and nurses, which has caused and may continue to cause an increase in our salaries, wages and benefits expense in excess of the inflation rate. Our ability to pass on increased costs associated with providing services to our patients, in some cases, may be limited.

Our level of indebtedness could adversely affect our ability to meet our obligations under our indebtedness, raise additional capital to fund our operations and to react to changes in the economy or our industry.

We are highly leveraged. The following chart shows our level of indebtedness as of December 31, 2010 (in thousands):


Term Loans and Revolving Line of Credit	$	432,305
Senior Subordinated Notes		175,954
Other		1,767

Total Debt	$	610,026

Total Stockholder’s Equity	$	255,841

On January 20, 2011, we entered into an amendment agreement and further amended and restated our existing credit agreement (the “Second Amended and Restated Credit Agreement”) to extend the maturity of a substantial portion of the existing term loans and revolving line of credit and provide us with greater flexibility to amend and refinance our term loans and revolving line of credit in the future. Under the terms of the Second Amended and Restated Credit Agreement, the maturity date of an aggregate amount of $309.0 million of the existing term loans was extended from February 6, 2013 to November 16, 2015 and the interest rates thereon were increased by 225 basis points. The maturity date of the remaining $89.3 million of the existing term loans that were not extended remains February 6, 2013 and there were no changes to the interest rates thereon. Additionally, under the Second Amended and Restated Credit Agreement, the maturity date of an aggregate amount of $63.0 million of the existing revolving credit commitments was extended from February 6, 2012 to August 16, 2015, provided that if the non-extended term loans have not been repaid or refinanced in full by January 6, 2013 or have not been subsequently extended to the maturity date of the extended term loans (November 16, 2015), then the maturity date of the extended revolving credit commitments will be January 6,

2013, and the interest rates thereon were increased by 150 basis points. The maturity date of the remaining $37.0 million of the existing revolving credit commitments that were not extended remains February 6, 2012 and there were no changes to the interest rates thereon. As of December 31, 2010, we had $9.2 million of letters of credit outstanding under our revolving line of credit leaving approximately $56.8 million available for additional borrowings under our revolving credit facility.

Our parent company has incurred $159.4 million of indebtedness as of December 31, 2010. Interest accrued on this indebtedness was $1.2 million at December 31, 2010. On December 22, 2010 our parent company entered into an amendment agreement and amended and restated this facility (the “Amended Parent Credit Agreement”), which became effective simultaneously with the Second Amended and Restated Credit Agreement. Under the terms of the Amended Parent Credit Agreement, the maturity date of an aggregate amount of $136.6 million of the existing term loans was extended from November 17, 2013 to February 1, 2016 and the interest rate thereon was set at 12.00% per annum. The maturity date of the remaining $22.8 million of the existing term loans that were not extended remains November 17, 2013 and there were no changes to the interest rates thereon.

Additionally, we had additional indebtedness related to discontinued operations of $1.8 million in seller notes and $0.1 million in lessor financing. During 2010 we incurred $43.1 million in interest expense on our indebtedness including term loans, revolving line of credit, seller notes, senior subordinated notes and interest rate swaps. At December 31, 2010, we recognized a liability of $3.5 million related to its interest rate swaps. Our substantial indebtedness and the indebtedness of our parent company could make it more difficult for us to satisfy our obligations with respect to our indebtedness, increase our vulnerability to general adverse economic and industry conditions, require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, place us at a competitive disadvantage compared to our competitors that have less debt and limit our ability to borrow additional funds.

Our ability to make payments, to refinance our indebtedness, and to fund planned capital expenditures and other general corporate matters will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof.

The strategic plan we recently implemented with respect to our Aspen business may not be successful in improving the performance of the Aspen business.

Our Aspen business in our healthy living division has experienced a significant decrease in admissions and average length of stay as a result of declining economic conditions and the inability of families to access credit markets to fund tuition. We recently implemented a strategic plan to transition the services provided by our Aspen business to a more focused national network of services. As part of this strategic plan, the Company will be discontinuing operations at five facilities and consolidating services at three other facilities. This smaller network is designed to allow us to apply our resources where there are the greatest needs and assure the best possible service for its students and families. There is no assurance that this plan will be successful or that the performance of our Aspen business will improve. If the plan is not successful in improving the performance of the Aspen business we may take additional action such as closing additional unprofitable facilities. If our Aspen business continues to experience difficulty, it could adversely affect our business and results of operation.

If federal or state healthcare programs, managed care organizations and other third-party payors reduce their reimbursement rates for services provided, our revenue and profitability may decline.

Government healthcare programs, managed care organizations and other third-party payors pay for the services we provide to some of our patients. If any of these entities reduce their reimbursement rates, or elect not to cover some or all of our services, our revenue and profitability may decline.

For 2010, we derived approximately 21.2% of our revenue from government programs and 78.8% of our revenue from non-government payors such as self pay, managed care organizations, private health insurance programs and labor unions. Government payors, such as Medicaid, generally reimburse us on a fee-for-service basis based on predetermined reimbursement rate schedules. As a result, we are limited in the amount we can record as revenue for our services from these government programs, and if we have a cost increase, we typically will not be able to recover this increase. In addition, the federal government and many state governments, such as California and Wisconsin, are operating under significant budgetary pressures, and they may seek to reduce payments under their Medicaid programs for services such as those we provide. Government payors also tend to pay on a slower schedule. Thus, while 21.2% of our revenue was attributable to governmental payors, such payors accounted for 41.9% of our gross accounts receivable as of December 31, 2010. Therefore, if governmental entities reduce the amounts they will pay for our services, or if they elect not to continue paying for such services altogether, our revenue and profitability may decline. In addition, if governmental entities slow their payment cycles further, our cash flow from operations could be negatively affected.

Commercial payors such as managed care organizations, private health insurance programs and labor unions generally reimburse us for the services rendered to insured patients based upon contractually determined rates. These commercial payors are under significant pressure to control healthcare costs. In addition to limiting the amounts they will pay for the services we provide their members, commercial payors may, among other things, impose prior authorization and concurrent utilization review programs that may further limit the services for which they will pay and shift patients to lower levels of care and reimbursement. These actions may reduce the amount of revenue we derive from commercial payors.

We are subject to restrictions that limit our flexibility in operating our business as a result of our debt financing agreements.

Our debt financing agreements contain a number of significant covenants that, among other things, restrict our ability to incur additional indebtedness, create liens on our assets, restrict our ability to engage in sale and leaseback transactions, mergers, acquisitions or asset sales and make investments. Under some circumstances, these restrictive covenants may not allow us the flexibility we need to operate our business in an effective and efficient manner and may prevent us from taking advantage of strategic and financial opportunities that could benefit our business. In addition, we are required under our senior secured credit facility to satisfy specified financial ratios and tests. Our ability to comply with those financial ratios and tests may be affected by events beyond our control, and we may not be able to meet those ratios and tests. A breach of any of those covenants could result in a default under our senior secured credit facility and in our being unable to borrow additional amounts under our revolving facility. If an event of default occurs, the lenders could elect to declare all amounts borrowed under our senior secured credit facility, together with accrued interest, to be immediately due and payable and could proceed against the collateral securing that indebtedness. Substantially all of our assets are pledged as collateral pursuant to the terms of our senior secured credit facility. In such an event, we could not assure that we would have sufficient assets to pay amounts under our secured indebtedness.

If we fail to comply with the restrictions in our debt financing agreements, a default may allow the creditors to accelerate the related indebtedness, as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to supply us with further funds.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligation to increase significantly.

Certain of our borrowings, primarily borrowings under our senior secured credit facility, are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows would decrease.

Despite our current leverage, we may still be able to incur additional indebtedness. This could further exacerbate the risks that we face.

We may be able to incur additional indebtedness in the future. Although our senior secured credit facility and the indenture governing our senior subordinated notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could be significant. If new debt is added to our existing debt levels, the related risks that we now face, including those described above, could intensify.

Unfavorable student loan markets and the lack of available credit have and could continue to negatively impact our revenues in our healthy living division.

Many students attending boarding school in our healthy living division obtain private loans from lenders to finance a portion of their education. In response to the tightening in the credit markets over the last few years, many lenders are no longer making student loans available or have announced that they will apply more stringent lending standards for private student loans. In addition, some of the families of our students in our healthy living division rely on third-party loans, including additional home loans, to fund the cost of tuition at our programs. The unavailability of these loans has and could continue to interfere with the ability of private-pay customers to afford our programs, and may harm our operating results. Continued tightening of the credit markets has and could continue to result in financing difficulties for those students who rely on private student loans and the credit markets and could adversely impact our revenues.

We derive a significant portion of our revenue from key treatment programs that are located in Pennsylvania, California, Arizona, North Carolina and Utah which makes us particularly sensitive to regulatory and economic conditions in those states.

For 2010, Pennsylvania facilities accounted for approximately 13.6% of our total revenue, our California facilities accounted for approximately 12.2% of our total revenue, our Arizona facilities accounted for approximately 10.8% of our total revenue, our North Carolina facilities accounted for approximately 10.7% of our total revenue, and our Utah facilities accounted for approximately 9.3% of our total revenue. If our treatment facilities in these states are adversely affected by changes in regulatory and economic conditions, our revenue and profitability may decline.

We may have difficulty operating and integrating treatment facilities and youth programs that we acquire. This may disrupt our business and increase our costs and harm our operating results.

In 2006, we acquired six residential facilities, five outpatient treatment clinics and Aspen Education Group, our largest acquisition to date. In 2010, we acquired five outpatient treatment clinics and one youth camp. In 2008 and 2007, we acquired three residential treatment facilities, two youth programs and one weight management facility. There were no acquisitions in 2009. Additional acquisitions would expose us to additional business and operating risk and uncertainties, including risks related to our ability to:

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integrate operations and personnel at acquired programs;

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retain key management and healthcare professional personnel;

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maintain and attract patients and students to acquired programs;

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manage our exposure to unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations; and

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realize our investment return on acquisitions.

Integration efforts can require spending substantial resources on projects, such as implementing consistent billing, payroll and information technology systems, instituting standard policies and procedures and re-training staff from the acquired businesses to conform to our service philosophy and internal compliance procedures. Furthermore, integrating an acquired treatment program may disrupt our ongoing business and distract our management and other key personnel. If we are unable to manage our expansion efforts efficiently or effectively, or are unable to attract and retain additional qualified management and healthcare professional personnel to run our expanded operations, our business may be disrupted, our costs may increase and our operating results may be harmed.

We may have difficulty opening new treatment facilities and/or youth programs and operating them profitably. We have limited experience in opening new residential treatment facilities. If we are unable to execute our strategy, our growth may be restrained and our operating results could be adversely affected.

Our growth strategy includes developing and opening new treatment facilities and youth programs and to date, we have limited experience in doing so. Planning and opening new treatment facilities and youth programs in each of the recovery and healthy living divisions can be complex, and may be delayed and, in some circumstances, prevented by a variety of forces, including local zoning and land use regulation, health facility licensing, certificate of need requirements, community opposition and other political issues. Healthcare laws and other rules and regulations may also impede or increase the cost of opening new programs. If we are unable to open new treatment programs on time and on budget, our rate of growth and operating results may be adversely affected.

Even if we are able to open new facilities and programs, we may not be able to staff them or integrate them into our organization. In addition, there can be no assurance that once completed, new facilities and programs will achieve sufficient patient census or student enrollment to generate operating profits. Developing new programs, particularly residential facilities and programs, involves significant upfront capital investment and expense and if we are unable to attract patients and/or students quickly and/or enter into contracts or extend our existing contracts with third-party payors for these programs, these programs may not be profitable and our operating results could be adversely affected.

Changes to federal, state and local regulations could prevent us from operating our existing facilities or acquiring additional facilities or could result in additional regulation of our operations which may cause our growth to be restrained, an increase in our operating expenses and our operating results to be adversely affected.

Federal, state and local regulations determine the capacity at which our therapeutic education programs for adolescents may be operated. Some of our programs in our healthy living division rely on federal land use permits to conduct the hiking, camping and ranching aspects of these programs. State licensing standards require many of our programs to have minimum staffing levels, minimum amounts of residential space per student and adhere to other minimum standards. Local regulations require us to follow land use guidelines at many of our programs, including those pertaining to fire safety, sewer capacity and other physical plant matters.

In addition, federal, state and local regulations may be enacted that impose additional requirements on our facilities. For example, effective 2011, the state of Indiana adopted additional regulations covering our clinics in Indiana and increasing our operating costs for such clinics. In 2009 and 2010, legislators in California, West Virginia and Pennsylvania sponsored legislation that could impact our operations and increase our operating expenses. In addition, U.S. Representative Miller introduced federal legislation in April 2008, which, if adopted,

would impose an additional layer of federal regulation on all private residential and outdoor treatment programs for youth under the age of 18. Adoption of legislation or the creation of new regulations affecting our facilities could increase our operating costs, restrain our growth and harm our operating results.

State and local regulation of the construction, acquisition or expansion of treatment facilities and youth programs could prevent us from opening or acquiring additional treatment facilities and youth programs or expanding or renovating our existing treatment facilities and youth programs, which may cause our growth to be restrained and our operating results to be adversely affected.

Some states have enacted laws which require prior approval for the construction, acquisition or expansion of treatment facilities and youth programs, or for other capital expenditures such as the acquisition of certain kinds of equipment. In giving approval, these states consider the need for additional or expanded treatment facilities or services. In the states of North Carolina, West Virginia and Indiana, in which we currently operate, certificates of need may be required to be obtained for capital expenditures exceeding a prescribed amount, changes in capacity or services offered. Other states in which we now or may in the future operate may also require certificates of need under certain circumstances not currently applicable to us, or may impose standards and other health planning requirements upon us.

No assurance can be given that we will be able to obtain the required approvals or certificates of need for additional or expanded treatment facilities or services in the future, which may restrain our growth. If we are unable to obtain required regulatory, zoning or other required approvals for renovations and expansions, our growth may be restrained and our operating results may be adversely affected.

Our employees may elect to obtain union representation and our business could be impacted.

If some or all of our workforce were to become unionized and the terms of the collective bargaining agreements were significantly different from our current compensation arrangements, it could increase our costs and adversely impact our business. The Employee Free Choice Act of 2007 (“EFCA”), which was passed in the U.S. House of Representatives in 2008, or a variation of such bill could be enacted in the future and could have an adverse impact on our business.

Our treatment facilities are sometimes subject to attempts by local or regional governmental authorities and local area residents to force their closure or relocation.

Property owners and local authorities have attempted, and may in the future attempt, to use or enact zoning ordinances to eliminate our ability to operate a given treatment facility or program. Local governmental authorities in some cases also have attempted to use litigation and the threat of prosecution to force the closure of certain of our clinics. If any of these attempts were to succeed or if their frequency were to increase, our revenue would be adversely affected and our operating results might be harmed. In addition, such actions may require us to litigate which would increase our costs.

A shortage of qualified workers could adversely affect our ability to identify, hire and retain qualified personnel. This could increase our operating costs, restrain our growth and reduce our revenue.

The success of our business depends on our ability to identify, hire and retain a professional team of addiction counselors, nurses, psychiatrists, physicians, licensed counselors and clinical technicians across our network of treatment facilities. Competition for skilled employees is intense. For example, there are currently national shortages of qualified addiction counselors and registered nurses. The process of locating and recruiting skilled employees with the qualifications and attributes required to treat those suffering from addiction and other behavioral health illnesses can be lengthy and competition for these workers could cause the salaries, wages and benefits we must pay to increase faster than anticipated. Furthermore, many states require specified staff to patient ratios for residential and outpatient treatment facilities. If we are unable to identify, hire and retain

sufficient numbers of qualified professional employees, or to continue to offer competitive salaries and benefits, we may be unable to staff our facilities with the appropriate personnel or to maintain required staff ratios and may be required to turn away patients. Certain of our treatment facilities are located in remote geographical areas, far from population centers, which increases this risk. These factors could increase our operating costs, restrain our growth and reduce our revenue.

If we fail to cultivate new or maintain established relationships with referral sources, our revenue may decline.

Our ability to grow or even to maintain our existing level of business depends significantly on our ability to establish and maintain close working relationships with physicians, managed care companies, insurance companies, educational consultants and other referral sources. We do not have binding contracts or commitments with any of these referral sources. We may not be able to maintain our existing referral source relationships or develop and maintain new relationships in existing or new markets. If we lose existing relationships with our referral sources, the number of people to whom we provide services may decline, which may adversely affect our revenue. If we fail to develop new referral relationships, our growth may be restrained.

There are only two significant suppliers of methadone distributed by our outpatient treatment facilities. If one or both of these vendors does not supply the methadone we require, we may face increased costs in our outpatient treatment division, which may adversely affect our operating results and profitability.

Although methadone is a generic drug, there are only two significant national suppliers of methadone. We currently purchase methadone for dispensation in our clinics from one. If one of these suppliers were to reduce or curtail production of methadone, we would need to identify other suppliers of methadone. If we are unable to do so, our cost to purchase methadone may increase which may adversely affect our operating results and profitability.

A decline in the revenues or profitability of our Sierra Tucson facility would likely have a material adverse effect on our revenues and operating results.

For 2010, our Sierra Tucson facility represented approximately 9.5% of our total revenue and approximately 26.9% of our operating income before corporate and divisional overhead. Historically, our Sierra Tucson facility has had a high occupancy rate as well as a favorable average length of stay and price of treatment which made it our most profitable facility for 2010. As discussed above, we rely primarily on self payor patients at our Sierra Tucson facility. We have experienced a significant decrease in demand at certain facilities as a result of the inability of patients and students to pay for our services due to tightening credit markets and the downturn in the U.S. economy. Should Sierra Tucson’s revenues or profitability decline as a result of the inability or unwillingness of patients to pay for the services or for other reasons or its operations be interrupted, our total revenue and profitability would likely decline. For example, a terrorist act, significant terrorist threat or other disruption to air travel may reduce the willingness or ability of Sierra Tucson’s national and international patient base to travel to the facility or a fire or other casualty loss could interrupt its operations. These events could negatively affect our consolidated operating results.

Accidents or other incidents involving the students at our youth treatment facilities within our healthy living divisions, or those of our competitors, may adversely affect our revenues and operating results directly or through negative public perception of the industry.

Accidents resulting in physical injuries to our students or staff, or incidents that attract negative attention to the youth treatment industry generally, such as those involving death or criminal conduct against, or by a student could result in regulatory action against us, including but not limited to the suspension of our license, possible legal claims and lost referrals or student withdrawals. In connection with such an investigation, the department requested that we remove all students. Similar accidents or incidents at programs operated by our competitors

could negatively impact public perception of the therapeutic education industry and harm our operations as well. No assurance can be given that accidents or other incidents at our programs or those of our competitors will not adversely affect our operations.

Natural disasters such as hurricanes, earthquakes and floods may adversely affect our revenues and operating results.

Natural disasters such as hurricanes, earthquakes and floods may adversely affect our operations. Such natural disasters may result in physical damage to or destruction of our programs as well as damage to areas where our patients or referral sources are based. In 2005, hurricanes resulted in property damage and additional expense to our Florida facilities. In addition, these facilities experienced a loss of referrals from areas affected by the hurricanes. Such natural disasters may lead to decreased census, decreased revenues and higher operating costs.

We face significant competition from established providers as well as new entrants.

We compete directly with a wide variety of non-profit, government and for-profit treatment providers, and this competition may intensify in the future. In addition, we compete with different modalities of treatment. Non-profit and government providers may be able to offer competitive services at lower prices, which may adversely affect our revenue in regional markets and service categories. In addition, many for-profit providers are local, independent operators or physician groups with strong established reputations within the surrounding communities, which may adversely affect our ability to attract a sufficiently large number of patients in markets where we compete with such providers. For example, we have seen an increase in physicians providing treatment care through the use of suboxone. Our healthy living division competes against a small number of multiple-location providers, such as Universal Health Services, Second Nature and Three Springs, as well as a number of independent operators. These providers compete with us not only for referrals, but also for qualified personnel, and in some cases our personnel have resigned their positions with us to operate programs of their own. We may also face increasing competition from new operators which may adversely affect our revenue and operating results in impacted markets.

As a provider of treatment services, we are subject to claims and legal actions by patients, students, employees and others, which may increase our costs and harm our business.

We are subject to medical malpractice and other lawsuits based on the services we provide. In addition, treatment facilities and programs that we have acquired, or may acquire in the future, may have unknown or contingent liabilities, including liabilities related to care and failure to comply with healthcare laws and regulations, which could result in large claims, significant defense costs and interruptions to our business. These liabilities may increase our costs and harm our business. A successful lawsuit or claim that is not covered by, or is in excess of, our insurance coverage may increase our costs and reduce our profitability. Furthermore, we maintain a $0.5 million deductible per claim under our workers’ compensation insurance, and an increase in workers compensation claims or average claim size may also increase our costs and reduce our profitability. Our insurance coverage may not continue to be available at a reasonable cost, especially given the significant increase in insurance premiums generally experienced in the healthcare industry.

The integration of our information systems may be more costly than we anticipate, may not be completed on time or the integrated systems may not function properly.

We are currently introducing new software to consolidate and integrate critical information systems used in daily operations, including for claims processing, billing, financial, intake and other clinical functions. The new software is also intended to streamline internal controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We expect to make additional capital expenditures related to this plan before it is complete. If this implementation takes longer or is more expensive than anticipated, or if we fail to successfully

complete this implementation or if the software fails to perform as expected, our operations may be disrupted and we may not comply with the requirements of Section 404 of the Sarbanes-Oxley Act. This may increase our costs, reduce our revenue and harm our business.

Borrowers of our loan program may default, resulting in loss.

We maintain a private loan program pursuant to which our students and/or patients who meet predetermined credit standards can obtain third-party financing to pay a portion of the cost of participating in certain of our programs. As of December 31, 2010, there were $7.9 million outstanding in loans. The loans are unsecured. If the borrowers default on these loans, we will incur losses.

We have a limited history of profitability, have incurred net losses in the past and may incur substantial net losses in the future.

We had an accumulated deficit of $205.0 million at December 31, 2010. For 2008, 2009 and 2010 we recorded a net loss of approximately $141.9 million, a net loss of $26.6 million, and a net loss of $43.7 million respectively. We cannot assure that we will operate profitably in the future. In addition, we may experience significant quarter-to-quarter variations in operating results.

We depend on our key management personnel.

Our senior management team has many years of experience addressing the broad range of concerns and issues relevant to our business. The loss of existing key management or the inability to attract, retain and motivate sufficient numbers of qualified management personnel could have an adverse effect on our business and our ability to execute our growth strategy.

Funds managed by Bain Capital Partners, LLC control us and may have conflicts of interest with us.

Investment funds managed by Bain Capital Partners, LLC which we refer to as Bain Capital, indirectly own, through their ownership in our parent company, substantially all of our capital stock. As a result, Bain Capital has control over our decisions to enter into any corporate transaction regardless of whether our debt holders believe that any such transaction is in their own best interests. For example, Bain Capital could cause us to make acquisitions or pay dividends that increase the amount of indebtedness that is secured or that is senior to our senior subordinated notes or to sell assets.

Additionally, Bain Capital is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Bain Capital may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by Bain Capital continue to indirectly own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, Bain Capital will continue to be able to strongly influence or effectively control our decisions.

Regulatory Risks

We cannot predict the effect that healthcare reform and other changes in government programs may have on our business, financial condition, results of operations or cash flows.

On March 23, 2010, the President signed into law the “Patient Protection and Affordable Care Act,” which contains reforms to the insurance markets and makes dramatic changes to the Medicare and Medicaid programs by adopting numerous initiatives intended to improve the quality of healthcare, promote patient safety, reduce the cost of healthcare, increase transparency and reduce fraud and abuse of federal healthcare programs.

Many of the provisions of this healthcare legislation have not gone into effect immediately and may be delayed for several years, during which time the bill will be subject to further adjustments through future legislation or even constitutional challenges. This legislation will make significant changes to the U.S. healthcare system by requiring most individuals to have health insurance coverage, and would mandate material changes to the delivery of healthcare services and the reimbursement paid for such services in order to generate savings in the Medicare program. A primary focus of health care reform is to ultimately reduce costs, which could include material reductions in reimbursement paid to us and other healthcare providers. Healthcare reform could increase our operating costs and have a negative impact on third-party payors and insurance companies. Several states are also considering separate healthcare reform measures.

Due to the uncertainty of the resulting regulatory changes that will be needed to implement these reforms, we cannot predict the effects these reforms may have on our business; however, they may have a material adverse effect on our business, financial condition, results of operations and cash flows.

If we fail to comply with extensive laws and government regulations, we could suffer penalties, become ineligible to participate in reimbursement programs, be the subject of federal and state investigations or be required to make significant changes to our operations, which may reduce our revenues, increase our costs and harm our business.

Healthcare service providers are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

•

licensure, certification and accreditation;

•

handling of controlled substances;

•

adequacy of care, quality of services, qualifications of professional and support personnel;

•

referrals of patients and relationships with physicians;

•

inducements to use healthcare services that are paid for by governmental agencies;

•

billings for reimbursement from commercial and government payors;

•

confidentiality, maintenance and security issues associated with health-related information and medical records;

•

physical plant planning, construction of new facilities and expansion of existing facilities;

•

state and local land use and zoning requirements; and

•

corporate practice of medicine and fee splitting.

Failure to comply with these laws and regulations could result in the imposition of significant penalties or require us to change our operations, which may harm our business and operating results. Both federal and state government agencies as well as commercial payors have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations.

The 2006 Work Plan issued by the OIG includes among the areas that the agency will target for investigation in 2006 a number of services we offer, including Outpatient Alcoholism Services and Freestanding Inpatient Alcoholism Providers. Any investigations of us or our executives or managers could result in significant liabilities or penalties, including possible exclusion from the Medicare or Medicaid programs, as well as adverse publicity.

The following is a discussion of some of the risks relating to specific laws and regulations that apply to us.

Licensure, accreditation and certification

In order to operate our business, our treatment facilities for substance abuse must obtain the required state and federal licenses and certification as well as, in most cases, accreditation from JCAHO or CARF. In addition, such licensure, certification and accreditation are required to receive reimbursement from most commercial and government payors. If our programs are unable to maintain such licensure, certification and accreditation, our revenue may decline, our growth may be limited and our business may be harmed.

Handling of controlled substances

All of our facilities that handle and dispense controlled substances must comply with especially strict federal and state regulations regarding such controlled substances. The potential for theft or diversion of such controlled substances distributed at our facilities for illegal uses has led the federal government as well as a number of states and localities to adopt stringent regulations not applicable to many other types of healthcare providers. Compliance with these regulations is expensive and these costs may increase in the future.

Referrals of patients and relationships with physicians

The federal anti-kickback statute and related regulations prohibit certain offers, payments or receipt of remuneration in return for referring patients covered by Medicaid or other federal healthcare programs or purchasing, leasing, ordering or arranging for or recommending any services, good, item or facility for which payment may be made under a federal healthcare program. Federal physician self-referral legislation, known as the Stark Law, generally prohibits a physician from ordering certain services reimbursable by a federal healthcare program from an entity with which the physician has a financial relationship, unless an exception applies, and prohibits the entity from billing for certain services rendered pursuant to any prohibited referrals. Several of the states in which we operate have laws that are similar to the federal Stark Law and anti-kickback laws and that reach services paid for by private payors and individual patients.

If we fail to comply with the federal anti-kickback statute and its safe harbors, the Stark Law or other related state and federal laws and regulations, we could be subjected to criminal and civil penalties, we could lose our license to operate, and our residential and outpatient treatment programs could be excluded from participation in Medicaid and other federal and state healthcare programs and could be required to repay governmental payors amounts received by our residential and outpatient treatment programs for services resulting from prohibited referrals. In lieu of repayment, the OIG may impose civil monetary assessments of three times the amount of each item or service wrongfully claimed. In addition, if we do not operate our treatment facilities in accordance with applicable law, our residential and outpatient treatment programs may lose their licenses or the ability to participate in third-party reimbursement programs.

Coding and billing rules

If we fail to comply with federal and state documentation, coding and billing rules, we could be subject to criminal and civil penalties, loss of licenses, loss of payment for past services and exclusion from Medicaid programs, which could harm us. Approximately 21.2% of our revenue for 2010 consisted of payments from Medicaid and other government programs. In billing for our services to government payors, we must follow complex documentation, coding and billing rules. Failure to follow these rules could result in potential criminal or civil liability under the federal False Claims Act, under which extensive financial penalties can be imposed. It could further result in criminal liability under various federal and state criminal statutes, or in our being ineligible for reimbursement under Medicaid programs. The rules are complex and we submit a large number of claims per year for Medicaid and other federal program payments and we cannot assure that governmental investigators, commercial insurers or whistleblowers will not challenge our practices or that there will be no errors. Any such challenges or errors could result in increased costs and have an adverse effect on our profitability, and could result in a portion of our recorded revenue being uncollectible or subject to repayment to governmental payors.

Privacy and security requirements

There are numerous federal and state regulations such as the federal regulations issued under the Drug Abuse Prevention, Treatment and Rehabilitation Act of 1979 and the Health Insurance Portability and Accountability Act of 1996 (HIPAA) addressing patient information privacy and security concerns. Compliance with these regulations can be costly and requires substantial management time and resources. Our failure to comply with HIPAA privacy or security requirements could lead to civil and criminal penalties and our business could be harmed.

In addition, many states impose similar, and in some cases more restrictive, requirements. For example, some states impose laws governing the use and disclosure of health information pertaining to mental health and/or substance abuse issues that are more stringent than the rules that apply to healthcare information generally. As public attention is drawn to the issues of the privacy and security of medical information, states may revise or expand their laws concerning the use and disclosure of health information, or may adopt new laws addressing these subjects. Failure to comply with these laws could expose us to criminal and civil liability, as well as requiring us to restructure certain of our operations.

Changes in state and federal regulation and in the regulatory environment, as well as different or new interpretations of existing regulations, could adversely affect our operations and profitability.

Since our treatment programs and operations are regulated at federal, state and local levels, we could be affected by different regulatory changes in different regional markets. Increases in the costs of regulatory compliance and the risks of noncompliance may increase our operating costs, and we may not be able to recover these increased costs, which may adversely affect our results of operations and profitability.

Also, because many of the current laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our treatment facilities, equipment, personnel, services or capital expenditure programs. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could adversely affect our business and operating results.

ITEM 1B.

Unresolved Staff Comments

None.

ITEM 2.

Properties

Recovery division. The following tables list our residential and outpatient treatment facilities, as of December 31, 2010.

Program

City

State

Owned /Leased

Inpatient Residential Treatment Facilities

Azure Acres

Sebastopol

Owned

Bayside Marin (with multiple licensed treatment programs)

San Rafael

Leased

Brandywine

Kennett Square

Owned

Burkwood

Hudson

Owned

Camp Recovery Center

Scotts Valley

Owned

Galax Treatment Center

Galax

Owned

Keystone Treatment Center

Canton

Owned

Life Healing Center

Santa Fe

Owned

New Life Lodge

Burns

Owned

New Life Lodge Extended Care Program

Burns

Leased

Sierra Tucson

Tucson

Leased

Sober Living by the Sea—Extended Care

Newport Beach

Leased

Sober Living by the Sea—Sunrise Ranch

Riverside

Leased

Sober Living by the Sea—Victorian

Newport Beach

Leased

Sober Living by the Sea—The Rose

Newport Beach

Leased

Sober Living by the Sea—The Landing

Newport Beach

Leased

Starlite Recovery Center

Center Point

Owned

Twelve Oaks

Navarre

Owned

Wellness Resource Center

Boca Raton

Leased

White Deer Run (WDR)—Allenwood

Allenwood

Owned

WDR—Blue Mountain

Blue Mountain

Owned

WDR—Lancaster

Lancaster

Leased

WDR—Lebanon

Lebanon

Leased

WDR—Johnstown New Directions

Johnstown

Owned

WDR—Johnstown Renewal Center

Johnstown

Leased

WDR—Torrance

Torrance

Leased

WDR—Williamsburg

Williamsburg

Leased

WDR—Williamsport

Williamsport

Owned

WDR—York/Adams

York

Leased

Wilmington Treatment Center

Wilmington

Owned

Outpatient Treatment Facilities

Azure

Sacramento

Leased

Bayside Marin

San Rafael

Leased

Camp Recovery Center—San Jose

San Jose

Leased

Keystone—Sioux Falls

Sioux Falls

Leased

New Life Recovery Services—Jamestown

Jamestown

Leased

New Life Recovery Services—Cookeville

Cookeville

Leased

New Life Recovery Services—Jacksboro

Jacksboro

Leased

New Life Recovery Services—Knoxville West

Knoxville

Leased

New Life Recovery Services—Knoxville

Knoxville

Leased

Sober Living—Costa Mesa

Costa Mesa

Leased

Wilmington—Myrtle Beach

Myrtle Beach

Leased

Wilmington—Shallotte

Shallotte

Leased

WDR—Allentown

Allentown

Leased

WDR—Altoona

Altoona

Leased

WDR—Erie

Erie

Leased

WDR—Harrisburg

Harrisburg

Leased

WDR—Lewisburg

Lewisburg

Leased

WDR—New Castle

New Castle

Leased

WDR—Pittsburgh

Pittsburgh

Leased

WDR—Williamsport

Williamsport

Leased

Recovery division. The following table lists our comprehensive treatment centers by state and number, as of December 31, 2010.


State	Clinics		Owned / Leased
California		12	All clinics leased
Delaware		1	All clinics leased
Georgia		1	Leased
Indiana		5	All clinics leased
Kansas		1	Leased
Louisiana		1	Leased
Maryland		3	All clinics leased
North Carolina		3	All clinics leased
Oregon		5	All clinics leased
Pennsylvania		2	All clinics leased
Tennessee		1	Leased
Virginia		3	All clinics leased
Washington		4	All clinics leased
West Virginia		7	All leased except for one owned property
Wisconsin		5	All clinics leased

Total		54

Healthy living division. The following table lists our adolescent treatment programs within our healthy living division as of December 31, 2010.


Program	City	State		Owned /Leased
Residential Treatment Centers

Aspen Institute for Behavioral Assessment	Syracuse		UT		Leased
Aspen Ranch	Loa		UT		Leased
Island View	Syracuse		UT		Leased
Pine Ridge Academy	South Jordan		UT		Leased
Sunhawk Academy	St George		UT		Leased
Turn-About Ranch	Escalante		UT		Owned/Leased
Youth Care	Draper		UT		Owned/Leased

Therapeutic Boarding Schools

Academy at Swift River	Cummington		MA		Leased
Bromley Brook School	Manchester		VT		Leased
Copper Canyon Academy	Rimrock		AZ		Leased
New Leaf Academy	Bend		OR		Leased
Talisman Academy	Hendersonville		NC		Leased
NorthStar Center	Bend		OR		Leased
Oakley School	Oakley		UT		Leased
Stone Mountain School	Black Mountain		NC		Leased

Special Learning Needs

Camp Huntington	High Falls		NY		Leased
Talisman Summer Camps	Zirconia		NC		Leased

Outdoor Programs

Adirondack Leadership Expeditions	Saranac Lake		NY		Leased
Aspen Achievement Academy	Loa		UT		Leased
Four Circles Recovery Center	Horseshoe		NC		Leased
Outback Therapeutic Expeditions	Lehi		UT		Leased
Passages to Recovery	Loa		UT		Leased
SUWS of the Carolinas / Phoenix Outdoor	Old Fort		NC		Leased
SUWS of Idaho	Shoshone		ID		Leased

Healthy living division. The following table lists our eating disorder facilities, residential weight management program, and weight management schools and camps as of December 31, 2010.


Program	City	State		Owned /Leased
Eating Disorder Facilities

Montecatini	Carlsbad		CA	Owned
Montecatini IOP	Carlsbad		CA	Leased
Center For Hope of the Sierras	Reno		NV	Owned/Leased
Center For Hope of the Sierras IOP	Reno		NV	Leased
Carolina House	Durham		NC	Owned

Residential Weight Management Program

Structure House	Durham		NC	Owned

Weight Management Schools and Camps

Wellspring Academy of the Carolinas	Brevard		NC	Leased
Wellspring Academy of California	Reedley		CA	Leased
Wellspring Adventure Camp NC	Canton		NC	Leased
Wellspring Family Camp	La Jolla		CA	Leased
Wellspring La Jolla	La Jolla		CA	Leased
Wellspring Florida	Melbourne		FL	Leased
Wellspring New York	Schenectady		NY	Leased
Wellspring Pennsylvania	Scranton		PA	Leased
Wellspring Texas	San Marcos		TX	Leased
Wellspring Wisconsin	Platteville		WI	Leased
Wellspring UK	Exeter		UK	Leased
Wellspring Vancouver	Vancouver, BC		Canada	Leased

Our properties are owned and or leased by our recovery division and healthy living division. All owned property is subject to a security interest under our senior secured credit facility. We believe that our existing properties are in good condition and are suitable for the conduct of our business.

ITEM 3.

Legal Proceedings

We are subject to various claims and legal actions that arise in the ordinary course of our business. In the opinion of management, we are not currently a party to any proceeding that could have a material adverse effect on our financial condition or results of operations.

ITEM 4.

Reserved

PART II

ITEM 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There is no established public trading market for our common stock. We are a wholly owned subsidiary of CRC Health Group, Inc. which holds all of our outstanding common stock.

ITEM 6.

Selected Financial Data

On February 6, 2006, investment funds managed by Bain Capital Partners, LLC (“Bain Capital”) acquired CRC Health Group, Inc. for a total cash consideration of approximately $742.3 million (including acquisition and financing transactions related fees and expenses of $28.5 million). As a result of the acquisition, Bain Capital received control of the Company. We refer to our acquisition by Bain Capital and the related financings as the “Transactions.”

Set forth below is selected historical consolidated financial information at the dates and for the periods indicated. The summary of historical financial information as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 has been derived from our audited financial statements. The date of the purchase of our company by investment funds managed by Bain Capital was February 6, 2006, but for accounting purposes and to coincide with our normal financial accounting closing dates, we have utilized February 1, 2006, as the effective date of the close of the transaction. As a result, we have reported operating results and financial position for all periods presented prior to February 1, 2006 as those of the Predecessor Company (“Predecessor”) and for all periods from and after February 1, 2006 as those of the Successor Company (“Successor”) due to the resulting change in the basis of accounting. For the purpose of presenting a comparison of our 2006 results to all other years, we have presented the year ended December 31, 2006 as the mathematical addition of our operating results for January 2006 to the operating results of the eleven months ended December 31, 2006. This approach is not consistent with generally accepted accounting principles and may yield results that are not strictly comparable on a period-to-period basis primarily due to the impact of purchase accounting entries recorded as a result of the Transactions. For purposes of the following presentation of selected historical consolidated information, however, management believes that it is the most meaningful way to present our results of operations for the year ended December 31, 2006.

The selected historical financial information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes thereto included in Item 8, “Financial Statements and Supplementary Data,” which are included elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results to be expected for future periods. (All amounts presented below are in thousands)


	Successor																		Predecessor
	Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007			Combined Year Ended December 31, 2006			Eleven Months Ended December 31, 2006			One Month Ended January 31, 2006
Statement of Operations Data:
Net revenue	$	443,706		$	427,744		$	453,141		$	429,711		$	263,440		$	243,962		$	19,478
Operating expenses⁽¹⁾	$	445,531		$	396,941		$	535,017		$	368,241		$	255,100		$	197,211		$	57,889

Operating (loss) income	$	(1,825	)	$	30,803		$	(81,876	)	$	61,470		$	8,340		$	46,751		$	(38,411	)
Interest expense		(42,780	)		(44,158	)		(54,104	)		(60,262	)		(43,844	)		(41,338	)		(2,506	)
Gain on debt repurchase and other financing costs		—			—			8,086			—			(10,655	)		—			(10,655	)
Other (expense) income		(88	)		(82	)		1			(1,771	)		167			112			55

Loss from continuing operations before income taxes	$	(44,693	)	$	(13,437	)	$	(127,893	)	$	(563	)	$	(45,992	)	$	5,525		$	(51,517	)
Income tax (benefit) expense		(5,119	)		4,128			(6,261	)		1,007			(9,800	)		2,672			(12,472	)

(Loss) income from continuing operations, net of tax	$	(39,574	)	$	(17,565	)	$	(121,632	)	$	(1,570	)	$	(36,192	)	$	2,853		$	(39,045	)
(Loss) income from discontinued operations, net of tax		(4,086	)		(9,096	)		(20,426	)		3,223			683			631			52

Net (loss) income	$	(43,660	)	$	(26,661	)	$	(142,058	)	$	1,653		$	(35,509	)	$	3,484		$	(38,993	)
Less: net (loss) income attributable to the noncontrolling interest		—			(62	)		(153	)		189			(38	)		(38	)		—

Net (loss) income attributable to CRC Health Corporation	$	(43,660	)	$	(26,599	)	$	(141,905	)	$	1,464		$	(35,471	)	$	3,522		$	(38,993	)

Amounts attributable to CRC Health Corporation:
(Loss) income from continuing operations, net of tax	$	(39,574	)	$	(17,508	)	$	(121,470	)	$	(1,759	)	$	(36,154	)	$	2,891		$	(39,045	)
Discontinued operations, net of tax		(4,086	)		(9,091	)		(20,435	)		3,223			683			631			52

Net (loss) income attributable to CRC Health Corporation	$	(43,660	)	$	(26,599	)	$	(141,905	)	$	1,464		$	(35,471	)	$	3,522		$	(38,993	)


	Successor															Predecessor
	Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007			Eleven Months Ended December 31, 2006			One Month Ended January 31, 2006
Balance Sheet Data (at period end):
Working capital⁽²⁾	$	(8,936	)	$	(15,285	)	$	(14,468	)	$	(56,539	)	$	(18,730	)
Property and equipment, net		125,626			125,215			129,728			122,937			94,976
Cash and cash equivalents		7,111			4,982			2,540			5,118			4,206
Total assets		1,040,224			1,108,334			1,169,175			1,322,291			1,288,788
Long-term debt		610,026			631,076			653,152			648,367			626,528
Shareholders’ equity		255,841			288,542			303,222			445,749			437,174

Other Financial Data:

Cash paid for interest	$	39,079		$	42,707		$	51,758		$	56,418		$	29,118		$	1,336
Depreciation and amortization		21,496			22,845			21,968			21,373			10,112			360
Capital expenditures		21,988			12,999			25,279			30,159			14,189			411
Cash flows from operating activities		46,489			37,028			24,176			56,420			(4,486	)		1,201
Cash flows from investing activities		(22,623	)		(12,378	)		(39,645	)		(70,947	)		(746,811	)		(315	)
Cash flows from financing activities		(21,737	)		(22,208	)		12,891			15,439			755,080			(5,540	)

(1)

Operating expenses for the one month ended January 31, 2006 and the twelve months ended December 31, 2006 includes $43.7 million in acquisition related costs incurred in connection with the purchase of our company by Bain Capital. During the years ended December 31, 2010, 2009 and 2008, the Company recognized $52.7 million, $30.5 million and $142.2 million respectively in non-cash goodwill impairment charges related to its healthy living division.

(2)	We define working capital as our current assets (including cash and cash equivalents) minus our current liabilities, which includes the current portion of long-term debt and accrued interest thereon.

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this Annual Report.

Unless the context otherwise requires, in this management’s discussion and analysis of financial condition and results of operations, the terms “our company,” “we,” “us,” “the Company” and “our” refer (i) for periods prior to the consummation of the Transactions, to CRC Health Group, Inc. and its consolidated subsidiaries and (ii) for periods following the consummation of the Transactions, to CRC Health Corporation and its consolidated subsidiaries following the mergers described below as “The Transactions.”

OVERVIEW

We have two operating segments: recovery division and healthy living division. As of December 31, 2010, our recovery division, which operates 30 inpatient, 20 outpatient facilities, and 54 comprehensive treatment centers (“CTCs”) in 21 states, provides treatment services to patients suffering from chronic addiction related diseases and related behavioral disorders. As of December 31, 2010, our recovery division treated approximately 28,000 patients per day. As of December 31, 2010, our healthy living division, which operates 24 adolescent and young adult programs in 8 states, provides a wide variety of therapeutic educational programs for underachieving young people. Our healthy living division also operates 18 facilities in 8 states inclusive of one facility each in the United Kingdom and Canada with a focus on providing treatment services for eating disorders and weight management. Other activities classified as corporate represent revenue and expenses associated with eGetgoing, an online internet treatment option, and general and administrative expenses (i.e., expenses associated with our corporate offices in Cupertino, California, which provides management, financial, human resource and information system support) and stock-based compensation expense that are not allocated to the segments.

Management uses segment profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Intersegment sales and transfers are insignificant. We report in two segments: recovery division and healthy living division. In addition to the two reportable segments, the Company has activities classified as Corporate which represent revenue and expenses associate with eGetgoing, an online internet treatment option, as well as certain corporate-level operating general and administrative costs. The recovery division includes all inpatient and outpatient drug and alcohol treatment programs consistent with our long-term objective of being a full spectrum chemical dependency provider that integrates the best of the various treatment modalities into a seamless web of service. The healthy living division includes adolescent residential and outdoor programs, eating disorders and adult weight management facilities and adolescent weight management programs.

Basis of Presentation

The accompanying financial data has been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and is in conformity with U.S. generally accepted accounting principles (“GAAP”). Our fiscal year end is December 31. Unless otherwise stated, all years and dates refer to our fiscal year.

Management is responsible for the fair presentation of the accompanying consolidated financial statements, prepared in accordance with GAAP, and has full responsibility for their integrity and accuracy. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly our consolidated balance sheets, statements of operation, statements of cash flows and statements of changes in equity for all periods presented.

Principles of consolidation. The consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Discontinued Operations. We have reflected certain facility closures, and facilities held for sale, as discontinued operations in our consolidated statements of operations for all periods presented and as discontinued operations for 2010.

Acquisitions

2010 Acquisitions

For the year ended December 31, 2010, we completed two acquisitions for a total purchase consideration of approximately $1.0 million. The acquisitions are intended to provide expansion of our services within the respective markets of the acquired facilities in the United States. We recorded $0.5 million and $0.4 million of goodwill within our recovery division and healthy living division, respectively, related to the acquisitions, all of which is expected to be deductible for tax purposes.

The purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values. We have included the acquired entities’ results of operations in the consolidated statements of operations from the date of each acquisition. Pro forma results of operations have not been presented because the effect of the acquisitions was not material.

2009 Acquisitions

We did not complete any acquisitions during the year ended December 31, 2009.

2008 Acquisitions

During the third quarter of 2008, we closed two acquisitions and paid approximately $11.6 million in cash. The acquisitions are intended to provide expansion of our services within the respective corresponding markets of the acquired facilities in the United States.

EXECUTIVE SUMMARY

We generate revenue by providing substance abuse treatment services and adolescent treatment services in the United States. We also generate revenue by providing treatment services for other specialized behavioral disorders. Revenue is recognized when rehabilitation and treatment services are provided to a patient. Client service revenue is reported at the estimated net realizable amounts from clients, third-party payors and others for services rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue for therapeutic educational services provided to adolescent services consists primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenue and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered. The enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of stay, ranging between 2 and 16 months. Alumni fee revenue represents upfront fees for post graduation services and these fees are deferred and recognized systematically over the contracted life. During the years ended December 31, 2010 and December 31, 2009, we generated 78.8% and 80.1% of our net revenue from non-governmental sources, including 60.2% and 64.3% from self payors, respectively, and 18.6% and 15.8% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states under Medicaid and similar programs. Tightening credit markets, depressed consumer spending and high unemployment rates during 2010 had an adverse effect on the revenue that we generated from self payors. In 2010, we experienced a significant decrease in admissions and average length of stay in our healthy living division as a result of declining economic conditions and the inability of families to access the credit markets to fund tuition. In March 2011, as a consequence of the economic conditions, we decided to discontinue operations at five facilities and consolidate services at three other facilities, in our Aspen business within our healthy living division.

“Same-facility” means a comparison over the comparable period of the financial performance of a facility we have operated for at least one year. “Total-facility” means a comparison over the comparable period of the financial performance of a facility that we have operated for any duration of time. Both the total-facility and same-facility represent facilities that are a part of the continuing operations.

Our operating expenses include salaries and benefits, supplies, facilities and other operating costs, provision for doubtful accounts, depreciation and amortization and acquisition related costs. Operating expenses for our recovery and healthy living divisions exclude corporate level general and administrative costs (i.e., expenses associated with our corporate offices in Cupertino, California, which provide management, financial, human resources and information systems support), stock-based compensation expense and expenses associated with eGetgoing. Goodwill impairment is not included in the same-facility analysis.

During the year ended December 31, 2010, our consolidated same-facility net revenue increased $17.4 million or 4.1% compared to a decrease of $24.7 million or 5.5% for the same period in 2009.

Effective April 1, 2009, we created a private loan program (“the Loan Program”) pursuant to which students and/or patients (“the Borrowers”) who meet predetermined credit standards can obtain third-party financing to pay a portion of the cost of participating in certain of our programs. We initiated this program in response to the lack of credit availability for our students/patients, particularly in the healthy living division, to secure financing to access our services. The Board of Directors has approved a loan pool of up to $20.0 million. At December 31, 2010, we had issued $10.8 million in loans under the Loan Program.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Long-Lived Assets — We test our long-lived assets and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. The long-lived and intangible assets are tested for impairment at the facility level which represents the lowest level at which identifiable cash flows are largely independent of the cash flows of other

groups of assets and liabilities. If the undiscounted future cash flows from the asset tested are less than the carrying value, a loss equal to the difference between the carrying value and the fair market value of the asset is recorded. Fair value is determined using discounted cash flow methods.

Our impairment analysis requires judgment with respect to many factors, including future cash flows, success at executing its business strategy, and future revenue and expense growth rates. It is possible that our estimates of undiscounted cash flows may change in the future resulting in the need to reassess the carrying value of our long-lived and intangible assets for impairment.

Goodwill and Other Intangible Assets — We test goodwill for impairment annually, at the beginning of our fourth quarter or more frequently if evidence of possible impairment arises. We perform a two-step impairment test on goodwill. In the first step, we compare the fair value of the reporting unit, defined as an operating segment or one level below an operating segment, being tested to its carrying value. The goodwill impairment test is performed based on the reporting units that we have in place at the time of the test. The reporting units may change over time as our operating segments change, or the component businesses therein change, due to economic conditions, acquisitions, restructuring or otherwise. At the time of these events, we reevaluate our reporting units using the reporting unit determination guidelines. As necessary, goodwill is reassigned between the affected reporting units using a relative fair-value approach.

We determine the fair value of our reporting units using a combination of the income approach and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate fair value based on what investors have paid for similar interests in comparable companies through the development of ratios of market prices to various earnings indications of comparable companies taking into consideration adjustments for growth prospects, debt levels and overall size. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.

The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions at many points during the analysis. Our estimated future cash flows are based on assumptions that reflect our best estimates and incorporate estimated future cash flows consistent with our annual planning process and include estimates for revenue and operating margins and future economic and market conditions. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units tested. Changes in assumptions or circumstances could result in an additional impairment in the period in which the change occurs and in future years. Factors that could cause us to record additional goodwill impairment include, but are not limited to:

Decreases in revenues or increases in operating costs

Increases in the Company’s borrowing rates or weighted average cost of capital

Increase in the blended tax rate

Changes in working capital

Significant alteration of market multiples utilized in the valuation process

Significant decrease in market value of comparable companies

Significant changes in perpetuity growth rate

Our other indefinite lived intangible assets consist of trademarks and trade names, certificates of need, and regulatory licenses. We test other indefinite lived intangible assets for impairment annually, at the beginning of

our fourth quarter or more frequently if evidence of possible impairment arises. We apply a fair value-based impairment test to the net book value of other indefinite lived intangible assets using a combination of income and market approaches.

Impairment charges related to fixed asset, goodwill and intangible assets not subject to amortization are included in the consolidated statements of operations under goodwill impairment, asset impairment and discontinued operations.

Revenue Recognition — Revenue is recognized when rehabilitation and treatment services are provided to a patient. Client service revenue is reported at the estimated net realizable amounts from clients, third-party payors and others for services rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue for educational services provided by our healthy living division consists primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenue and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered. The enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of stay, ranging between 2 and 16 months. Alumni fees revenue represents non-refundable upfront fees for post-graduation services and these fees are deferred and recognized systematically over the contracted life. We may, from time to time, provide charity care to a limited number of clients. We do not record revenues or receivables for charity care provided. Advance billings for client services are deferred and recognized as the related services are performed.

Stock-Based Compensation — We measure and recognize compensation expense for all stock-based payment awards, including employee stock options, granted after January 1, 2006, based on the grant-date fair value. We estimate grant date fair value of our awards by utilizing the Black Scholes Merton model for time-based awards and a closed-form lattice model for awards containing market conditions. For awards that are subject to both a performance and market condition, compensation expense is recognized over the longer of the implicit service period associated with the performance condition or the derived service period associated with the market condition.

Income Taxes — We account for income taxes under an asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and tax bases of assets and liabilities using tax rates in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. For U.S. federal tax return purposes, we are part of a consolidated tax return with our Parent, CRC Health Group, Inc. However, our provision for income taxes is prepared on a stand-alone basis.

We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate based on new information. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties. We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes based on technical merits.

Interest Rate Swaps — Interest rate swaps are used exclusively in the management of our interest rate exposures and are recorded on the balance sheet at fair value. As part of our hedging strategy, we have designated our interest rate swaps as cash flow hedges.

The fair value of the interest rate swaps are estimated based upon terminal value models. If the swaps are designated as a cash flow hedge, the effective portions of changes in the fair value of the swap are recorded in other comprehensive income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. Additionally, reclassifications of deferred gains or losses related to ineffectiveness of interest rate swaps are recognized as interest expense on the consolidated statements of operations.

Recently Adopted Accounting Guidance — During the quarter ended March 31, 2010, we adopted updated authoritative guidance which amends and enhances disclosures about fair value measurements. The updated guidance required the addition of new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 roll forward. The amended guidance also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The adoption of this guidance did not have a material effect on the consolidated financial statements.

Recently Issued Accounting Guidance — In December 2010, the Financial Accounting Standards Board (“FASB”) issued changes to the testing of goodwill for impairment. These changes require an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. This guidance is effective for fiscal years (and interim periods within those years) that begin after December 15, 2010. We are currently assessing the impact that the adoption of this guidance will have on our consolidated financial statements.

In December 2010, the FASB issued changes to the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. The adoption of the new disclosure requirements will not have a material impact on our consolidated financial statements.

In August 2010, the FASB issued updated authoritative guidance which clarifies that health care entities should not net insurance recoveries against a related claim liability. Further, such entities should determine the claim liability without considering insurance recoveries. The guidance is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2010. A cumulative-effect adjustment should be recognized in opening retained earnings in the period of adoption if a difference exists between any liabilities and insurance receivables recorded as a result of applying the amendments in this guidance. Retrospective application and early adoption is permitted. The adoption of the guidance will not have a material impact on our consolidated financial statements.

In August 2010, the FASB issued updated authoritative guidance which requires that health care entities use costs as a measurement basis for charity care disclosures and that they identify those costs as the direct and indirect costs of providing the charity care. The guidance also requires disclosure of the method used to identify the costs. The guidance is effective for fiscal years beginning after December 15, 2010. Retrospective application and early adoption is permitted. The adoption of the guidance will not have a material impact on our consolidated financial statements.

of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. The new and amended disclosures that relate to information as of the end of a reporting period were effective for us for the first interim or annual reporting periods ending on or after December 15, 2010. However, the disclosures that include information for activity that occurs during a reporting period will be effective for the first interim or annual periods beginning after December 15, 2010. Those disclosures include (1) the activity in the allowance for credit losses for each period and (2) disclosures about modifications of financing receivables. The adoption of the new disclosure requirements will not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued updated authoritative guidance, which, among other things, requires entities to separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and which clarifies existing disclosure requirements regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy. The updated guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements (which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years). The adoption of the new disclosure requirements will not have a material impact on our consolidated financial statements.

RESULTS OF OPERATIONS

Continuing Operations Year Ended December 31, 2010 Compared to Continuing Operations Year Ended December 31, 2009

The following table presents our results of operations by segment for the year ended December 31, 2010 and 2009 (numbers in thousands, except for percentages).


	Years Ended December 31, Total Facility
Statement of Operations Data:	2010			2009			2010 vs. 2009 $ Change			2010 vs. 2009 % Change
Net revenue:
Recovery division	$	327,243		$	309,989		$	17,254			5.6	%
Healthy living division		116,270			117,515			(1,245	)		(1.1	)%
Corporate		193			240			(47	)		(19.6	)%

Total net revenue		443,706			427,744			15,962			3.7	%
Operating expenses:
Recovery division		218,025			212,208			5,817			2.7	%
Healthy living division⁽¹⁾		196,336			153,098			43,238			28.2	%
Corporate		31,170			31,635			(465	)		(1.5	)%

Total operating expenses		445,531			396,941			48,590			12.2	%
Operating income (loss):
Recovery division		109,218			97,781			11,437			11.7	%
Healthy living division		(80,066	)		(35,583	)		(44,483	)		(125.0	)%
Corporate		(30,977	)		(31,395	)		418			1.3	%

Total operating (loss) income		(1,825	)		30,803			(32,628	)		(105.9	)%
Interest expense		(42,780	)		(44,158	)		1,378			3.1	%
Other expense		(88	)		(82	)		(6	)		(7.3	)%

Loss from continuing operations before income taxes		(44,693	)		(13,437	)		(31,256	)		(232.6	)%
Income tax (benefit) expense		(5,119	)		4,128			(9,247	)		224.0	%

Loss from continuing operations, net of tax		(39,574	)		(17,565	)		(22,009	)		(125.3	)%
Loss from discontinued operations, (net of tax benefit of ($2,576) and ($5,073) in the year ended December 31, 2010 and 2009, respectively)		(4,086	)		(9,096	)		5,010			55.1	%

Net loss		(43,660	)		(26,661	)		(16,999	)		(63.8	)%
Less: Net income attributable to the noncontrolling interest		—			(62	)		62			100.0	%

Net loss attributable to CRC Health Corporation	$	(43,660	)	$	(26,599	)	$	(17,061	)		(64.1	)%

(1)	Healthy living division operating expenses include $21.2 million of asset impairment and $52.7 million of goodwill impairment for the year ended December 31, 2010 and $2.3 million of asset impairment and $30.5 million of goodwill impairment for the year ended December 31, 2009.

The following table compares key total facility statistics for the years ended December 31, 2010 and 2009:


	Year Ended December 31, Total Facility
	2010		2009		% change
Recovery Division
Residential facilities
Revenue (in thousands)	$	208,309	$	197,291		5.6	%
Patient Days		577,170		551,899		4.6	%
Net revenue per patient day	$	360.92	$	357.48		1.0	%
CTCs
Revenue (in thousands)	$	118,934	$	112,698		5.5	%
Patient Days		9,628,338		9,427,599		2.1	%
Net revenue per patient day	$	12.35	$	11.95		3.3	%

Healthy Living Division
Residential facilities
Revenue (in thousands)	$	61,271	$	66,420		(7.8	)%
Patient Days		244,633		262,713		(6.9	)%
Net revenue per patient day	$	250.46	$	252.82		(0.9	)%
Outdoor programs
Revenue (in thousands)	$	26,419	$	25,569		3.3	%
Patient Days		60,012		56,427		6.4	%
Net revenue per patient day	$	440.23	$	453.14		(2.8	)%
Weight management programs
Revenue (in thousands)	$	28,557	$	25,492		12.0	%
Patient Days		99,705		85,314		16.9	%
Net revenue per patient day	$	286.41	$	298.81		(4.1	)%

Consolidated net revenue increased $16.0 million, or 3.7%, to $443.7 million for year ended December 31, 2010 from $427.7 million for the year ended December 31, 2009. Of the total net revenue increase, the recovery division contributed an increase of $17.3 million and the healthy living division contributed a decrease of $1.2 million. The $17.3 million, or 5.6%, increase within the recovery division was driven by increases of $11.0 million and $6.2 million within residential and CTC facilities, respectively. The $1.2 million, or 1.1%, decrease within the healthy living division was driven by increases of $3.1 million and $0.8 million within weight management and outdoor programs, respectively, offset by a decrease of $5.1 million in residential facilities.

See facility statistics table above for explanation of changes in revenue utilizing metrics for patient days and revenue per patient day.

Consolidated operating expenses increased $48.6 million, or 12.2%, to $445.5 million for the year ended December 31, 2010 from $396.9 million in 2009. The $48.6 million increase in operating expenses was primarily driven by the higher non-cash goodwill impairment of $52.7 million and asset impairment of $21.2 million during the year ended December 31, 2010 compared to goodwill impairment of $30.5 million and asset impairment of $2.3 million in 2009 within the healthy living division. Without considering non-cash goodwill and asset impairment charges, consolidated operating expenses increased $7.5 million, or 2.0%, over 2009. Of the $7.5 million increase, the recovery division and the healthy living division contributed an increase of $5.8 million and $2.1 million, offset by a decrease of $0.5 million in corporate.

Our consolidated operating margin was (0.4)% in the year ended December 31, 2010 compared to 7.2% in 2009. The decrease in operating margin resulted primarily from higher non-cash goodwill and asset impairment. Without considering non-cash goodwill and asset impairment charges, consolidated operating margin was 16.2% in the year ended December 31, 2010 compared to 14.9% in 2009. Recovery division margins for the year ended

December 31, 2010 were 33.4% compared to 31.5% in 2009. Healthy living division operating margin decreased to (68.9)% for the year ended December 31, 2010 compared to operating margin of (30.3) % in 2009. Without considering non-cash goodwill and asset impairment charges, healthy living division operating margin was (5.3)% for the year ended December 31, 2010 compared to (2.4)% in 2009.

For the year ended December 31, 2010, consolidated net loss from continuing operations increased by $22.0 million over the same period of 2009 resulting in a loss from continuing operations, net of tax, of $39.6 million compared to $17.6 million in the same period of 2009. The increase in loss from continuing operations in 2010 compared to 2009 is primarily driven by an increase in non-cash goodwill impairment charges of $22.2 million and asset impairment charges of $18.9 million offset by increase in revenues of $16.0 million.

The following table presents our same-facility results of operations for our recovery division and our healthy living division for the years ended December 31, 2010 and 2009 (numbers in thousands, except for percentages).


	Years Ended December 31, Same Facility
Statement of Operations Data:	2010			2009		2010 vs. 2009 $ Change			2010 vs. 2009 % Change
Net revenue:
Recovery division	$	327,164		$	309,989	$	17,175			5.5	%
Healthy living division		114,401			114,135		266			0.2	%

Total net revenue		441,565			424,124		17,441			4.1	%
Operating expenses:
Recovery division		197,057			192,179		4,878			2.5	%
Healthy living division ⁽¹⁾		125,282			105,385		19,897			18.9	%

Total operating expenses		322,339			297,564		24,775			8.3	%
Operating income:
Recovery division		130,107			117,810		12,297			10.4	%
Healthy living division		(10,881	)		8,750		(19,631	)		(224.4	)%

Operating income	$	119,226		$	126,560	$	(7,334	)		(5.8	)%

(1)	Healthy living division operating expenses include $18.5 million of asset impairment for the year ended December 31, 2010 and $2.2 million of asset impairment for the year ended December 31, 2009.

The following table compares key same facility statistics for the years ended December 31, 2010 and 2009:


	Years Ended December 31, Same Facility
	2010		2009		% change
Recovery Division
Residential facilities
Revenue (in thousands)	$	208,230	$	197,291		5.5	%
Patient Days		577,170		551,899		4.6	%
Net revenue per patient day	$	360.78	$	357.48		0.9	%
CTCs
Revenue (in thousands)	$	118,934	$	112,698		5.5	%
Patient Days		9,628,338		9,427,599		2.1	%
Net revenue per patient day	$	12.35	$	11.95		3.3	%

Healthy Living Division
Residential facilities
Revenue (in thousands)	$	59,426	$	63,150		(5.9	)%
Patient Days		236,160		247,026		(4.4	)%
Net revenue per patient day	$	251.63	$	255.64		(1.6	)%
Outdoor programs
Revenue (in thousands)	$	26,419	$	25,569		3.3	%
Patient Days		60,012		56,427		6.4	%
Net revenue per patient day	$	440.23	$	453.14		(2.8	)%
Weight management programs
Revenue (in thousands)	$	28,557	$	25,416		12.4	%
Patient Days		99,705		85,314		16.9	%
Net revenue per patient day	$	286.41	$	297.91		(3.9	)%

On a same-facility basis, recovery division net revenue increased $17.2 million, or 5.5%, to $327.2 million for the year ended December 31, 2010 from $310.0 million in 2009. The same-facility increases were due to increases of $10.9 million and $6.2 million within the residential and CTC facilities, respectively. Healthy living division same-facility revenue increased $0.3 million or 0.2% to $114.4 million for the year ended December 31, 2010 from $114.1 million in 2009. The same-facility revenue increase within the healthy living division was driven by increases of $3.1 million and $0.9 million within weight management and outdoor programs, respectively, offset by a decrease of $3.7 million in residential facilities.

See facility statistics table above for explanation of changes in revenue utilizing metrics for patient days and revenue per patient day.

On a same-facility basis, recovery division operating expenses increased $4.9 million driven by an increase of $3.3 million in residential facilities and an increase of $1.6 million in CTCs compared to 2009. Healthy living division same-facility operating expenses increased $19.9 million due to increases in asset impairment of $16.2 million and supplies, facilities and other operating costs of $4.2 million and salaries and benefits of $1.5 million offset by decreases of $1.7 million in depreciation and amortization and $0.4 million in provision for doubtful accounts.

Continuing Operations Year Ended December 31, 2009 Compared to Continuing Operations Year Ended December 31, 2008

The following table presents our results of operations by segment for the years ended December 31, 2009 and 2008 (numbers in thousands, except for percentages).


	Years Ended December 31, Total Facility
Statement of Operations Data:	2009			2008			2009 vs. 2008 $ Change			2009 vs. 2008 % Change
Net revenue:
Recovery division	$	309,989		$	308,316		$	1,673			0.5	%
Healthy living division		117,515			144,507			(26,992	)		(18.7	)%
Corporate		240			318			(78	)		(24.5	)%

Total net revenue		427,744			453,141			(25,397	)		(5.6	)%
Operating expenses:
Recovery division		212,208			223,342			(11,134	)		(5.0	)%
Healthy living division		153,098			282,491			(129,393	)		(45.8	)%
Corporate		31,635			29,184			2,451			8.4	%

Total operating expenses		396,941			535,017			(138,076	)		(25.8	)%
Operating income (loss):
Recovery division⁽¹⁾		97,781			84,974			12,807			15.1	%
Healthy living division ⁽²⁾		(35,583	)		(137,984	)		102,401			74.2	%
Corporate		(31,395	)		(28,866	)		(2,529	)		(8.8	)%

Operating (loss) income		30,803			(81,876	)		112,679			137.6	%
Interest expense		(44,158	)		(54,104	)		9,946			18.4	%
Gain on debt repurchase		—			8,086			(8,086	)		(100.0	)%
Other (expense) income		(82	)		1			(83	)		(8,300.0	)%

Loss from continuing operations before income taxes		(13,437	)		(127,893	)		114,456			89.5	%
Income tax (benefit) expense		4,128			(6,261	)		10,389			(165.9	)%

Loss from continuing operations, net of tax		(17,565	)		(121,632	)		104,067			85.6	%
Loss from discontinued operations, (net of tax benefit of ($5,073) and ($10,870) in the years ended December 31, 2009 and 2008, respectively)		(9,096	)		(20,426	)		11,330			55.5	%

Net loss		(26,661	)		(142,058	)		115,397			81.2	%
Less: Net income attributable to the noncontrolling interest		(62	)		(153	)		91			59.5	%

Net loss attributable to CRC Health Corporation	$	(26,599	)	$	(141,905	)	$	115,306			81.3	%

(1)	Recovery division operating expenses for the year ended December 31, 2008 include $4.5 million of asset impairment.

(2)	Healthy living division operating expenses include $2.3 million of asset impairment and $30.5 million of goodwill impairment for the year ended December 31, 2009, and $142.2 million of goodwill impairment for the year ended December 31, 2008.

The following table compares key total facility statistics for the years ended December 31, 2009 and 2008:


	Years Ended December 31, Total Facility
	2009		2008		% change
Recovery Division
Residential facilities
Revenue (in thousands)	$	197,291	$	202,603		(2.6	)%
Patient Days		551,899		558,696		(1.2	)%
Net revenue per patient day	$	357.48	$	362.64		(1.4	)%
CTCs
Revenue (in thousands)	$	112,698	$	105,713		6.6	%
Patient Days		9,427,599		9,008,216		4.7	%
Net revenue per patient day	$	11.95	$	11.74		1.9	%

Healthy Living Division
Residential facilities
Revenue (in thousands)	$	66,420	$	81,198		(18.2	)%
Patient Days		262,713		313,481		(16.2	)%
Net revenue per patient day	$	252.82	$	259.02		(2.4	)%
Outdoor programs
Revenue (in thousands)	$	25,569	$	35,711		(28.4	)%
Patient Days		56,427		71,802		(21.4	)%
Net revenue per patient day	$	453.14	$	497.35		(8.9	)%
Weight management programs
Revenue (in thousands)	$	25,492	$	27,412		(7.0	)%
Patient Days		85,314		94,201		(9.4	)%
Net revenue per patient day	$	298.81	$	291.00		2.7	%

Consolidated net revenue decreased $25.4 million, or 5.6%, to $427.7 million for the year ended December 31, 2009 from $453.1 million for the year ended December 31, 2008. Of the total net revenue decrease, the healthy living division contributed a decrease of $27.0 million which was partially offset by an increase within the recovery division of $1.7 million. The $1.7 million, or 0.5%, increase within the recovery division was driven by increases of $7.0 million within CTCs, offset by a decrease of $5.4 million in residential facilities. The $27.0 million, or 18.7%, decrease within the healthy living division was driven by decreases of $14.8 million, $10.1 million and $1.9 million within residential facilities, outdoor facilities and weight management programs, respectively.

See facility statistics table above for explanation of changes in revenue utilizing metrics for patient days and revenue per patient day.

Consolidated operating expenses decreased $138.1 million, or 25.8%, to $396.9 million for the year ended December 31, 2009 from $535.0 million in the same period of 2008. The $138.1 million decrease in operating expenses was primarily driven by decreases in non-cash goodwill and asset impairment charges of $111.7 million and $2.3 million, respectively. Without considering non-cash goodwill and asset impairment charges, consolidated operating expenses decreased $24.1 million or 6.2% over the same period of 2008.

Our consolidated operating margin was 7.2% during the year ended December 31, 2009 compared to (18.1)% during the same period of 2008. The increase in operating margin resulted from the decrease in non-cash goodwill and asset impairment charges. Without considering non-cash goodwill and asset impairment charges, consolidated operating margin was 14.9% in the year ended December 31, 2009 compared to 14.3% in the same period of 2008. Recovery division margins for the year ended December 31, 2009 were 31.5% compared to 27.6% in the prior year period. Healthy living division operating margin increased to (30.3)% for the year ended

December 31, 2009 compared to operating margin of (95.5)% in the same period of 2008. Without considering non-cash goodwill and asset impairment charges, healthy living division operating margin was (2.4)% for the year ended December 31, 2009 compared to 2.9% in the same period of 2008.

For the year ended December 31, 2009, consolidated net loss from continuing operations decreased by $104.1 million over the prior year period to $17.5 million from $121.6 million in the same period of 2008. The decrease in loss from continuing operations in 2009 compared to 2008 is primarily driven by decreases in non-cash goodwill and asset impairment charges of $111.7 million and $2.3 million, respectively, and a decrease of $25.4 million in revenue, offset by an increase in tax benefit of $10.4 million and decrease of $9.9 million in interest expense, and a decrease of $8.1 million in gain on debt repurchase.

The following table presents our same-facility results of operations for our recovery division and our healthy living division for the year ended December 31, 2009 and 2008 (numbers in thousands, except for percentages).


	Years Ended December 31, Same Facility
Statement of Income Data:	2009		2008		2009 vs. 2008 $ Change			2009 vs. 2008 % Change
Net revenue:
Recovery division	$	307,407	$	307,550	$	(143	)		0.0	%
Healthy living division		114,135		140,556		(26,421	)		(18.8	)%

Total net revenue		421,542		448,106		(26,564	)		(5.9	)%
Operating expenses:
Recovery division⁽¹⁾		190,784		202,344		(11,560	)		(5.7	)%
Healthy living division⁽²⁾		105,385		119,023		(13,638	)		(11.5	)%

Total operating expenses		296,169		321,367		(25,198	)		(7.8	)%
Operating income (loss):
Recovery division		116,623		105,206		11,417			10.9	%
Healthy living division		8,750		21,533		(12,783	)		(59.4	)%

Operating income	$	125,373	$	126,739	$	(1,366	)		(1.1	)%

(1)	Recovery division operating expenses for the year ended December 31, 2008 include $4.5 million of asset impairment.

(2)	Healthy living division operating expenses for the year ended December 31, 2009 include $2.2 million of asset impairment.

The following table compares key same facility statistics for the years ended December 31, 2009 and 2008:


	Years Ended December 31, Same Facility
	2009		2008		% change
Recovery Division
Residential facilities
Revenue (in thousands)	$	194,708	$	201,837		(3.5	)%
Patient Days		541,397		549,325		(1.4	)%
Net revenue per patient day	$	359.64	$	367.43		(2.1	)%
CTCs
Revenue (in thousands)	$	112,698	$	105,713		6.6	%
Patient Days		9,427,599		9,008,216		4.7	%
Net revenue per patient day	$	11.95	$	11.74		1.9	%

Healthy Living Division
Residential facilities
Revenue (in thousands)	$	63,150	$	77,584		(18.6	)%
Patient Days		247,026		295,497		(16.4	)%
Net revenue per patient day	$	255.64	$	262.56		(2.6	)%
Outdoor programs
Revenue (in thousands)	$	25,569	$	35,711		(28.4	)%
Patient Days		56,427		71,802		(21.4	)%
Net revenue per patient day	$	453.14	$	497.35		(8.9	)%
Weight management programs
Revenue (in thousands)	$	25,416	$	27,261		(6.8	)%
Patient Days		85,314		94,131		(9.4	)%
Net revenue per patient day	$	297.91	$	289.61		2.9	%

On a same-facility basis, recovery division net revenue decreased $0.1 million, to $307.4 million from $307.6 million in the same period of 2008. This was due to an increase in revenues of $7.0 million within CTCs offset by a decrease of $7.1 million within residential facilities. Healthy living division same-facility revenue decreased $26.4 million, or 18.8%, to $114.1 million from $140.5 million in the same period of 2008. This was due to decrease in revenue of $14.4 million, $10.1 million and $1.8 million within the residential facilities, outdoor programs and the weight management programs, respectively.

See facility statistics table above for explanation of changes in revenue utilizing metrics for patient days and revenue per patient day.

On a same-facility basis, recovery division operating expenses decreased $11.6 million due to decreases of $10.1 million and $1.5 million within residential facilities and CTCs, respectively. Healthy living division same-facility operating expenses decreased $13.6 million due to decreases in salary and benefits of $10.3 million and supplies, facilities and other operating costs of $5.8 million, offset by increases in depreciation and amortization of $0.5 million and asset impairment charge of $2.2 million.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity for operating activities are payments from self pay patients, students, commercial payors and government programs for treatment services. We receive most of our cash from self payors in advance or upon completion of treatment. Cash revenue from commercial payors and government programs is typically received upon the collection of accounts receivable, which are generated upon delivery of treatment services. Additionally, the competitive health care environment and the Company’ desire to make its services more accessible to a greater number of potential clients maintains a competitive pricing pressure on many of the Company’s services.

Sources and Uses of Cash


	Years Ended December 31,
	2010			2009			2008
	(In thousands)
Net cash provided by operating activities	$	46,489		$	37,028		$	24,176
Net cash used in investing activities		(22,623	)		(12,378	)		(39,645	)
Net cash (used in) provided by financing activities		(21,737	)		(22,208	)		12,891

Net increase (decrease) in cash	$	2,129		$	2,442		$	(2,578	)

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Cash provided from operating activities was $46.5 million in 2010 and $37.0 million in 2009. The $9.5 million increase in cash flows from operating activities in fiscal 2010 was the result of the following factors. Interest payments decreased to $39.1 million in 2010 from $42.7 million in 2009 due to lower interest rates and lower debt levels due to repayments during the year. Other changes totaling $1.7 million resulted from lower taxes payments during 2010 as compared to 2009, and the remainder was due to higher levels of operating profit year over year.

Cash used in investing activities was $22.6 million in 2010, compared to $12.4 million in 2009. The increase of $10.2 million in the cash used for investing activities during 2010 was due primarily to increases in capital expenditures and acquisitions of $9.0 million and $0.7 million, respectively, compared to 2009 as well as a decrease of $0.7 million in proceeds resulting from the sale in 2009 of four facilities classified as discontinued operations.

Cash used in financing activities was $21.8 million in 2010, compared to $22.2 million in 2009. The decrease of cash used in financing activities of $0.4 million was due primarily to lower outflows related to cash distributed to Parent of $0.4 million.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Cash provided from operating activities was $37.0 million in 2009 and $24.2 million in 2008. The $12.8 million increase in cash flows from operating activities in fiscal 2009 was primarily the result of a reduction in payments for interest. Interest payments decreased to $42.7 million in 2009 from $51.8 million in 2008 due to lower interest rates and lower debt levels due to repayments during the year. Other changes totaling $3.7 million resulted from higher levels of operating profit year over year.

Cash used in investing activities was $12.4 million in 2009, compared to $39.6 million in 2008. The decrease of $27.2 million in the cash used for investing activities during 2009 was due primarily to decreases in acquisition related activity of $11.6 million compared to 2008 as well as to a decrease of $12.2 million in purchases of property and equipment and a decrease of $2.7 million in payments made under earnout arrangements.

Cash used in financing activities was $22.2 million in 2009, compared to cash provided by financing activities of $12.9 million in 2008. The increase of cash used in financing activities of $35.1 million was due primarily to $15.0 million in net repayments during 2009 compared to $35.0 million in net borrowings activity in 2008 under the revolving line of credit mostly offset by a reduction of $13.6 million in repurchase of long-term debt and a reduction of $1.2 million in repayment of long term debt.

Financing and Liquidity

We intend to fund our ongoing operations through cash generated by operations, funds available under the revolving portion of our senior secured credit facility and existing cash and cash equivalents. As of December 31, 2010, our senior secured credit facility was comprised of a $398.3 million senior secured term loan facility due

February 6, 2013, and a $100.0 million revolving credit facility due February 6, 2012. At December 31, 2010, the revolving credit facility had $56.8 million available for borrowing, $34.0 million outstanding and classified on our balance sheet as long-term debt, and $9.2 million of letters of credit issued and outstanding. On January 20, 2011, we entered into an amendment agreement and further amended and restated our existing credit agreement (the “Second Amended and Restated Credit Agreement”) to extend the maturity on a substantial portion of the existing term loans and revolving line of credit and provide the Company with greater flexibility to amend and refinance our term loans and revolving line of credit in the future. Under the terms of the Second Amended and Restated Credit Agreement, the maturity date of an aggregate amount of $309.0 million of the existing term loans was extended from February 6, 2013 to November 16, 2015. The maturity date of an aggregate amount of $63.0 million of the existing revolving credit commitements was extended from February 6, 2012 to August 16, 2015, provided that if the non-extended term loans have not been repaid or refinanced in full by January 6, 2013 or have not been subsequently extended to the maturity date of the extended term loans (November 16, 2015), then the maturity date of for the extended revolving credit commitments will be January 6, 2013. The reduction of $37.0 million in the amount of funds available to us under our revolving credit facility beyond February 6, 2012, will not have a significant impact on our ability to fund our short-term or long-term needs.

As part of the Transactions, we issued $200.0 million in aggregate principal amount of senior subordinated notes of which $177.3 million, excluding discount, remained outstanding at December 31, 2010. The senior subordinated notes mature on February 1, 2016.

We anticipate that cash generated by current operations, the remaining funds available under the revolving portion of our senior secured credit facility and existing cash and cash equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the next 12 months.

In addition, we may expand existing recovery and healthy living treatment facilities and build or acquire new facilities. Management continually assesses our capital needs and may seek additional financing, including debt or equity, to fund potential acquisitions, additions of property and equipment, or for other corporate purposes. In negotiating such financing, there can be no assurance that we will be able to raise additional capital on terms satisfactory to us. Failure to obtain additional financing on reasonable terms could have a negative effect on our plans to acquire additional treatment facilities. We expect to spend approximately $7.8 million for maintenance related expenditures and up to an additional $12.2 million over the next 12 months for expansion projects, systems upgrades and other related initiatives.

Under the terms of our borrowing arrangements, we are required to comply with various covenants, including the maintenance of certain financial ratios. As of December 31, 2010, we were in compliance with all such covenants. A breach of these could result in a default under our credit facilities and in our being unable to borrow additional amounts under our revolving credit facility. If an event of default occurs, the lenders could elect to declare all amounts borrowed under our credit facilities to be immediately due and payable and the lenders under our term loans and revolving credit facility could proceed against the collateral securing the indebtedness.

The interest rates under the Second Amended and Restated Credit Agreement are based on: (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of (w) 4.50% for extended term loans and (x) 2.25% for non-extended term loans, subject to reduction to 2.00% contingent upon our achieving a corporate family rating of at least B1 (with stable or better outlook) from Moody’s Investor Service, Inc. (“Moody’s”), (y) 4.00%, 3.75%, 3.50% or 3.25% for extended revolving credit commitments, based upon our leverage ratio being within certain defined ranges, and (z) 2.50%, 2.25%, 2.00% or 1.75% for non-extended revolving commitments, based upon our leverage ratio being within certain defined ranges, and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of (1) 3.50% for extended term loans, (2) 1.25% for non-extended term loans, subject to reduction to 1.00% contingent upon our achieving a corporate family rating of at least B1 (with stable or better outlook) from

Moody’s, (3) 3.00%, 2.75%, 2.50% or 2.25% for extended revolving commitments, based upon our leverage ratio being within certain defined ranges, and (4) 1.50%, 1.25%, 1.00% or 0.75% for non-extended revolving commitments, based upon our leverage ratio being within certain defined ranges.

Under the Second Amended and Restated Credit Agreement, in addition to certain customary administrative and other fees, on the last day of each calendar quarter we are required to pay each lender a commitment fee in respect of any unused commitments under the revolving credit facility, which is equal to (i) 0.625% per annum with respect to the extended revolving credit commitments and (ii) 0.50% or 0.375%, based upon our leverage ratio being within certain defined ranges, with respect to the non-extended revolving credit commitments.

Funding Commitments

Certain agreements contain contingent earnout provisions that provide for additional payments if the acquisitions meet performance milestones as specified in the agreements. During the year ended December 31, 2008, the Company made payments of $2.9 million related to earnout provisions. During 2009, the Company paid $0.2 million due to buyout of an earnout commitment related to a 2008 acquisition. The Company is not subject to any future earnout repayment commitments at December 31, 2010.

Off-Balance Sheet Obligations

As of December 31, 2010, our off-balance sheet obligations consisted of $9.2 million in letters of credit and $0.5 million in loan purchase commitments related to our Loan Program.

Obligations and Commitments

The following table sets forth our contractual obligations as of December 31, 2010 after giving effect to the Second Amendment Agreement (dollars in millions):


	Total		Less Than 1 Year		1-3 Years		4-5 Years		Thereafter
Term loans, including interest^{(i )}	$	475.4	$	26.8	$	115.7	$	332.9	$	—
Senior subordinated notes, including interest⁽ⁱⁱ⁾		282.1		19.1		38.1		38.1		186.8
Revolving line of credit, including interest⁽ⁱⁱⁱ⁾		37.5		1.8		35.7		—		—
Seller notes, including interest^(iv)		3.7		3.1		0.6		—		—
Operating leases		123.3		19.3		30.6		21.6		51.8
Consulting agreements and other service contracts		7.8		3.8		3.8		0.1		0.1
Liability for income taxes associated with uncertain tax positions		0.6		—		0.1		—		0.5

Total obligations	$	930.4	$	73.9	$	224.6	$	392.7	$	239.2

(i)	Interest rate was calculated using published three month LIBOR at December 31, 2010 plus 4.5% and 2.25% for the extended and non-extended portion of term loans, respectively. This interest rate was 4.80% and 2.55% for the extended and non-extended portion of the term loans, respectively.

(ii)	Stated interest rate of 10.75% per the indenture.

(iii)

Interest rate was calculated using published one month LIBOR at December 31, 2010, plus 4.0%, which equals 4.30%.

(iv)	Includes $1.8 million of seller notes related to discontinued operations. These seller notes are presented on the balance sheet under current liabilities of discontinued operations.

ITEM 7A.

Quantitative and Qualitative Disclosure about Market Risk

Interest rate risk

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate exposure relates to the term loans outstanding under our amended and restated senior secured credit facility. As of December 31, 2010 we have $398.3 million in term loans outstanding, bearing interest at variable rates. A hypothetical quarter point increase or decrease in market interest rates compared to the interest rates at December 31, 2010 would result in a $0.5 million change in annual interest expense on our term loans. We also have a revolving credit facility, which provides for borrowings of up to $100.0 million, which bears interest at variable rates. Assuming the revolving line of credit is fully drawn, each quarter point change in interest rates compared to the interest rates at December 31, 2010 would result in an immaterial change in the annual interest expense on our revolving credit facility. In conjunction with our term loans, we entered into an interest rate swap agreement on February 28, 2006 in the amount of $115.0 million as provided under our credit agreement and retained in our amended and restated credit agreement to exchange floating for fixed interest rate payments to reduce interest rate volatility. The effective date of the swap agreement was March 31, 2006 and has a maturity date of March 31, 2011. At December 31, 2010, this swap agreement converts $10.0 million of our floating-rate debt to fixed-rate debt at 4.99%. On June 30, 2008, as provided for in the Credit Agreement and retained in the Amended and Restated Credit Agreement and Amendment No. 2, the Company entered into an interest rate swap agreement to provide for interest rate protection for an aggregate notional amount of $200.0 million. The effective date of the agreement is June 30, 2008 and has a maturity date of June 30, 2011. The Company receives an interest rate equal to 3-month LIBOR and in exchange pays a fixed rate of 3.875% on the 200.0 million notional amount.

ITEM 8.

Financial Statements and Supplementary Data

TABLE OF CONTENTS


Report of Independent Registered Public Accounting Firm			52

Consolidated Balance Sheets as of December 31, 2010 and 2009			53

Consolidated Statements of Operations for the years ended December 31, 2010, 2009, and 2008			54

Consolidated Statements of Changes in Equity for the years ended December 31, 2010, 2009, and 2008			55

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009, and 2008			56

Notes to Consolidated Financial Statements			58

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

CRC Health Corporation:

We have audited the accompanying consolidated balance sheets of CRC Health Corporation and subsidiaries (the “Company”), (a wholly owned subsidiary of CRC Health Group, Inc.) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in equity, and cash flows for the years ended December 31, 2010, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CRC Health Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years ended December 31, 2010, 2009, and 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

March 30, 2011

CRC HEALTH CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	December 31, 2010			December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7,111		$	4,982
Restricted cash		546			420
Accounts receivable, net of allowance for doubtful accounts of $5,044 in 2010 and $5,327 in 2009		32,706			31,558
Prepaid expenses		8,623			7,489
Other current assets		1,921			1,306
Income taxes receivable		259			676
Deferred income taxes		6,547			6,346
Current assets of discontinued operations		1,635			1,720

Total current assets		59,348			54,497
PROPERTY AND EQUIPMENT-Net		125,626			125,215
GOODWILL		521,807			573,594
INTANGIBLE ASSETS-Net		314,032			335,409
OTHER ASSETS-Net		19,411			19,619

TOTAL ASSETS	$	1,040,224		$	1,108,334

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,957		$	3,011
Accrued liabilities		30,292			29,851
Current portion of long-term debt		11,111			8,814
Other current liabilities		18,305			25,992
Current liabilities of discontinued operations		3,619			2,114

Total current liabilities		68,284			69,782
LONG-TERM DEBT-Less current portion		598,915			622,262
OTHER LONG-TERM LIABILITIES		8,786			8,735
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS		3,142			1,679
DEFERRED INCOME TAXES		105,256			117,334

Total liabilities		784,383			819,792

COMMITMENTS AND CONTINGENCIES (Note 12)
CRC HEALTH CORPORATION STOCKHOLDER’S EQUITY:
Common stock, $0.001 par value-1,000 shares authorized, issued and outstanding at December 31, 2010 and 2009		—			—
Additional paid-in capital		462,970			454,880
Accumulated deficit		(205,023	)		(161,363	)
Accumulated other comprehensive loss		(2,106	)		(4,975	)

Total CRC Health Corporation stockholder’s equity		255,841			288,542

Total equity		255,841			288,542

TOTAL LIABILITIES AND EQUITY	$	1,040,224		$	1,108,334

See notes to consolidated financial statements.

CRC HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)


	Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
NET REVENUE:
Net client service revenue	$	443,706		$	427,744		$	453,141

OPERATING EXPENSES:
Salaries and benefits		213,127			211,237			226,119
Supplies, facilities and other operating costs		129,846			122,333			133,765
Provision for doubtful accounts		7,175			7,772			6,402
Depreciation and amortization		21,496			22,845			21,968
Asset impairment		21,164			2,257			4,525
Goodwill impairment		52,723			30,497			142,238

Total operating expenses		445,531			396,941			535,017

OPERATING (LOSS) INCOME		(1,825	)		30,803			(81,876	)
INTEREST EXPENSE -Net		(42,780	)		(44,158	)		(54,104	)
GAIN ON DEBT REPURCHASE		—			—			8,086
OTHER (EXPENSE) INCOME		(88	)		(82	)		1

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(44,693	)		(13,437	)		(127,893	)
INCOME TAX (BENEFIT) EXPENSE		(5,119	)		4,128			(6,261	)

LOSS FROM CONTINUING OPERATIONS, NET OF TAX		(39,574	)		(17,565	)		(121,632	)
LOSS FROM DISCONTINUED OPERATIONS (net of tax benefit of ($2,576) in 2010, ($5,073) in 2009, and ($10,870) in 2008, respectively)		(4,086	)		(9,096	)		(20,426	)

NET LOSS		(43,660	)		(26,661	)		(142,058	)
LESS: NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST		—			(62	)		(153	)

NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	(43,660	)	$	(26,599	)	$	(141,905	)

AMOUNTS ATTRIBUTABLE TO CRC HEALTH CORPORATION:
LOSS FROM CONTINUING OPERATIONS, NET OF TAX	$	(39,574	)	$	(17,508	)	$	(121,470	)
DISCONTINUED OPERATIONS, NET OF TAX		(4,086	)		(9,091	)		(20,435	)

NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	(43,660	)	$	(26,599	)	$	(141,905	)

See notes to consolidated financial statements

CRC HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except share amounts)


							CRC Health Corporation Stockholder’s Equity
	Total			Comprehensive Income (Loss)			Accumulated (Deficit) Retained Earnings			Accumulated Other Comprehensive Loss			Series A Common Stock				Additional Paid-in Capital		Noncontrolling Interest
	Total			Comprehensive Income (Loss)			Accumulated (Deficit) Retained Earnings			Accumulated Other Comprehensive Loss			Shares		Amount		Additional Paid-in Capital		Noncontrolling Interest
BALANCE—December 31, 2007	$	446,123		$	1,653		$	7,141		$	—			1,000	$	—	$	438,608	$	374
Comprehensive loss:
Net loss for the year ended December 31, 2008		(142,058	)		(142,058	)		(141,905	)											(153	)
Other comprehensive income, net of tax:
Unrealized loss on cash flow hedges, net of tax of ($4,161)		(6,289	)		(6,289	)					(6,289	)

Other comprehensive income		(6,289	)		(6,289	)

Comprehensive loss		(148,347	)	$	(148,347	)

Capital contributed by Parent, net		5,667																5,667

BALANCE—December 31, 2008	$	303,443					$	(134,764	)	$	(6,289	)		1,000	$	—	$	444,275	$	221

Noncontrolling interest buyout		(138	)															21		(159	)
Comprehensive loss:
Net loss for the year ended December 31, 2009		(26,661	)		(26,661	)		(26,599	)											(62	)
Other comprehensive income, net of tax:
Unrealized gain on cash flow hedges, net of tax of $865		1,314			1,314						1,314

Other comprehensive income		1,314			1,314

Comprehensive loss		(25,347	)	$	(25,347	)

Capital contributed by Parent, net		10,584																10,584

BALANCE—December 31, 2009	$	288,542					$	(161,363	)	$	(4,975	)		1,000	$	—	$	454,880	$	—

Comprehensive loss:
Net loss for the year ended December 31, 2010		(43,660	)		(43,660	)		(43,660	)											—
Other comprehensive income, net of tax:
Unrealized gain on cash flow hedges, net of tax of $1,905		2,869			2,869						2,869

Other comprehensive income		2,869			2,869

Comprehensive loss		(40,791	)	$	(40,791	)

Capital contributed by Parent, net		8,090																8,090

BALANCE—December 31, 2010	$	255,841					$	(205,023	)	$	(2,106	)		1,000	$	—	$	462,970	$	—

See notes to consolidated financial statements.

CRC HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(43,660	)	$	(26,661	)	$	(142,058	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		21,527			23,142			22,811
Amortization of debt discount and capitalized financing costs		4,244			4,290			4,536
Goodwill impairment		52,723			30,497			142,862
Asset impairment		21,164			11,500			30,836
Write-off of prior year paid acquisition costs		—			62			—
Gain on debt repurchase		—			—			(8,086	)
Gain on interest rate swap agreement		(350	)		(1,272	)		(1	)
Loss on sale of property and equipment		157			1,509			68
Loss on sale of discontinued operations		—			47			—
Provision for doubtful accounts		7,340			8,002			6,561
Stock-based compensation		2,277			5,541			6,026
Deferred income taxes		(14,184	)		(7,253	)		(19,756	)
Changes in assets and liabilities:
Restricted cash		(126	)		(420	)		—
Accounts receivable		(8,299	)		(8,771	)		(5,655	)
Prepaid expenses		(1,189	)		44			(164	)
Income taxes receivable and payable		6,003			3,812			1,395
Other current assets		(453	)		(3,989	)		494
Accounts payable		1,938			(3,189	)		(803	)
Accrued liabilities		733			1,216			(8,381	)
Other current liabilities		(2,794	)		(1,814	)		(6,288	)
Other long-term assets		(3,731	)		375			(19	)
Other long-term liabilities		3,169			360			(202	)

Net cash provided by operating activities		46,489			37,028			24,176

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment		(21,988	)		(12,999	)		(25,279	)
Proceeds from sale of property and equipment		81			148			188
Proceeds from sale of discontinued operations		—			732			—
Acquisition of businesses, net of cash acquired		(716	)		—			(11,597	)
Acquisition adjustments		—			(59	)		(10	)
Payments made under earnout arrangements		—			(200	)		(2,947	)

Net cash used in investing activities		(22,623	)		(12,378	)		(39,645	)

CRC HEALTH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)


	Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital distributed to Parent		(10	)		(412	)		(359	)
Capitalized financing costs		(93	)		—			(338	)
Repayments of capital lease obligations		—			(12	)		(22	)
Repurchase of long term debt		—			—			(13,607	)
Borrowings under revolving line of credit		19,500			14,000			59,000
Repayments under revolving line of credit		(32,000	)		(29,000	)		(24,000	)
Repayment of long-term debt		(9,134	)		(6,550	)		(7,783	)
Noncontrolling interest buyout		—			(234	)		—

Net cash (used in) provided by financing activities		(21,737	)		(22,208	)		12,891

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,129			2,442			(2,578	)
CASH AND CASH EQUIVALENTS—Beginning of year		4,982			2,540			5,118

CASH AND CASH EQUIVALENTS—End of year	$	7,111		$	4,982		$	2,540

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes payable issued in connection with earnout arrangements	$	—		$	—		$	897

Note payable in connection to leasehold improvements	$	—		$	—		$	374

Payable related to acquisition	$	279		$	—		$	—

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	39,079		$	42,707		$	51,758

Cash paid for income taxes, net of refunds	$	486		$	2,164		$	1,128

See notes to consolidated financial statements.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

CRC Health Corporation, (the “Company”) is headquartered in Cupertino, California and is a wholly owned subsidiary of CRC Health Group, Inc. referred to as the “Group” or the “Parent.” The Company is a leading provider of substance abuse treatment services and youth treatment services in the United States. The Company also provides treatment services for other addiction diseases and behavioral disorders such as eating disorders. Effective January 1, 2009, the Company realigned its operations and internal organizational structure by combining its “youth division” with its “healthy living division,” formerly included as a component of “corporate/other.” There were no organizational changes to the Company’s recovery division.

The Company delivers services through two divisions, the recovery division and the healthy living division. The recovery division provides substance abuse and behavioral disorder treatment services through its residential treatment facilities and outpatient treatment clinics. The healthy living division provides therapeutic and educational programs to underachieving young people through residential schools and wilderness programs. The healthy living division also provides treatment services through adolescent and adult weight management programs as well as eating disorder facilities. The healthy living division and recovery division are also the Company’s two operating segments.

As of December 31, 2010, the recovery division, operates 30 inpatient, 20 outpatient facilities, and 54 comprehensive treatment centers (“CTCs”) in 21 states, and provides treatment services to patients suffering from chronic addiction related diseases and related behavioral disorders. As of December 31, 2010, the healthy living division, operates 24 adolescent and young adult programs in 8 states and provides a wide variety of therapeutic and educational programs for underachieving young people. Additionally, the healthy living division operates 18 weight management facilities in 8 states, one facility in the United Kingdom and one facility in Canada with a focus on providing treatment services for eating disorders and weight management. Other activities classified as corporate represent revenue and expenses associated with eGetgoing, an online internet treatment option, and general and administrative expenses (i.e., expenses associated with the Company’s corporate offices in Cupertino, California, which provide management, financial, human resource and information system support).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation — These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable for annual financial information. The Company’s consolidated financial statements include the accounts of CRC Health Corporation and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates — Preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Cash and Cash Equivalents — Cash includes amounts in demand accounts. At December 31, 2010 and 2009 substantially all cash was on deposit with financial institutions. Cash equivalents are short-term investments with original maturities of three months or less. Interest income for the years ended December 31, 2010, 2009 and 2008 was approximately $0.6 million, $0.1 million, and $0.1 million, respectively, and is recorded in interest expense on the consolidated statements of operations.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property and Equipment — Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed on a straight-line basis over the estimated useful lives of the assets, generally three to seven years, except for buildings, which are depreciated over thirty years. Leasehold improvements and assets held under capital leases are amortized using the straight-line method over the life of the lease, or the estimated useful life of the asset, whichever is shorter. Maintenance and repairs are charged to operations as incurred.

Long-Lived Assets — The Company tests its long-lived assets and intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. The long-lived and intangible assets are tested for impairment at the facility level which represents the lowest level at which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the undiscounted future cash flows from the asset tested are less than the carrying value, a loss equal to the difference between the carrying value and the fair market value of the asset is recorded. Fair value is determined using discounted cash flow methods.

The Company’s analysis requires judgment with respect to many factors, including future cash flows, success at executing its business strategy, and future revenue and expense growth rates. It is possible that the Company’s estimates of undiscounted cash flows may change in the future resulting in the need to reassess the carrying value of its long-lived and intangible assets for impairment.

Goodwill and Other Intangible Assets — The Company tests goodwill for impairment annually, at the beginning of its fourth quarter or more frequently if evidence of possible impairment arises. The Company performs a two-step impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit, defined as an operating segment or one level below an operating segment, being tested to its carrying value. The goodwill impairment test is performed based on the reporting units that the Company has in place at the time of the test. The reporting units may change over time as the Company’s operating segments change, or the component businesses therein change, due to economic conditions, acquisitions, restructuring or otherwise. At the time of these events, the Company reevaluates its reporting units using the reporting unit determination guidelines. As necessary, goodwill is reassigned between the affected reporting units using a relative fair-value approach.

The Company determines the fair value of its reporting units using a combination of the income approach and the market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, the Company estimates fair value based on what investors have paid for similar interests in comparable companies through the development of ratios of market prices to various earnings indications of comparable companies taking into consideration adjustments for growth prospects, debt levels and overall size. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.

The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions at many points during the analysis. The Company’s estimated future cash flows are based on assumptions that are consistent with its annual planning process and include estimates for revenue and operating margins and future economic and market conditions. Actual future results may differ from those estimates. In addition, the Company makes certain judgments and assumptions in allocating shared assets and

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

liabilities to determine the carrying values for each of its reporting units tested. Changes in assumptions or circumstances could result in an additional impairment in the period in which the change occurs and in future years. Factors that could cause the Company to record additional goodwill impairment include, but are not limited to:

Decreases in revenues or increases in operating costs

Increases in the Company’s borrowing rates or weighted average cost of capital

Increase in the blended tax rate

Changes in working capital

Significant alteration of market multiples utilized in the valuation process

Significant decrease in market value of comparable companies

Significant changes in perpetuity growth rate

The Company’s other indefinite lived intangible assets consist of trademarks and trade names, certificates of need, and regulatory licenses. The Company tests other indefinite lived intangible assets for impairment annually, at the beginning of its fourth quarter or more frequently if evidence of possible impairment arises. The Company applies a fair value-based impairment test to the net book value of other indefinite lived intangible assets using a combination of income and market approaches.

Capitalized Financing Costs — Costs to obtain long-term debt financing are capitalized and amortized over the expected life of the debt instrument. As of December 31, 2010 and 2009, other assets include net capitalized financing costs of $10.8 million, and $14.7 million, respectively. Amortization expenses for the years ended December 31, 2010, 2009 and 2008 were $4.0 million, $4.1 million, and $4.2 million, respectively and are included in the Company’s consolidated statement of operations under interest expense.

Revenue Recognition — Revenue is recognized when rehabilitation and treatment services are provided to a patient. Client service revenue is reported at the estimated net realizable amounts from clients, third-party payors and others for services rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided for in the period the related services are rendered and adjusted in future periods as final settlements are determined. Revenue for educational services provided by the Company’s healthy living division consists primarily of tuition, enrollment fees, alumni services and ancillary charges. Tuition revenue and ancillary charges are recognized based on contracted monthly/daily rates as services are rendered. The enrollment fees for service contracts that are charged upfront are deferred and recognized over the average student length of stay, ranging between 2 and 16 months. Alumni fees revenue represents non-refundable upfront fees for post-graduation services and these fees are deferred and recognized systematically over the contracted life. The Company, from time to time, may provide charity care to a limited number of clients. The Company does not record revenues or receivables for charity care provided. Advance billings for client services are deferred and recognized as the related services are performed.

Advertising Costs — Advertising costs, included in supplies, facilities and other operating costs are expensed as incurred. Advertising costs for the years ended December 31, 2010, 2009 and 2008, were approximately $2.3 million, $4.0 million, and $4.1 million, respectively.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation — The Company measures and recognizes compensation expense for all stock-based payment awards, including employee stock options, based on the grant-date fair value. The Company estimates grant-date fair value of its awards by utilizing the Black Scholes Merton model for time-based awards and a closed-form lattice model for awards containing market conditions. For awards that are subject to both a performance and market condition, compensation expense is recognized over the longer of the implicit service period associated with the performance condition or the derived service period associated with the market condition.

Gain on Debt Repurchase — During the year ended December 31, 2008, the Company retired senior subordinated notes with a par amount of $22.7 million. Excluding immaterial transaction related costs, the Company realized a gain of $8.1 million from debt retirement activities. The Company did not have any debt retirement activities in 2010 or 2009.

Noncontrolling Interest — The Company, through the acquisition of Aspen Education Group, acquired a seventy-five percent interest in certain weight loss programs. Additionally, a former employee acquired a 10% interest in two healthy living division programs as a result of a prior agreement in place from the Aspen acquisition. The Company consolidates its investment for financial reporting purposes. Losses are allocated based upon the “at risk” capital of each limited liability partner member. Losses in excess of the “at risk” capital are allocated to the Company without regard to the percentage of ownership. The Company retained an option to buy-out the non-controlling interest of all above programs at a price to be calculated pursuant to the terms and conditions of the operating agreement. During the year ended December 31, 2009, the Company exercised its option to buy-out the non-controlling interests, related to the aforementioned two healthy living division programs, and paid a total consideration of $0.2 million.

Income Taxes — The Company accounts for income taxes under an asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and tax bases of assets and liabilities using tax rates in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. For U.S. federal tax return purposes, the Company is part of a consolidated tax return with its Parent, CRC Health Group, Inc. However, the Company’s provision for income taxes is prepared on a stand-alone basis.

The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate based on new information. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties. The Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes based on technical merits.

Restructuring and Discontinued Operations — The Company accounts for facility closures and restructuring costs in accordance with applicable accounting standards. The Company records an obligation for the estimated costs that will not be recovered. These costs include employment termination benefits, lease contract termination costs and other associated costs. Additionally, upon review of facility closures and those facilities held for sale, the Company assesses the classification of such facilities as discontinued operations.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Should the Company classify certain facility closures and facilities held for sale as discontinued operations, the facility operations related to closures and facilities held for sale are classified as discontinued operations on the consolidated statements of operations for all periods presented. Assets and liabilities of discontinued operations are classified under assets and liabilities of discontinued operations on the Company’s consolidated balance sheets. See Note 18 and Note 19.

Concentration of Credit Risk — Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and accounts receivable. The Company’s cash accounts are maintained with financial institutions in the United States of America. At times, deposits in these institutions may exceed federally insured limits. The Company’s accounts receivable are primarily derived from methadone treatment, detoxification, psychological evaluations, counseling, education, weight loss management and other related rehabilitation services provided to clients. As of December 31, 2010 and 2009, approximately 41.9% and 38.3% of gross accounts receivable and approximately 21.2% and 19.9% of net client service revenue, respectively, was derived from county, state and federal contracts under Medicaid and other programs. In the event of cancellation or curtailment of these programs or default on these accounts receivable, the Company’s operating results and financial position would be adversely affected. The Company performs ongoing credit evaluations of its third-party insurance payors’ financial condition and generally requires advance payment from its clients who do not have verifiable insurance coverage. The Company maintains an allowance for doubtful accounts to cover potential credit losses based upon the estimated collectability of accounts receivable.

Interest Rate Swaps — Interest rate swaps are used exclusively in the management of the Company’s interest rate exposures and are recorded on the balance sheet at fair value. As part of its hedging strategy, the Company has designated its interest rate swaps as cash flow hedges.

The fair value of the interest rate swaps are estimated based upon terminal value models. The effective portions of changes in the fair value of the interest rate swap are recorded in other comprehensive income. Ineffective portions of changes in the fair value of the interest rate swap are recognized in earnings. Additionally, reclassifications of deferred gains or losses related to ineffectiveness of interest rate swaps, are recognized as interest expense on the consolidated statement of operations.

Other Comprehensive Income — Other comprehensive income (“OCI”) includes gains and losses that are excluded from net income and are recorded directly as a component of stockholders’ equity. For the years ended December 31, 2010, 2009 and 2008, the effective portion of changes in fair value of the interest rate swaps designated as cash flow hedges was recorded as other comprehensive income.

Business Segments — Performance of the Company’s two reportable segments (recovery division and healthy living division) is evaluated based on profit or loss from operations before depreciation and amortization, gain on sale of assets, special charges or benefits, income taxes and minority interest (“segment profit”). Management uses segment profit information for internal reporting and control purposes and considers it important in making decisions regarding the allocation of capital and other resources, risk assessment and employee compensation, among other matters. Intersegment sales and transfers are insignificant.

Student Loan Program — Effective April 1, 2009, the Company created a private loan program (“the Loan Program”) pursuant to which students and/or patients (“the Borrowers”) who meet predetermined credit standards can obtain third-party financing to pay a portion of the cost of participating in certain of the Company’s programs. The Company initiated this program in response to the lack of credit availability for its students/patients, particularly in the healthy living division, to secure financing to access the Company’s services. The Board of Directors has approved a loan pool of up to $20.0 million.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has entered into an agreement (“the Agreement”) with an unrelated third party (“the Lender”) to facilitate unsecured consumer loans for certain of the Company’s students and/or patients. The loans are funded by the Lender based on predetermined loan criteria, including risk profile and credit quality requirements. The loans are unsecured consumer loans with a floating interest rate. Under the terms of the Loan Program, the Company has agreed to purchase from the Lender on a recurring basis loan notes that meet Loan Program criteria. In accordance with the Agreement, the Company can terminate the Loan Program at any time upon a 120 day advance notice of termination to the Lender.

The Company considers the purchase commitments as off-balance sheet arrangements and maintains restricted cash for the fulfillment of its Loan Program note purchase commitments. As of December 31, 2010, the Company had purchased approximately $10.8 million in Loan Program notes with a weighted average interest rate of 6.9% and a maximum remaining amortization period of 20 years. At December 31, 2010, the Company had $0.5 million of outstanding loan purchase commitments related to its Loan Program. Loan Program notes are recorded under other current assets and other assets on the Company’s consolidated balance sheets. The Company has the intent and ability to hold these loan notes to maturity.

The Company maintains balances in its restricted cash account for the purchase of notes pursuant to the Agreement. Restricted cash is recorded on the Company’s consolidated balance sheets under restricted cash. At December 31, 2010 and 2009, the Company had $0.5 million and $0.4 million, respectively, classified as restricted cash under current assets on the Company’s consolidated balance sheets.

The Company has established a loan loss reserve to account for non-performing Loan Program notes. The Company has utilized a variety of data from the consumer and education loan industry to establish its initial loan loss reserve. On a periodic basis, the Company evaluates the adequacy of the allowance based on the Company’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions. At December 31, 2010 and 2009, the Company had recorded $0.9 million and $0.2 million, respectively, in loan loss reserves under other assets, net, on its consolidated balance sheets.

Recently Adopted Accounting Guidance — During the quarter ended March 31, 2010, the Company adopted updated authoritative guidance which amends and enhances disclosures about fair value measurements. The updated guidance required the addition of new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 roll forward. The amended guidance also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The adoption of this guidance did not have a material effect on the consolidated financial statements.

Recently Issued Accounting Guidance — In December 2010, the Financial Accounting Standards Board (“FASB”) issued changes to the testing of goodwill for impairment. These changes require an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. This guidance is effective for fiscal years (and interim periods within those years) that begin after December 15, 2010. The Company is currently assessing the impact that the adoption of this guidance will have on its consolidated financial statements.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. The adoption of the new disclosure requirements will not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued updated authoritative guidance which requires more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. For the Company, the new and amended disclosures that relate to information as of the end of a reporting period were effective for the first interim or annual reporting periods ending on or after December 15, 2010. However, the disclosures that include information for activity that occurs during a reporting period will be effective for the first interim or annual periods beginning after December 15, 2010. Those disclosures include (1) the activity in the allowance for credit losses for each period and (2) disclosures about modifications of financing receivables. The adoption of the new disclosure requirements will not have a material impact on the Company’s consolidated financial statements.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. ACQUISITIONS

2010 Acquisitions

For the year ended December 31, 2010, the Company completed two acquisitions for a total purchase consideration of approximately $1.0 million. The acquisitions are intended to provide expansion of the Company’s services within the respective markets of the acquired facilities in the United States. The Company recorded $0.5 million and $0.4 million of goodwill within its recovery division and healthy living division, respectively, related to the acquisitions, all of which is expected to be deductible for tax purposes.

The purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values. The Company has included the acquired entities’ results of operations in the consolidated statements of operations from the date of each acquisition. Pro forma results of operations have not been presented because the effect of the acquisitions was not material.

2009 Acquisitions

The Company did not complete any acquisitions during the year ended December 31, 2009.

2008 Acquisitions

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. BALANCE SHEET COMPONENTS

Balance sheet components at December 31, 2010 and 2009 consist of the following (in thousands):


	2010			2009
Accounts receivable—gross	$	37,750		$	36,885
Less allowance for doubtful accounts		(5,044	)		(5,327	)

Accounts receivable—net	$	32,706		$	31,558

Other assets-net:
Capitalized financing costs—net	$	10,776		$	14,663
Deposits		662			925
Note receivable		7,973			4,031

Total other assets-net	$	19,411		$	19,619

Accrued liabilities:
Accrued payroll and related expenses	$	10,796		$	8,698
Accrued vacation		4,596			4,615
Accrued interest		8,153			8,019
Accrued expenses		6,747			8,519

Total accrued liabilities	$	30,292		$	29,851

Other current liabilities:
Deferred revenue	$	10,600		$	9,650
Client deposits		3,604			4,130
Interest rate swap liability		3,535			8,659
Other liabilities		566			3,553

Total other current liabilities	$	18,305		$	25,992

The following schedule reflects activity associated with the Company’s allowance for doubtful accounts for the years ended December 31, 2010, 2009 and 2008 (in thousands):


	2010			2009			2008
Allowance for Doubtful Accounts
Balance—beginning of the period ⁽¹⁾	$	5,309		$	5,344		$	6,849
Provision for doubtful accounts		7,175			7,839			6,492
Write-off of uncollectible accounts		(7,440	)		(7,856	)		(7,932	)

Balance—end of the period	$	5,044		$	5,327		$	5,409

(1)	Beginning balance for the years ended December 31, 2010, 2009 and 2008 has been adjusted to exclude accounts receivable related to discontinued operations.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2010 and 2009 consists of the following (in thousands):


	2010			2009
Land	$	21,373		$	21,373
Building and improvements		79,860			74,551
Leasehold improvements		19,203			23,181
Furniture and fixtures		12,639			12,404
Computer equipment		12,369			10,855
Computer software		17,472			11,332
Motor vehicles		5,660			5,911
Field equipment		2,634			2,782
Construction in progress		8,370			6,363

		179,580			168,752
Less accumulated depreciation		(53,954	)		(43,537	)

Property and equipment—net	$	125,626		$	125,215

Depreciation expense was $15.0 million, $15.6 million, and $13.9 million for the years ended December 31, 2010, 2009 and 2008, respectively.

Asset impairment

During the second quarter of 2010, the Company lowered its view of forecasted future cash flows, compared to a forecast prepared in the fourth quarter of 2009, for the healthy living division. This was based upon the Company’s assessment of economic conditions and lack of available credit for families of potential students of the healthy living division each of which affect both admissions and pricing. At June 30, 2010, the Company tested the fixed assets within its healthy living division at the facility level for impairment. For the three months ended June 30, 2010, the Company recognized a non-cash impairment charge of $4.0 million related to impairment of property and equipment which was included in the consolidated statements of operations as asset impairment.

The operations and enrollment of the Aspen programs within the Company’s healthy living division are highest in the summer months. Additionally, the Aspen programs have limited leading indicators regarding performance. As a result, the Company has more information in late summer and early fall around Aspen’s performance, which came in below the performance levels expected in July and August 2010. At the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs relative to its prior forecast and fiscal year budget. In response to negative results in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. This triggering event caused the Company to test the fixed assets within its healthy living division for impairment. For the three months ended September 30, 2010, the Company recognized a non-cash impairment charge of $1.8 million related to impairment of property and equipment which is included in the consolidated statements of operations as asset impairment.

At December 31, 2010, the Company recognized a non-cash impairment charge of $0.5 million related to certain Aspen facilities that under-performed relative to forecast during the fourth quarter. This charge is included in the consolidated statement of operations as asset impairment. For the years ended December 31, 2010, 2009 and 2008, the Company had recognized non-cash impairment charges of $6.3 million, $0.2 million

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and $3.0 million, respectively related to the impairment of property and equipment. The property and equipment impairment charge in 2008 was recorded in the Company’s consolidated statements of operations under discontinued operations.

6. GOODWILL AND INTANGIBLE ASSETS

Changes to goodwill by reportable segment for the years ended December 31, 2010 and 2009 are as follows (in thousands):


	Recovery						Healthy Living						Total
	2010			2009			2010			2009			2010			2009
Balance as of January 1
Goodwill	$	502,168		$	502,155		$	244,785		$	244,785		$	746,953		$	746,940
Accumulated impairment losses		(624	)		(624	)		(172,735	)		(142,238	)		(173,359	)		(142,862	)

Balance as of January 1		501,544			501,531			72,050			102,547			573,594			604,078
Activity during the year:
Goodwill additions		503			—			433			—			936			—
Goodwill impairment		—			—			(52,723	)		(30,497	)		(52,723	)		(30,497	)
Goodwill related to earn-outs		—			200			—			—			—			200
Goodwill related to sale of facilities		—			(236	)		—			—			—			(236	)
Goodwill adjustments		—			49			—			—			—			49

Balance as of December 31
Goodwill		502,671			502,168			245,218			244,785			747,889			746,953
Accumulated impairment losses		(624	)		(624	)		(225,458	)		(172,735	)		(226,082	)		(173,359	)

Balance as of December 31	$	502,047		$	501,544		$	19,760		$	72,050		$	521,807		$	573,594

Goodwill impairment

2010 Goodwill Impairment — As of September 30, 2010, as a result of the economic conditions and their adverse impact on the Aspen business and its long term growth prospects, the Aspen reporting unit could no longer be aggregated with the weight management reporting unit within the healthy living division for goodwill impairment testing purposes. It was determined that healthy living division had two reporting units within its segment: Aspen and weight management. The Aspen reporting unit encompasses short-term and long term therapeutic programs for adolescents with behavioral or learning challenges that are interfering with their performance in school and in life such as substance abuse, academic underachievement, anger and aggressive behavior, family conflict, special learning needs and depression. The weight management reporting unit offers a number of different types of weight management programs for adults and adolescents and a full range of services for anorexia nervosa, bulimia nervosa, binge eating and related disorders. The Company’s three reporting units as of December 31, 2010 are recovery, Aspen and weight management.

During 2010, the Company tested its recovery reporting unit for possible impairment in accordance with its annual goodwill impairment testing policy. The Company determined that the fair value of its recovery reporting unit exceeded its carrying value. As a result of the impairment testing, the Company established that the second step of goodwill impairment testing was not required for its recovery reporting unit.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the healthy living division each of which affect both admissions and pricing. This triggering event caused the Company to test its healthy living division in advance of the annual goodwill impairment test date. The Company recognized a non-cash impairment charge of $43.7 million during the three months ended June 30, 2010.

The operations and enrollment of the Aspen programs within the Company’s healthy living division are highest in the summer months. Additionally, the Aspen programs have limited leading indicators regarding performance. As a result, the Company has more information in late summer and early fall around Aspen’s performance, which came in below the performance levels expected in July and August 2010. At the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs relative to its prior forecast and fiscal year budget. In response to results below previous estimates in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. This triggering event caused the Company to test Aspen’s goodwill for impairment. For the three months ended September 30, 2010, the Company recognized a non-cash impairment charge of $9.1 million related to impairment within the Aspen reporting unit of healthy living division to write off all remaining goodwill in the Aspen reporting unit. For the year ended December 31, 2010, the Company recognized non-cash impairment charges of $52.7 million related to the impairment of goodwill for the healthy living division, including Aspen. Goodwill impairment charges for 2010 are reflected as goodwill impairment within continuing operations in the consolidated statement of operations.

At September 30, 2010, the Company tested its weight management reporting unit for possible impairment in accordance with its goodwill impairment policy. The Company determined that the fair value of its weight management reporting unit exceeded its carrying value and the Company determined that the second step of goodwill impairment testing was not required for its weight management reporting unit.

2009 Goodwill Impairment — During 2009, the Company tested its recovery reporting unit for possible impairment in accordance with its annual goodwill impairment testing policy. The Company determined that the fair value of its recovery reporting unit exceeded its carrying value. As a result of the impairment testing, the Company established that the second step of goodwill impairment testing was not required for its recovery reporting unit.

During the third quarter of 2009, the Company reduced its estimate of expected future cash flows for the healthy living reporting unit based upon current economic conditions including the lack of availability of student loans, credit for its clients and other factors. Accordingly, the Company tested its healthy living reporting unit in advance of the annual goodwill impairment test date as there was a significant adverse change in business climate and recognized a non-cash impairment charge of $24.9 million. Goodwill impairment charges, recognized by the Company during the three months ended September 30, 2009, were estimated amounts which were subsequently revised during the fourth quarter of 2009 resulting in a favorable goodwill adjustment of $0.6 million.

During the fourth quarter of 2009, the Company closed two facilities within its healthy living reporting unit. The closure of the two facilities negatively impacted the Company’s forecasted cash flows for the reporting unit. The decrease in forecasted cash flows was considered a triggering event that gave effect to additional goodwill impairment testing for the healthy living reporting unit. As a result of goodwill impairment testing for its healthy living reporting unit, the Company determined that the carrying value of its healthy living reporting unit exceeded the reporting unit’s estimated fair value and recognized a non-cash impairment charge of $6.2 million.

Goodwill impairment charges for 2009 are reflected as goodwill impairment within continuing operations in the consolidated statement of operations.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2008 Goodwill Impairment — In the third quarter of 2008, the Company tested its healthy living reporting unit for impairment in advance of the annual test date, based upon restructuring activity and deteriorating economic conditions. The Company recorded a non-cash impairment charge of $142.2 million related to its healthy living reporting unit, which is reflected as goodwill impairment in continuing operations on the consolidated statement of operations.

As of December 31, 2008, certain facilities within the Company’s recovery reporting unit were classified as held for sale. A portion of the recovery reporting unit goodwill was allocated to these assets held for sale on a relative fair value basis. At December 31, 2008, the Company determined that the carrying value of the assets held for sale exceeded the fair value. Accordingly, the Company recognized $0.6 million goodwill impairment charge which is recorded within discontinued operations on the consolidated statement of operations.

Goodwill related to earnouts

Certain acquisition agreements contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the results of the acquired entity’s operations exceed negotiated benchmarks. During the year ended December 31, 2009, the recovery unit recorded $0.2 million, respectively in additional goodwill related to earnouts. There were no such earnouts recorded during 2010 and 2008.

During the year ended December 31, 2008, the healthy living reporting unit recorded $0.6 million in additional goodwill as a result of one of the entities meeting the benchmarks.

Goodwill related to sale of facilities

During the year ended December 31, 2009, the Company completed the sale of four facilities within its recovery reporting unit which were classified as held for sale at December 31, 2008. The Company allocated approximately $0.2 million of goodwill to the facilities upon completion of the sales. There were no such transactions during 2010 or 2008.

Goodwill adjustments

For the year ended December 31, 2009, goodwill adjustments include an immaterial correction to an acquisition completed in 2007. For the year ended December 31 2008, goodwill adjustments include a $1.8 million correction related to an above market lease from an acquisition completed in 2007 and a $2.5 million correction of estimated deferred tax benefits related to acquisitions occurring in 2006. There were no such adjustments recognized during 2010.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible Assets

Total intangible assets at December 31, 2010 and 2009 consist of the following (in thousands):


	December 31, 2010									December 31, 2009
	Useful Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Useful Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets subject to amortization:
Referral network		20 years	$	20,834	$	(4,297	)	$	16,537		20 years	$	29,695	$	(4,632	)	$	25,063
Accreditations		20 years		8,899		(1,835	)		7,064		20 years		14,144		(2,219	)		11,925
Curriculum		20 years		5,483		(1,131	)		4,352		20 years		7,425		(1,159	)		6,266
Government including Medicaid contracts		15 years		34,967		(11,463	)		23,504		15 years		34,967		(9,131	)		25,836
Managed care contracts		10 years		14,400		(7,080	)		7,320		10 years		14,400		(5,640	)		8,760
Managed care contracts		5 years		100		(65	)		35		5 years		100		(45	)		55
Core developed technology		5 years		2,704		(2,663	)		41		5 years		2,704		(2,122	)		582
Covenants not to compete		3 years		152		(152	)		—		3 years		152		(152	)		—

Total intangible assets subject to amortization:			$	87,539	$	(28,686	)		58,853			$	103,587	$	(25,100	)		78,487

Intangible assets not subject to amortization:
Trademarks and trade names									173,078									174,821
Certificates of need									44,600									44,600
Regulatory licenses									37,501									37,501

Total intangible assets not subject to amortization									255,179									256,922

Total intangible assets								$	314,032								$	335,409

Amortization expense related to intangible assets subject to amortization was $6.5 million, $7.3 million and $8.1 million, for the years ended December 31, 2010, 2009 and 2008, respectively.

Intangible assets subject to amortization

During the second quarter of 2010, the Company lowered its view of forecasted future cash flows, compared to a forecast prepared in the fourth quarter of 2009, for the healthy living division. This was based upon the Company’s assessment of economic conditions and lack of available credit for families of potential students of the healthy living division each of which affect both admissions and pricing. This triggering event caused the Company to test the finite-lived intangible assets within its healthy living division for impairment. For the three months ended June 30, 2010, the Company recognized a non-cash impairment charge of $11.0 million related to the finite-lived intangible assets which was included in the consolidated statements of operations as asset impairment.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition, during the three months ended June 30, 2010, the Company consolidated programs offered at two of its facilities within its healthy living division. As a result, the Company recognized a non-cash impairment charge of $1.3 million related to finite-lived intangible assets of one of the programs. These impairment charges are included in the consolidated statements of operations as asset impairment.

The operations and enrollment of the Aspen programs within the Company’s healthy living division are highest in the summer months. Additionally, the Aspen programs have limited leading indicators regarding performance. As a result, the Company has more information in late summer and early fall around Aspen’s performance, which came in below the performance levels expected in July and August 2010. At the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs relative to its prior forecast and fiscal year budget. In response to negative results in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. This triggering event caused the Company to test the finite-lived intangible assets within its healthy living division for impairment. For the three months ended September 30, 2010, the Company recognized a non-cash impairment charge of $0.7 million related to impairment of finite-lived intangible assets.

At December 31, 2010, the Company recognized a non-cash impairment charge of $0.2 million related to certain Aspen facilities that under-performed relative to forecast during the fourth quarter. This charge is included in the consolidated statements of operation as asset impairment. For the year ended December 31, 2010, the Company had recognized non-cash impairment charges of $13.2 million related to the impairment of finite-lived intangible assets.

During 2009, the Company recognized non-cash impairment charges of $8.1 million related to impairment of finite-lived intangible assets. Of the total impairment charges, $6.1 million was due to the Company’s decision to close four of its healthy living program facilities and was included under asset impairment in the consolidated statement of operations under results from discontinued operations. The remaining impairment charge of $2.0 million was due to impairment testing during the year within the healthy living division and was included in the consolidated statement of operations under asset impairment.

During 2008, as a result of impairment testing during the year, the Company recognized non-cash impairment charges of $16.9 million related to finite-lived intangible assets. The impairment charges were recognized in the consolidated statement of operations under discontinued operations.

Estimated future amortization expense related to the finite-lived intangible assets at December 31, 2010 is as follows (in thousands):


Fiscal Year
2011	$	5,605
2012		5,558
2013		5,543
2014		5,543
2015		5,543
Thereafter		31,061

Total	$	58,853

Intangible assets not subject to amortization

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

determined that certain indefinite-lived intangible assets were impaired and recognized an impairment charge of $1.5 million during the three months ended June 30, 2010. Additionally, the Company recognized an impairment charge of $0.2 million due to the Company’s decision to consolidate programs offered at two of its facilities within its healthy living division. Charges related to impairment of indefinite-lived intangible assets are included in the Company’s consolidated statements of operations as asset impairment.

As described above, under “2010 Goodwill Impairment” section, at the end of the third quarter of 2010, the Company reviewed actual results for graduation, admissions, and average length of stay in the Aspen programs relative to its prior forecast and fiscal year budget. In response to results below previous estimates in these areas, the Company further lowered its view of forecasted future cash flows for the Aspen programs within its healthy living division. Based on the results of a fair value assessment of the indefinite lived intangible assets at September 30, 2010, no impairment was recognized for them during the three months ended September 30, 2010.

For the year ended December 31, 2010, the Company recognized a non-cash impairment charge of $1.7 million related to impairment of intangible assets not subject to amortization. This charge is included in the Company’s consolidated statements of operations as asset impairment.

During 2009, the Company recognized non-cash impairment charges of $3.2 million related to impairment of indefinite-lived intangible assets. These impairment charges were based on the Company’s decision to close four of its healthy living program facilities and were included under asset impairment in the consolidated statement of operations under results from discontinued operations.

During 2008, as a result of impairment testing during the year, the Company recognized non-cash impairment charges of $10.9 million related to finite-lived intangible assets. Of the total impairment charges, $4.5 million of charges related to intangible assets not subject to amortization are recognized in continuing operations on the Company’s consolidated statement of operations under asset impairment. The remaining impairment charges are recognized in discontinued operations.

7. INCOME TAXES

The provision for income taxes attributable to loss from continuing operations consists of the following (in thousands):


	2010			2009			2008
Current:
Federal	$	5,292		$	5,691		$	269
State		2,639			2,176			2,354

Total Current		7,931			7,867			2,623

Deferred:
Federal		(9,957	)		(3,183	)		(8,141	)
State		(3,093	)		(556	)		(743	)

Total Deferred		(13,050	)		(3,739	)		(8,884	)

Income tax expense (benefit) from continuing operations	$	(5,119	)	$	4,128		$	(6,261	)

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The reconciliation of income tax computed by applying the U.S. federal statutory rate to the effective tax rate for continuing operations is summarized in the following table:


	2010			2009			2008
Statutory federal tax rate		35.0	%		35.0	%		35.0	%
State income taxes (net of federal benefit)		1.0	%		(12.1	)%		(0.6	)%
Goodwill impairment		(32.0	)%		(61.5	)%		(28.2	)%
Non deductible expenses		1.2	%		1.4	%		(0.2	)%
Prior year provision true-ups		2.2	%		1.4	%		(0.3	)%
Release of tax reserve		1.2	%		—			0.0	%
Change in valuation allowances for NOL		—			1.8	%		(1.0	)%
Worthless stock loss		2.9	%		—			—
Other		—			3.3	%		0.2	%

Effective tax rate from continuing operations—(expense)/benefit		11.5	%		(30.7	)%		4.9	%

Deferred tax — Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purpose and the amounts used for income tax purpose. The tax effects of items comprising current deferred income taxes at December 31, 2010 and 2009 are as follows:


	2010			2009
Deferred tax assets:
Reserves and allowances	$	9,427		$	6,491
Net operating loss carryforwards		5,758			5,431
Research credits		—			1,068
Acquisition costs		2,646			2,674
Stock based compensation		8,666			7,850
Charitable contributions		—			109
State taxes		46			351
Interest rate swap		1,406			3,451

Gross deferred tax assets	$	27,949		$	27,425
Valuation allowance		(6,438	)		(5,763	)

Total deferred tax assets	$	21,511		$	21,662

Deferred tax liabilities:
Acquired intangible assets	$	(123,317	)	$	(130,096	)
Depreciation and amortization		6,855			(1,223	)
Flow through entity		(3,758	)		(1,331	)

Gross deferred tax liabilities	$	(120,220	)	$	(132,650	)

Total net deferred tax liabilities	$	(98,709	)	$	(110,988	)

Current net deferred tax assets	$	6,547		$	6,346
Non-current net deferred tax liabilities	$	(105,256	)	$	(117,334	)

At December 31, 2010, the Company had $3.6 million and $83.8 million of U.S. federal and state net operating loss carry-forwards, respectively, available to offset future taxable income. If not utilized, these net operating loss carry-forwards will expire in varying amounts beginning in 2020 for U.S. federal income taxes and

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2012 for state income taxes. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carry forwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three-year period. At December 31, 2010, a portion of the Company’s net operating loss and credit carry forwards may be subject to such limitations.

At December 31, 2010, the Company utilized $0.3 million of state research and development credit to offset the state tax liability. The Company does not have any remaining state research and development credit to carry forward to the future.

As of December 31, 2010, the Company utilized $1.1 million of federal alternative minimum tax credit, which had been carried forward to offset the federal regular tax liability. The ending balance of federal alternative minimum tax credit is zero at December 31, 2010.

Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is established for those benefits that do not meet the more likely than not criteria. The Company evaluated the need for a valuation allowance against deferred tax assets, and recorded a valuation allowance of $6.4 million and $5.8 million at December 31, 2010 and 2009, respectively.

The Company’s income tax returns are audited by federal and various states tax authorities. The Company is currently under examination by various states jurisdictions for various tax years. The Company periodically evaluates its exposures associated with its tax filing positions.

Income Tax related to Impairments — During the year ended December 31, 2010, the Company recognized a total of $ 73.9 million in impairments related to goodwill, intangible assets, and fixed assets. Of the $73.9 million in impairments, $67.6 million was related to impairment of goodwill and other intangibles. The remaining $6.3 million was related to fixed asset impairments.

Of the $67.6 million in impairments related to goodwill and other intangibles, $40.8 million represents goodwill that is non-deductible for income tax purpose, resulting in an increase to federal income expense of $14.3 million. The $14.3 million increase in federal income tax expense affected the Company’s effective tax rate by 32.0%. The $14.3 million income tax expense is related to continuing operations.

Of the total impairments, $33.0 million impairment generated approximately $11.6 million of income tax benefits in the form of future tax deductions.

During the year ended December 31, 2009, the Company recognized a total of $42.0 million in impairments related to goodwill, intangible assets, and fixed assets. Of the $42.0 million in impairment, $41.8 million was related to impairment of goodwill and other intangible. The remaining $0.2 million was related to fixed asset impairments.

Of the $41.8 million in impairments related to goodwill and other intangibles, $23.6 million represents goodwill that is non-deductible for income tax purpose, resulting in an increase to federal income expense of $8.3 million. The $8.3 million increase in income tax expense reduced the income tax benefit to the Company’s total effective tax rate by 60.1%. The $8.3 million was related to continuing operations.

Of the total impairments, $41.8 million impairment generated approximately $7.0 million of income tax benefits in the form of future tax deductions.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unrecognized tax benefits — At December 31, 2010, the Company’s total unrecognized tax benefits were approximately $0.6 million exclusive of interest and penalties described below. Included in this amount is approximately $0.5 million of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in a future period. The Company realized $0.5 million unrecognized tax benefit due to 2006 IRS audit close at the beginning of the year.

The Company recognizes interest related to unrecognized tax benefits within the income tax expenses line in the accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheet. At December 31, 2010 and 2009, the Company had an insignificant amount and $0.3 million accrued for estimated interest and penalties.

The Company is no longer subject to U.S. federal, state and local income tax audits by taxing authorities for tax years through 2005. The tax years 2006 through 2009 remain subject to examination by major taxing jurisdictions to which the Company is subject, in the United States. The statute of limitations for the Company’s federal and certain state net operating losses relative to net operating loss carryovers has not expired for tax years 2001 and after.

The Company’s roll forward of its total gross unrecognized tax benefit liabilities for the years ended December 31, 2010, 2009 and 2008 (in thousands) is as follows:


	2010			2009			2008
Balance as of January 1,	$	1,081		$	1,097		$	1,075
Tax positions related to
Additions		—			—			—
Reductions		—			—			—
Tax positions related to prior years:
Additions		—			—			112
Reductions		—			—			—
Settlements		(403	)		—			—
Lapse of statute of limitations		(60	)		(16	)		(90	)

Balance as of December 31,	$	618		$	1,081		$	1,097

8. LONG-TERM DEBT

Long-term debt at December 31, 2010 and 2009 consists of the following (in thousands):


	2010			2009
Term loans	$	398,305		$	405,649
Revolving line of credit		34,000			46,500
Senior subordinated notes, net of discount of $1,342 in 2010 and $1,606 in 2009		175,954			175,690
Seller notes		1,680			3,116
Note payable, leasehold improvement		87			121

Total debt		610,026			631,076
Less current portion		(11,111	)		(8,814	)

Long-term debt—less current portion	$	598,915		$	622,262

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Term Loans and Revolving Line of Credit — On February 6, 2006, the Company entered into a Credit Agreement (the “Credit Agreement”) with a syndicate of institutional lenders and financial institutions. The Credit Agreement provided for financing of $245.0 million in senior secured term loans and $100.0 million of revolving line of credit. On November 17, 2006, concurrent with the Aspen Education Group acquisition, the Company amended and restated the Credit Agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement provided for financing of $419.3 million in senior secured term loans (“Term Loans”) and $100.0 million of revolving line of credit. The Company borrowed $175.5 million in senior secured term loans upon execution of the amendment. Effective April 16, 2007, the Company entered into Amendment No. 2 (“Amendment No. 2”) that amended the Company’s Amended and Restated Credit Agreement. On January 20, 2011, the Company entered into an amendment agreement and further amended and restated the Amended and Restated Credit Agreement (“Second Amended and Restated Credit Agreement”) to extend the maturity of a substantial portion of the Term Loans and revolving line of credit and provide the Company with greater flexibility to amend and refinance its Term Loans and revolving line of credit in the future. Certain financial covenants were also amended.

Term Loans — At December 31, 2010, the Term Loans were subject to the terms of the Amended and Restated Credit Agreement, as amended by Amendment No. 2. Interest was payable quarterly at (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.25% , subject to reduction to 2.00% contingent upon the Company achieving a corporate family rating of at least B1 (with stable or better outlook) from Moody’s and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 1.25% subject to reduction to 1.00% contingent upon the Company achieving a corporate family rating of at least B1 (with stable or better outlook) from Moody’s. At December 31, 2010, the entire amount of Term Loans consisted of LIBOR loans and the interest rate thereon was 2.553%. At December 31, 2010, the aggregate amount of $398.3 million was payable in quarterly principal installments of $1.0 million through December 31, 2012 with the remainder due on the maturity date of February 6, 2013. The Company was subject to compliance with certain restrictive financial covenants that limited the amount of capital expenditures the Company may make on an annual basis and required the Company to maintain certain debt to income ratios and interest coverage ratios. The Company was in compliance with all such covenants as of December 31, 2010. The principal balance outstanding at December 31, 2010 was $398.3 million.

Under the Amended and Restated Credit Agreement, the Company was required to apply a certain portion of excess cash to the principal amount of the Term Loans. Excess cash under the Credit Agreement was defined as net income attributable to the Company adjusted for certain cash and non-cash items.

Key provisions of the Term Loans that were extended pursuant to the Second Amended and Restated Credit Agreement (“Extended Term Loans”) and those that were not (“Non-Extended Term Loans”) are summarized below.

Non-Extended Term Loans: The aggregate amount of $89.3 million is payable in quarterly principal installments of $0.2 million over the payment period March 31, 2011 through December 31, 2012, with the remainder on February 6, 2013. Interest is payable quarterly at the rates applicable under Amendment No. 2.

Extended Term Loans: The aggregate amount of $309.0 million is payable in quarterly principal installments of $0.8 million over the payment period March 31, 2011 through September 30, 2015, with the remainder due on the maturity date of November 16, 2015. Interest is payable quarterly and rates are based on (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

an applicable margin of 4.50% and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 3.50%.

Revolving Line of Credit — At December 31, 2010, the revolving line of credit was subject to the terms of the Amended and Restated Credit Agreement. Interest was payable at (i) for LIBOR loans of any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.50%, 2.25%, 2.00% or 1.75%, based upon the Company’s leverage ratio being within certain defined ranges, and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 1.50%, 1.25%, 1.00% or 0.75%, based upon the Company’s leverage ratio being within certain defined ranges. In addition, on the last day of each calendar quarter the Company was required to pay each lender a commitment fee in respect of any unused commitments under the revolving line of credit, which was equal to 0.50% or 0.375%, based upon the Company’s leverage ratio being within certain defined ranges. Maximum borrowings were not to exceed $100.0 million, and principal was payable at the Company’s discretion based on available operating cash balances, with any outstanding borrowings due on the maturity date of February 6, 2012. At December 31, 2010, the outstanding balance under the revolving line of credit was $34.0 million, the entire amount of which consisted of LIBOR loans, and the interest rate thereon was payable at LIBOR rate plus 2.50%. Based on periodic review of its debt structure, the Company determined it appropriate to classify $34.0 million related to the revolving line of credit as long-term debt as the Company does not intend to repay such amount in 2011. From time to time the revolving line of credit may include one or more swing line loans that are base rate loans or one or more letters of credit (“LCs”). At December 31, 2010, the Company did not have any swing line loans outstanding. The aggregate amount of LCs outstanding at December 31, 2010 was $9.2 million with interest payable quarterly at the applicable LIBOR rate described above in this paragraph. The LCs secured various liability and workers’ compensation policies in place for the Company and its subsidiaries. The Company has historically and currently intends to make payments to reduce borrowing under the revolving line of credit from operating cash flow. In addition, the Company expects that future financings will serve not only to partially fund acquisitions but also to repay all or part of any outstanding revolving line of credit balances then outstanding.

Key provisions of the revolving line of credit commitments that were extended pursuant to the Second Amended and Restated Credit Agreement (“Extended Revolving Line of Credit”) and those that were not extended (“Non-Extended Revolving Line of Credit”) are summarized below.

Non-Extended Revolving Line of Credit: The aggregate commitments of $37.0 million mature on February 6, 2012. Interest and commitment fees are payable quarterly at the rates applicable to the revolving line of credit under the Amended and Restated Credit Agreement.

Extended Revolving Line of Credit: The aggregate commitments of $63.0 million mature on August 16, 2015 provided that if any Non-Extended Term Loans have not been repaid or refinanced in full by January 6, 2013 or have not been subsequently extended to the maturity date of the Extended Term Loans (November 16, 2015), then the maturity date of the Extended Revolving Line of Credit commitments will be January 6, 2013. Interest is payable quarterly at (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 4.00%, 3.75%, 3.50% or 3.25%, based upon the Company’s leverage ratio being within certain defined ranges, and (ii) for base rate loans, a rate per annum equal to the greater of (x) the prime rate of the administrative agent and (y) the federal funds rate plus one-half of 1.00%, plus an applicable margin of 3.00%, 2.75%, 2.50% or 2.25%, based upon the Company’s leverage ratio being within certain defined ranges. Commitment fees are payable quarterly at a rate equal to 0.625% per annum.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Senior Subordinated Notes — On November 16, 2006, the Company issued $200.0 million aggregate principal amount of 10³/4% Senior Subordinated Notes (the “Notes”) due February 1, 2016. Interest is payable semiannually beginning August 1, 2006. The Notes were issued at a price of 98.511%, resulting in $3.0 million of original issue discount. The Company may redeem some or all of the Notes on or prior to February 1, 2011 at a redemption price equal to 100% of the principal amount of the Notes redeemed plus a “make-whole” premium as of, and accrued and unpaid interest to, the applicable redemption date . On and after February 1, 2011, the Company may redeem some or all of the Notes at the redemption prices (expressed as percentages of principal amount of Notes to be redeemed) set forth below, plus accrued and unpaid interest thereon, if redeemed during the twelve-month period beginning on February 1 of each of the years indicated below:


Year	Percentage
2011		105.375	%
2012		103.583	%
2013		101.792	%
2014 and thereafter		100.000	%

If there is a change of control as specified in the indenture, the Company must offer to repurchase the Notes at 101% of their face amount, plus accrued and unpaid interest. The Notes are subordinated to all of the Company’s existing and future senior indebtedness, rank equally with all of the Company’s existing and future senior subordinated indebtedness and rank senior to all of the Company’s existing and future subordinated indebtedness. The Notes are guaranteed on an unsecured senior subordinated basis by each of the Company’s wholly owned subsidiaries that guarantee the Company’s Term Loans and Revolving Line of Credit.

During the year ended December 31, 2008, the Company retired senior subordinated notes with a par amount of $22.7 million. Excluding immaterial transaction related costs, the Company realized a gain of $8.1 million related to debt retirement activities, which is included in gain on debt repurchase on the Company’s consolidated statement of operations.

Seller Notes — Represents notes payable for amounts owed by the Company to former shareholders of business acquired related to the achievement of certain earnout obligations. Interest rates on these notes range from 7.00% to 10.25%. Principal and interest are payable quarterly through January 2012.

Interest expense (gross) on total debt was $43.7 million, $45.7 million and $54.9 million for the year ended December 31, 2010, 2009 and 2008, respectively.

At December 31, 2010, without giving effect to the Second Amendment Agreement, currently scheduled principal payments of total long-term debt, excluding discount on senior subordinated notes, are as follows (in thousands):


	Total
2011	$	11,111
2012		34,332
2013		388,629
2014		—
2015		—
Thereafter		177,296

Total	$	611,368

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. DERIVATIVES

The Company uses interest rate swaps to manage risk related to fluctuations in interest rates and does not engage in speculation or trading activities with its interest rate swaps.

The Company expects that the interest rate swaps will hedge the variable cash flows associated with existing variable-rate debt. Accordingly, the Company has designated these as cash flow hedges under applicable accounting literature. The effective portion of changes in the fair value of interest rate swaps designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in interest expense on the statements of operations.

As of December 31, 2010, the Company had two outstanding interest rate derivatives with a combined $210.0 million in notional amounts that were designated as cash flow hedges of interest rate risk. One of the derivatives (the “2006 Swap”) with a maturity date of March 31, 2011, converts $10.0 million of its floating-rate debt to fixed-rate debt at 4.99%. For the second derivative (the “2008 Swap”) with a maturity date of June 30, 2011, the Company receives an interest rate equal to 3-month LIBOR and in exchange pays a fixed rate of 3.875% on the $200.0 million notional amount.

For the years ended December 31, 2010, 2009 and 2008, the Company recorded an unrealized gain of $0.4 million, net of tax and an unrealized gain of $1.3 million, net of tax, and an unrealized loss of $6.3 million, net of tax, respectively, related to its cash flow hedges. Unrealized gains and losses related to the Company’s cash flow hedges are recorded in accumulated other comprehensive income. See Note 11.

At June 30, 2008, the 2006 Swap had not been designated as a qualifying hedge. On July 1, 2008 (the “off-market” date) the Company designated the 2006 Swap as a qualifying cash flow hedge. During the three months ended December 31, 2009, the Company reclassified $1.3 million related to 2006 Swap hedge ineffectiveness from other comprehensive income to earnings. During the year ended December 31, 2010, the Company reclassified $0.4 million related to 2006 Swap hedge ineffectiveness from other comprehensive income to earnings. The reclassification of hedge ineffectiveness relates to unrealized gains being deferred in other comprehensive income that represent changes in fair value of the 2006 Swap. The reclassification from other comprehensive income to earnings represents a favorable increase to earnings, before taxes, and is recorded in interest expense in the Company’s consolidated statements of operations.

During 2008, the Company recognized a $0.3 million loss in cumulative hedge ineffectiveness of the 2006 Swap which was recorded in interest expense on the Company’s consolidated statement of operations. For the six months ended June 30, 2008, and prior to the off-market date, the Company recognized an immaterial loss for the 2006 Swap.

For the years ended December 31, 2010, 2009 and 2008, there was no hedge ineffectiveness related to the 2008 Swap.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $3.6 million of the effective portion of its derivatives will be reclassified as an increase to interest expense.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below presents the fair value of the Company’s derivative financial instruments at December 31, 2010 and 2009 (in thousands):


	Liability Derivatives
	Balance Sheet Location		Fair Value
			December 31, 2010		December 31, 2009
Derivatives designated as hedging instruments
Interest Rate Swaps		Other current liabilities	$	3,535	$	8,659

Total derivatives designated as hedging instruments			$	3,535	$	8,659

The table below presents the before-tax effect of the Company’s derivative financial instruments for the years ending December 31, 2010 and 2009 (in thousands):


Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)		Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	2010			2009					2010			2009					2010			2009
Interest Rate Swaps	$	(3,112	)	$	(5,101	)		Interest expense	$	(7,887	)	$	(7,279	)		Interest expense	$	(1	)	$	536

Credit-Risk-Related Contingent Features

The Company has agreements with one of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

At December 31, 2010, the liability due to counterparties to the derivative agreements is $3.7 million, which includes accrued interest but excludes any adjustment for nonperformance risk (“credit valuation adjustments”). As of December 31, 2010, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at December 31, 2010, it may be required to settle its obligations under the agreements at their termination value of $3.7 million. At December 31, 2010, the Company was in compliance with all agreements related to its debt and derivatives.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. FAIR VALUE MEASUREMENTS

The Company accounts for certain assets and liabilities at fair value. As defined in the authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. An asset or liability’s level is based on the lowest level of input that is significant to the fair value measurement. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:


Level 1:		Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2:		Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;

Level 3:		Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company values its interest rate swaps using terminal values which are derived using proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions at December 31, 2010 and 2009. These instruments are allocated to Level 2 on the fair value hierarchy because the critical inputs into these models, including the relevant yield curves and the known contractual terms of the instrument, are readily available. Refer to Note 9 for disclosure of fair value measurements and impact of unrealized gain or loss on earnings.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company measures, on a non-recurring basis, its long-lived assets and indefinite-lived intangible assets at fair value when performing impairment assessments under the relevant accounting guidance. Nonfinancial liabilities for facility exit activities are also measured at fair value on a non-recurring basis.

The following table presents the non-financial assets that were measured and recorded at fair value on a non-recurring basis during the year ended December 31, 2010 (in thousands):


	Year Ended December 31, 2010				Level Used to Determine New Cost Basis
	Impairment Charge		New Cost Basis		Level 1		Level 2		Level 3
Property and equipment	$	6,298		1,110	$	—	$	—	$	1,110
Referral network		7,245		151		—		—		151
Accreditation		4,290		89		—		—		89
Curriculum		1,587		146		—		—		146
Trademarks and trade names		1,744		7,046		—		—		7,046
Goodwill—healthy living division		52,723		19,760		—		—		19,760

Total	$	73,887		28,302	$	—	$	—	$	28,302

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the year ended December 31, 2010, the estimated fair value of the assets was determined based on level 3 inputs.

Fair Value of Financial Instruments

Financial instruments not measured on a recurring basis include cash, restricted cash, accounts receivable, accounts payable, loan program notes and long-term debt. With the exception of financial instruments noted in the following table, the fair value of the Company’s financial instruments approximate carrying value due to their short maturities.

The estimated fair value of financial instruments with long-term maturities is as follows:


	December 31, 2010				December 31, 2009
	(in thousands)
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Loan program notes	$	7,949	$	6,028	$	3,821	$	3,872

Total Assets	$	7,949	$	6,028	$	3,821	$	3,872

Liabilities
Senior subordinated notes	$	175,954	$	187,232	$	175,690	$	156,570
Term loan	$	398,305	$	377,778	$	405,649	$	358,568

Total Liabilities	$	574,259	$	565,010	$	581,339	$	515,138

Loan program notes are measured at their estimated fair market value measured primarily based on securitization market conditions for similar loans. The Company’s senior subordinated notes are measured at fair based on bond-yield data from market trading activity as well as U.S Treasury rates with similar maturities as the senior subordinated notes. The Company’s term loans are measured at fair value based on present value methods using credit spreads derived from market data to discount the projected interest and principal payments on the Company’s term loans. For the year ended December 31, 2010, the estimated fair value of loan program notes, senior subordinated notes and term loans was determined based on Level 3 inputs.

11. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes other gains and losses affecting equity that are excluded from net income. The components of accumulated other comprehensive income (loss) consist of changes in the fair value of derivative financial instruments.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Comprehensive income (loss) for the years ended December 31, 2010, 2009 and 2008 is comprised of the following (in thousands):


	Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net loss	$	(43,660	)	$	(26,661	)	$	(142,058	)
Other comprehensive income (loss):
Net change in unrealized gain/(loss) on cash flow hedges (net of tax of $1,905 in 2010, $865 in 2009, and ($4,161) in 2008)		2,869			1,314			(6,289	)

Total comprehensive loss	$	(40,791	)	$	(25,347	)	$	(148,347	)

Comprehensive loss attributable to noncontrolling interest	$	—		$	(62	)	$	(153	)

Comprehensive loss attributable to CRC Health Corporation	$	(40,791	)	$	(25,285	)	$	(148,194	)

12. COMMITMENTS AND CONTINGENCIES

Operating Leases — The Company leases various office space, clinic offices, facilities and equipment under non-cancelable operating leases throughout the United States with various expiration dates through November 2026. Rent expense was $20.1 million, $19.4 million and $22.1 million for the years ended December 31, 2010, 2009 and 2008, respectively. The Company earned $0.4 million, $0.4 million, and $0.5 million in sublease rental income for the years ended December 31, 2010, 2009 and 2008, respectively. The terms of certain facility leases provide for annual scheduled increases in cost adjustments and rental payments on a graduated scale. The Company is party to certain related party leases as a result of the Company’s acquisitions (see Note 16). Such related party leases are due and payable on a monthly basis on similar terms and conditions as the Company’s other leasing arrangements. In addition, the Company is also responsible for certain expenses including property tax, insurance and maintenance costs associated with some of the clinic offices and facility leases.

Future minimum lease payments under all non-cancelable operating leases at December 31, 2010 are as follows (in thousands):


	Third Party Operating Lease Payments		Related Party Operating Lease Payments		Total Operating Lease Payments
2011	$	16,563	$	2,706	$	19,269
2012		14,172		2,241		16,413
2013		12,133		2,019		14,152
2014		10,160		1,693		11,853
2015		8,760		979		9,739
Thereafter		43,064		8,767		51,831

Total minimum lease payments	$	104,852	$	18,405	$	123,257

Indemnifications — The Company provides for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, bylaws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance which should enable the Company to recover a portion of any future amounts paid.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with business dispositions and acquisitions and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to such sales or acquisitions.

While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, no payments have been made under any of these indemnities.

Self-Insurance Plans — Effective May 2004, the Company established a self-insurance program for workers’ compensation benefits for employees. Self-insurance reserves are based on past claims experience and projected losses for incurred claims and include an estimate of costs for claims incurred but not reported at the balance sheet date. The Company obtains an independent actuarial valuation of the estimated costs of claims reported but not settled, and claims incurred but not reported and may adjust the reserves based on the results of the valuations. Insurance coverage in excess of the per occurrence self-insurance retention has been secured with insurers for specified amounts. The reserve for self-insured workers’ compensation claims was $3.3 million and $3.2 million at December 31, 2010 and 2009, respectively, and is included in accrued liabilities on the consolidated balance sheets.

The Company maintains a self-insurance program for employee group health insurance to consolidate both self-insured and insured plans that had been in existence previously. The self-insured group health plan covers approximately 68% of our employees enrolled in group health plans. The remaining approximate 32% of our employees enrolled in group health plans are covered through health maintenance organizations. Insurance coverage, in excess of the per occurrence self-insurance retention, has been secured with insurers for specified amounts. Self-insurance reserves are based on projected costs for incurred claims and include an estimate of costs of claims incurred but not reported at the balance sheet date. The reserve for self-insured health insurance claims totaled $1.9 million and $2.1 million at December 31, 2010 and 2009, respectively, and is included in accrued liabilities on the consolidated balance sheets.

Litigation — The Company is involved in litigation and regulatory investigations arising in the course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Company’s future financial position or results from operations and cash flows.

Loan Program — At December 31, 2010, the Company had $0.5 million in loan purchase commitments related to its Loan Program.

13. STOCKHOLDER’S EQUITY

Common Stock

The Company’s amended and restated certificate of incorporation authorizes the Company to issue 1,000 shares of $0.001 par value common stock, all of which are issued and outstanding as of December 31, 2010 and are held by the Group.

Voting — Each share of common stock is entitled, on all matters submitted for a vote or the consent of the holders of shares of common stock, to one vote.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Capital Contributed by Parent

As discussed in Note 1, the Company is a wholly owned subsidiary of the Group. Contributions from and distributions to the Group are reflected as capital contributed by Parent, net on the Company’s consolidated statement of changes in equity. During the years ended December 31, 2010, 2009, and 2008, the Company recorded capital contributions from the Parent of $8.1 million, $10.6 million and $5.7 million, respectively.

The Company is included in the consolidated income tax returns of the Parent. Settlements of intercompany tax receivable and payable amounts between the Company and the Group are reflected as capital contributions or distributions on the consolidated statement of changes in equity. During the year ended December 31, 2009, the Company received $5.4 million from the Parent representing settlement with the Group of the Company’s tax liability.

The Company recognizes stock-based compensation in conjunction with stock options issued by the Group. Stock-based compensation is primarily related to employees of the Company who have received options to purchase Group stock. Stock-based compensation expense associated with these grants is recorded as a capital contribution from the Parent. For the years ended December 31, 2010, 2009, and 2008, the Company recognized $2.3 million, $5.5 million and $6.0 million in non-cash capital contributions from the Parent.

During the years ended December 31, 2010, 2009 and 2008, the Company received an immaterial amount for 2010 and 2009 and $0.1 million for 2008 in cash related to stock options exercised, respectively. Additionally, during the years ended December 31, 2010, 2009 and 2008, the Company paid an immaterial amount and $0.3 million, and $0.4 million, respectively, in cash to repurchase Group common stock as a result of stock options exercised. During the year ended December 31, 2009, the Company also paid $0.1 million in cash related to an employee agreement not to exercise stock options. The cash payment related to Group stock repurchase and retirement is recorded as a capital distribution to the Parent.

14. STOCK-BASED COMPENSATION

Description of Share-Based Plans

2006 Executive Incentive Plan, 2006 Management Incentive Plan and 2007 Incentive Plan

On February 6, 2006 the Group adopted the 2006 Executive Incentive Plan (the “Executive Plan”) and the 2006 Management Incentive Plan (the “Management Plan”) and on September 7, 2007, the Group adopted the 2007 Incentive Plan (the “Incentive Plan”). The Company refers to the Executive Plan, Management Plan and Incentive Plan collectively as the “Plans.” The Plans provide for options to purchase Group stock by the Company’s key employees, directors, consultants and advisors. Options granted under the Plans may be either incentive or non-incentive stock options. As of December 31, 2010, only non-incentive options (non-qualified under Internal Revenue Code 422) have been awarded under the Plans. Options granted under the Plans represent units. One unit consists of nine shares of class A and one share of class L common stock of the Group.

Options under the Plans may be granted for periods of up to ten years at an exercise price generally not less than fair market value of the shares subject to the award, determined as of the award date. In the case that the incentive stock options are granted to a 10% shareholder, an exercise price shall not be less than 110% of the fair market value of the shares subject to the award at the grant date. All options granted under the Plans generally expire ten years from the date of grant.

Options granted under the Executive Plan and Incentive Plan vest in three tranches as follows: tranche 1 options vest and become exercisable at the rate of 20% in one year from the date of grant and 10% on each six-month period thereafter or, if earlier, 100% on a change of control as defined in the plans; tranche 2 options

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

vest and become exercisable upon achievement of both a performance and a market condition, as defined in the Executive and Incentive Plans; tranche 3 options vest and become exercisable over a five-year period upon achievement of performance conditions or alternatively upon achievement of both a performance and a market condition, as defined in the Executive and Incentive Plans. In order to vest, the recipient must continue to provide service as an employee through the vesting date. Tranche 1 options represent 50% of an option grant under the Executive Plan and Incentive Plans and tranches 2 and 3 options each represent 25% of the options granted under the Executive and Incentive Plans.

Options granted under the Management Plan vest and become exercisable over five years as follows: 20% in one year from the date of grant and 10% on each six-month period thereafter or, if earlier, 100% on a change of control, as defined in the Management Plan.

A maximum of 5,734,053 shares of Class A common stock of the Group and 637,117 shares of Class L common stock of the Group may be granted under the Plans.

Stock Option Expense Measurement and Recognition

The Company measures and recognizes expense for all stock-based payment awards, including employee stock options, granted after January 1, 2006, based on the grant-date fair value. Management estimates the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods on a straight-line basis in the consolidated statements of operations. In addition, for the options that vest upon the achievement of performance conditions, the Company recognizes compensation expense only if it is probable of achievement of such performance conditions. Such expense is recognized starting from the service inception date. For awards that are subject to both a performance and market condition, compensation expense is recognized over the longer of the implicit service period associated with the performance condition or the derived service period associated with the market condition.

As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 2010, 2009 and 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated forfeiture rate at December 31, 2010, 2009, and 2008 was 5% per year.

The Company recognizes the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost as financing cash flows.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Valuation of Stock-Based Awards

The Company estimates the fair value of stock options granted using the Black Scholes Merton option valuation model for Management Plan grants, tranche 1 Executive Plan grants, and tranche 1 Incentive Plan grants. The Company uses the binomial model in conjunction with Monte Carlo simulation to determine the fair value of tranche 2 and 3 Incentive Plan grants and tranche 2 and 3 Executive Plan grants. The estimated fair value of awards granted is based upon certain assumptions, including probability of achievement of market conditions for certain Executive Plan and Incentive Plan awards, stock price, expected term, expected volatility, dividend yield, and a risk-free interest rate. The weighted average grant date fair value of units granted during the years ended December 31, 2010, 2009 and 2008 were $23.21, $21.83, and $53.72 per unit, respectively. One unit consists of nine shares of class A and one share of class L common stock of the Group. The fair value of stock-based payment awards was estimated using the following assumptions.


	Year Ended December 31, 2010		Year Ended December 31, 2009		Year Ended December 31, 2008
Black Scholes Merton
Expected term (in years)		6.24 - 6.39		6.16 - 6.24		6.22 - 6.40
Expected volatility		41.00 - 44.70%		39.50 - 43.70%		38.70 - 39.90%
Dividend yield		0%		0%		0%
Risk-free interest rate		2.19 - 2.88%		2.03 - 2.92%		2.87 - 3.40%

Binomial (Monte Carlo simulation)
Expected volatility		50.93 - 52.68%		39.60 - 52.88%		50.80 - 51.78%
Dividend yield		0%		0%		0%
Risk-free interest rate		3.03 - 3.73%		2.74 - 3.71%		3.53 - 3.94%

•

Expected term used in the Black Scholes Merton valuation model represents the period that the Company’s stock options are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock options, vesting schedules and expectation of future employee behavior as influenced by changes to the terms of its stock option grants.

•

Expected volatility utilized for the units granted is based on the historical volatility of comparable public companies for periods corresponding to the expected term of the awards.

•

No dividends are expected to be paid over the option term.

•

The risk-free rate used for options granted is based on the implied yield on U.S. Treasury constant maturities issued with a term equal to the expected term of the options.

Stock-Based Compensation Expense

Options granted under the Plans are for the purchase of Group stock by the Company’s key employees, directors, consultants and advisors. Stock-based compensation expense related to the stock options granted by the Group is being recorded on the Company’s consolidated financial statements, as substantially all grants have been made to employees of the Company. The Company recognizes stock-based compensation costs net of an estimated forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award. For the years ended December 31, 2010, 2009 and 2008, the Company recognized stock-based compensation expense of $2.3 million, $5.5 million, and $6.0 million, respectively. Stock-based compensation expense is recorded within salaries and benefits on the consolidated statements of operations. The total income tax benefit recognized in the consolidated statements of operations for stock-based compensation expense was $0.8 million, $2.2 million, and $2.4 million, for the years ended December 31, 2010, 2009, and 2008, respectively.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2010, $5.3 million of total unrecognized compensation, net of estimated forfeitures of $0.3 million, is expected to be recognized over a weighted-average period of 3.0 years if all the service, performance and market conditions are met under the provisions of the option plans. During the years ended December 31, 2010, 2009 and 2008, 460,047 shares, 638,186 shares and 570,719 shares vested with an aggregate grant date fair value of $2.4 million, $3.4 million and $3.1 million, respectively.

Stock Option Activity under the Plans

During the year ended December 31, 2010, the Group granted 63,764 units, which represent 573,876 option shares to purchase Class A common stock of the Group and 63,764 option shares to purchase Class L common stock of the Group. Activity under the Plans for the year ended December 31, 2010 is summarized below:


	Option Shares			Weighted- Average Exercise Price Per Share		Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Term (In Years)
Balance at December 31, 2009		6,888,776		$	7.87				6.47
Granted		637,640			9.00		2.32		9.16
Exercised		(61,950	)		—		—
Forfeited/cancelled/expired		(1,461,728	)		6.13		4.92

Outstanding—December 31, 2010		6,002,738		$	7.77				5.77

Exercisable—December 31, 2010		3,465,453		$	6.57				5.32

Exercisable and expected to be exercisable		5,702,605		$	7.77				5.77

As of December 31, 2010, the aggregate intrinsic value of share options outstanding, exercisable, and outstanding and expected to be exercisable was $7.0 million, $7.0 million and $6.7 million, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the Group’s shares as of December 31, 2010. At December 31, 2010 and 2009, the Company had 2,537,289 and 3,605,488 unvested option shares with per-share, weighted average grant date fair values of $4.75 and $5.28, respectively. Additionally, 460,047 option shares with a per-share weighted average grant date fair value of $5.15 vested during the twelve months ended December 31, 2010.

The aggregate intrinsic value of share options exercised under equity compensation plans was $1.1 million, $0.5 million and $0.8 million for the years ended December 31, 2010, 2009 and 2008, respectively.

The following table presents the composition of options outstanding and exercisable as of December 31, 2010.


Options Outstanding							Options Exercisable
Range of Exercise Prices	Number of Shares		Weighted Average Remaining Contractual Term (years)		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
$ 0.02 - $ 0.32		995,637		5.11	$	0.10		995,637	$	0.10
$ 1.00 - $ 3.30		4,407,078		5.92		1.11		2,123,506		1.09
$ 7.89 - $17.62		110,373		5.11		8.04		110,373		8.04
$ 81.00 - $98.16		489,650		5.92		83.19		235,937		82.51

Total		6,002,738		5.77	$	7.77		3,465,453	$	6.57

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. EMPLOYEE BENEFITS

The Company has a qualified 401(k) plan (the “401 K Plan”). The 401 K Plan is a defined contribution plan, available to all eligible employees, that allows participants to contribute up to the legal maximum of their eligible compensation, not to exceed the maximum tax-deferred amount allowed by the Internal Revenue Service. The 401 K Plan also allows the Company to make discretionary matching contributions. During February 2009, the Company suspended its discretionary matching under the 401 K Plan and there is no assurance that the Company will reinstate its discretionary contribution portion of the 401 K plan in future periods. The Company’s defined contribution plan expense was an insignificant amount, $0.1 million and $0.7 million, for the years ended December 31, 2010, 2009, and 2008, respectively.

16. RELATED PARTY TRANSACTIONS

The Company maintains a stockholders agreement with its security holders. The stockholders agreement contains agreements among the parties with respect to the election of the Company’s directors and the directors of the Parent, restrictions on the issuance or transfer of shares, including tag-along rights and drag-along rights, other special corporate governance provisions (including the right to approve various corporate actions), registration rights (including customary indemnification provisions) and call options. Three of the Company’s five directors are employees of Bain Capital, the Company’s principal shareholder.

The Company maintains a management agreement with an affiliate of Bain Capital Partners, LLC. pursuant to which such entity or its affiliates will provide management services. Pursuant to such agreement, an affiliate of Bain Capital Partners, LLC will receive an aggregate annual management fee of $2.0 million and reimbursement in connection with the provision of services pursuant to the agreement. The management agreement has a five year, evergreen term; however, in certain circumstances, such as an initial public offering or change of control of the Group, the Company may terminate the management agreement and buy out its remaining obligations under the agreement to Bain Capital Partners, LLC and affiliates. In addition, the management agreement provides that an affiliate of Bain Capital Partners, LLC may receive fees in connection with certain subsequent financing and acquisition transactions. The management agreement includes customary indemnification provisions in favor of Bain Capital Partners, LLC and its affiliates. The Company, under this agreement, paid management fees of $2.2 million, $2.2 million and $2.2 million during the years ended December 31, 2010, 2009, and 2008, respectively, which is included in supplies, facilities and other operating costs in the Company’s consolidated statements of operations.

The Company maintains operating leases with certain employees resulting primarily from prior year acquisition activity within the healthy living division. Such related party leases are due and payable on a monthly basis on similar terms and conditions as the Company’s other leasing arrangements (see Note 12).

One of the Directors of the Company at December 31, 2010, received compensation for his services to the Company as a consultant. In 2006, he was granted options to purchase 13,435 shares of Class A common stock and 1,492 shares of Class L common stock which vest over a five year period. He also receives a salary of $10,000 per month in consideration of his services rendered to the Company.

17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of December 31, 2010, the Company had outstanding $177.3 million aggregate principal amount of Notes due in 2016. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by all of the Company’s wholly owned subsidiaries.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors as of December 31, 2010 and 2009, and the condensed consolidating statements of operations for the years ended December 31, 2010, 2009, and 2008, and the condensed consolidating statements of cash flows for the years ended December 31, 2010, 2009, and 2008.

Condensed Consolidating Balance Sheet as of December 31, 2010

(In thousands)


	CRC Health Corporation		Subsidiary Guarantors		Subsidiary Non-Guarantors		Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	6,826	$	285	$	—		$	7,111
Restricted cash		546		—		—		—			546
Accounts receivable—net of allowance for doubtful accounts		—		32,474		232		—			32,706
Prepaid expenses		4,488		3,955		180		—			8,623
Other current assets		585		1,333		3		—			1,921
Income taxes receivable		259		—		—		—			259
Deferred income taxes		6,547		—		—		—			6,547
Current assets of discontinued operations		—		1,635		—		—			1,635

Total current assets		12,425		46,223		700		—			59,348
PROPERTY AND EQUIPMENT—Net		9,515		115,023		1,088		—			125,626
GOODWILL		—		518,310		3,497		—			521,807
INTANGIBLE ASSETS—Net		—		314,032		—		—			314,032
OTHER ASSETS-Net		18,728		669		14		—			19,411
INVESTMENT IN SUBSIDIARIES		955,058		—		—		(955,058	)		—

TOTAL ASSETS	$	995,726	$	994,257	$	5,299	$	(955,058	)	$	1,040,224

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	3,850	$	1,066	$	41	$	—		$	4,957
Accrued liabilities		17,397		12,231		664		—			30,292
Current portion of long-term debt		9,641		1,470		—		—			11,111
Other current liabilities		4,127		13,128		1,050		—			18,305
Current liabilities of discontinued operations		—		3,619		—		—			3,619

Total current liabilities		35,015		31,514		1,755		—			68,284
LONG-TERM DEBT—Less current portion		598,618		297		—		—			598,915
OTHER LONG-TERM LIABILITIES		996		7,613		177		—			8,786
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS		—		3,142		—		—			3,142
DEFERRED INCOME TAXES		105,256		—		—		—			105,256

Total liabilities		739,885		42,566		1,932		—			784,383
CRC HEALTH CORPORATION STOCKHOLDER’S EQUITY		255,841		951,691		3,367		(955,058	)		255,841

Total equity		255,841		951,691		3,367		(955,058	)		255,841

TOTAL LIABILITIES AND EQUITY	$	995,726	$	994,257	$	5,299	$	(955,058	)	$	1,040,224

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Balance Sheet as of December 31, 2009

(In thousands)


	CRC Health Corporation		Subsidiary Guarantors		Subsidiary Non-Guarantors		Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	4,745	$	237	$	—		$	4,982
Restricted cash		420		—		—		—			420
Accounts receivable—net of allowance for doubtful accounts		—		31,153		405		—			31,558
Prepaid expenses		4,164		3,217		108		—			7,489
Other current assets		238		1,061		7		—			1,306
Income taxes receivable		676		—		—		—			676
Deferred income taxes		6,346		—		—		—			6,346
Current assets of discontinued operations		—		1,720		—		—			1,720

Total current assets		11,844		41,896		757		—			54,497
PROPERTY AND EQUIPMENT—Net		8,046		115,604		1,565		—			125,215
GOODWILL		—		561,796		11,798		—			573,594
INTANGIBLE ASSETS—Net		—		335,409		—		—			335,409
OTHER ASSETS-Net		18,645		959		15		—			19,619
INVESTMENT IN SUBSIDIARIES		1,026,293		—		—		(1,026,293	)		—

TOTAL ASSETS	$	1,064,828	$	1,055,664	$	14,135	$	(1,026,293	)	$	1,108,334

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,702	$	1,236	$	73	$	—		$	3,011
Accrued liabilities		16,603		12,806		442		—			29,851
Current portion of long-term debt		7,344		1,470		—		—			8,814
Other current liabilities		11,826		13,697		469		—			25,992
Current liabilities of discontinued operations		—		2,114		—		—			2,114

Total current liabilities		37,475		31,323		984		—			69,782
LONG-TERM DEBT—Less current portion		620,495		1,767		—		—			622,262
OTHER LONG-TERM LIABILITIES		982		7,723		30		—			8,735
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS		—		1,679		—		—			1,679
DEFERRED INCOME TAXES		117,334		—		—		—			117,334

Total liabilities		776,286		42,492		1,014		—			819,792
CRC HEALTH CORPORATION STOCKHOLDER’S EQUITY		288,542		1,013,172		13,121		(1,026,293	)		288,542

Total equity		288,542		1,013,172		13,121		(1,026,293	)		288,542

TOTAL LIABILITIES AND EQUITY	$	1,064,828	$	1,055,664	$	14,135	$	(1,026,293	)	$	1,108,334

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Operations

For the Year Ended December 31, 2010

(In thousands)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
NET REVENUE:
Net client service revenue	$	193		$	428,805		$	14,708		$	—		$	443,706
Management fee revenue		74,911			—			—			(74,911	)		—

Total net revenue		75,104			428,805			14,708			(74,911	)		443,706

OPERATING EXPENSES:
Salaries and benefits		18,177			189,009			5,941			—			213,127
Supplies, facilities and other operating costs		9,116			112,122			8,608			—			129,846
Provision for doubtful accounts		—			6,972			203			—			7,175
Depreciation and amortization		3,877			17,179			440			—			21,496
Asset impairment		—			20,927			237			—			21,164
Goodwill impairment		—			43,988			8,735			—			52,723
Management fee expense		—			71,749			3,162			(74,911	)		—

Total operating expenses		31,170			461,946			27,326			(74,911	)		445,531

OPERATING INCOME (LOSS)		43,934			(33,141	)		(12,618	)		—			(1,825	)
INTEREST EXPENSE—Net		(42,418	)		(362	)		—			—			(42,780	)
OTHER EXPENSE		—			(88	)		—			—			(88	)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		1,516			(33,591	)		(12,618	)		—			(44,693	)
INCOME TAX EXPENSE (BENEFIT)		174			(3,848	)		(1,445	)		—			(5,119	)

INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX		1,342			(29,743	)		(11,173	)		—			(39,574	)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($2,576)		—			(4,086	)		—			—			(4,086	)

NET INCOME (LOSS)		1,342			(33,829	)		(11,173	)		—			(43,660	)

EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX		(45,002	)		—			—			45,002			—

NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	(43,660	)	$	(33,829	)	$	(11,173	)	$	45,002		$	(43,660	)

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Operations

For the Year Ended December 31, 2009

(In thousands)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
NET REVENUE:
Net client service revenue	$	32		$	410,493		$	17,219		$	—		$	427,744
Management fee revenue		75,433			—			—			(75,433	)		—

Total net revenue		75,465			410,493			17,219			(75,433	)		427,744

OPERATING EXPENSES:
Salaries and benefits		20,125			183,523			7,589			—			211,237
Supplies, facilities and other operating costs		7,851			105,726			8,756			—			122,333
Provision for doubtful accounts		2			7,506			264			—			7,772
Depreciation and amortization		3,566			18,613			666			—			22,845
Asset impairment		—			2,257			—			—			2,257
Goodwill impairment		—			30,497			—			—			30,497
Management fee expense		—			72,414			3,019			(75,433	)		—

Total operating expenses		31,544			420,536			20,294			(75,433	)		396,941

OPERATING INCOME (LOSS)		43,921			(10,043	)		(3,075	)		—			30,803
INTEREST EXPENSE—Net		(43,685	)		(473	)		—			—			(44,158	)
OTHER EXPENSE		(82	)		—			—			—			(82	)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		154			(10,516	)		(3,075	)		—			(13,437	)
INCOME TAX (BENEFIT) EXPENSE		(47	)		3,231			944			—			4,128

INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX		201			(13,747	)		(4,019	)		—			(17,565	)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($5,073)		—			(9,096	)		—			—			(9,096	)

NET INCOME (LOSS)		201			(22,843	)		(4,019	)		—			(26,661	)

LESS: NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST		—			—			(62	)		—			(62	)
EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX		(26,800	)		—			—			26,800			—

NET (LOSS) ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	(26,599	)	$	(22,843	)	$	(3,957	)	$	26,800		$	(26,599	)

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Operations

For the Year Ended December 31, 2008

(In thousands)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
NET REVENUE:
Net client service revenue	$	36		$	432,470		$	20,635		$	—		$	453,141
Management fee revenue		68,437			—			—			(68,437	)		—

Total net revenue		68,473			432,470			20,635			(68,437	)		453,141

OPERATING EXPENSES:
Salaries and benefits		17,566			199,714			8,839			—			226,119
Supplies, facilities and other operating costs		9,151			113,570			11,044			—			133,765
Provision for doubtful accounts		8			6,217			177			—			6,402
Depreciation and amortization		2,390			18,835			743			—			21,968
Asset impairment		—			4,525			—			—			4,525
Goodwill impairment		—			142,238			—			—			142,238
Management fee expense		—			64,373			4,064			(68,437	)		—

Total operating expenses		29,115			549,472			24,867			(68,437	)		535,017

OPERATING INCOME (LOSS)		39,358			(117,002	)		(4,232	)		—			(81,876	)
INTEREST EXPENSE—Net		(53,388	)		(714	)		(2	)		—			(54,104	)
GAIN ON DEBT REPURCHASE		8,086			—			—			—			8,086
OTHER INCOME		1			—			—			—			1

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(5,943	)		(117,716	)		(4,234	)		—			(127,893	)
INCOME TAX BENEFIT		(292	)		(5,761	)		(208	)		—			(6,261	)

LOSS FROM CONTINUING OPERATIONS, NET OF TAX		(5,651	)		(111,955	)		(4,026	)		—			(121,632	)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($10,870)		—			(20,544	)		118			—			(20,426	)

NET LOSS		(5,651	)		(132,499	)		(3,908	)		—			(142,058	)

LESS: NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST		—			—			(153	)		—			(153	)
EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX		(136,254	)		—			—			136,254			—

NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	(141,905	)	$	(132,499	)	$	(3,755	)	$	136,254		$	(141,905	)

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Cash Flows

For the Year Ended December 31, 2010

(In thousands)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations		Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used in) provided by operating activities	$	(1,014	)	$	48,342		$	(839	)	$	—	$	46,489

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment		(6,265	)		(15,605	)		(118	)		—		(21,988	)
Proceeds from sale of property and equipment		—			81			—			—		81
Acquisition of businesses, net of cash required		(716	)		—			—			—		(716	)

Net cash used in investing activities		(6,981	)		(15,524	)		(118	)		—		(22,623	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany transfers		28,017			(29,022	)		1,005			—		—
Capital distributed to Parent		(10	)		—			—			—		(10	)
Capitalized financing costs		(93	)		—			—			—		(93	)
Borrowings under revolving line of credit		19,500			—			—			—		19,500
Repayments under revolving line of credit		(32,000	)		—			—			—		(32,000	)
Repayment of long-term debt		(7,419	)		(1,715	)		—			—		(9,134	)

Net cash provided by (used in) financing activities		7,995			(30,737	)		1,005			—		(21,737	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		—			2,081			48			—		2,129
CASH AND CASH EQUIVALENTS—Beginning of period		—			4,745			237			—		4,982

CASH AND CASH EQUIVALENTS—End of period	$	—		$	6,826		$	285		$	—	$	7,111

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Cash Flows

For the Year Ended December 31, 2009

(In thousands)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations		Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities	$	3,012		$	37,873		$	(3,857	)	$	—	$	37,028

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment		(2,891	)		(9,867	)		(241	)		—		(12,999	)
Proceeds from sale of property and equipment		110			38			—			—		148
Proceeds from sale of discontinued operations		—			732			—			—		732
Acquisition adjustments		(59	)		—			—			—		(59	)
Payments made under earnout arrangements		—			(200	)		—			—		(200	)

Net cash used in investing activities		(2,840	)		(9,297	)		(241	)		—		(12,378	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany transfers		22,024			(26,054	)		4,030			—		—
Capital distributed to Parent		(412	)		—			—			—		(412	)
Repayment of capital lease obligations		—			(12	)		—			—		(12	)
Borrowings under revolving line of credit		14,000			—			—			—		14,000
Repayments under revolving line of credit		(29,000	)		—			—			—		(29,000	)
Repayment of long-term debt		(6,550	)		—			—			—		(6,550	)
Noncontrolling interest buyout		(234	)		—			—			—		(234	)

Net cash (used in) provided by financing activities		(172	)		(26,066	)		4,030			—		(22,208	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			2,510			(68	)		—		2,442
CASH AND CASH EQUIVALENTS—Beginning of period		—			2,180			360			—		2,540

CASH AND CASH EQUIVALENTS—End of period	$	—		$	4,690		$	292		$	—	$	4,982

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Cash Flows

For the Year Ended December 31, 2008

(In thousands)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations		Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used in) provided by operating activities	$	(6,644	)	$	33,771		$	(2,951	)	$	—	$	24,176

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment		(5,509	)		(13,385	)		(6,385	)		—		(25,279	)
Proceeds from sale of property and equipment		—			188			—			—		188
Acquisition of businesses, net of cash acquired		(11,597	)		—			—			—		(11,597	)
Acquisition adjustments		—			(10	)		—			—		(10	)
Payments made under earnout arrangements		(2,947	)		—			—			—		(2,947	)

Net cash used in investing activities		(20,053	)		(13,207	)		(6,385	)		—		(39,645	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany transfers		13,784			(23,291	)		9,507			—		—
Capital distributed to Parent		(359	)		—			—			—		(359	)
Capitalized financing costs		(338	)		—			—			—		(338	)
Repayment of capital lease obligations		—			(22	)		—			—		(22	)
Repurchase of long-term debt		(13,607	)		—			—			—		(13,607	)
Borrowings under revolving line of credit		59,000			—			—			—		59,000
Repayments under revolving line of credit		(24,000	)		—			—			—		(24,000	)
Repayment of long-term debt		(7,783	)		—			—			—		(7,783	)

Net cash provided by (used in) financing activities		26,697			(23,313	)		9,507			—		12,891

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		—			(2,749	)		171			—		(2,578	)
CASH AND CASH EQUIVALENTS—Beginning of period		—			4,929			189			—		5,118

CASH AND CASH EQUIVALENTS—End of period	$	—		$	2,180		$	360		$	—	$	2,540

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. RESTRUCTURING

In the second half of fiscal 2008, management initiated a restructuring plan (the “FY08 Plan”) to align the Company’s resources with its strategic business plan by initiating facility consolidations, facility exit actions and certain workforce reductions. During the year ended December 31, 2010 and 2009, the Company continued its restructuring activities. Company’s restructuring activities are focused on those facilities which have been negatively impacted by the economic crisis and the depressed credit markets. Facility exit actions include the closure, sale or sale of certain facilities across all divisions.

At December 31, 2010, the Company had recorded approximately $6.2 million in remaining lease obligations, net of sublease income, related to minimum operating lease payments over the next six years for facility exit and an insignificant amount in remaining severance benefit payments over the next twelve months. Lease obligations related to minimum operating lease payments and severance benefit obligations are recorded on the Company’s consolidated balance sheets under accrued liabilities.

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of total restructuring activity, including those classified as discontinued operations, is shown in the table below:


	Workforce Reduction			Consolidation and Exit of Excess Facilities			Total
	(in thousands)
Total restructuring reserve at December 31, 2007		—			—			—
Expenses
Recovery division	$	53		$	2,208		$	2,261
Healthy living division		316			1,017			1,333
Corporate		—			—			—

Total expenses		369			3,225			3,594
Cash (payments) receipts, net
Recovery division		(41	)		—			(41	)
Healthy living division		(152	)		(121	)		(273	)
Corporate		—			—			—

Total cash (payments) receipts, net		(193	)		(121	)		(314	)
Restructuring reserve at December 31, 2008
Recovery division		12			2,208			2,220
Healthy living division		164			896			1,060
Corporate		—			—			—

Total restructuring reserve at December 31, 2008		176			3,104			3,280
Expenses
Recovery division		425			660			1,085
Healthy living division		1,154			1,302			2,456
Corporate		271			6			277

Total expenses		1,850			1,968			3,818
Cash (payments) receipts, net
Recovery division		(418	)		(761	)		(1,179	)
Healthy living division		(726	)		(1,323	)		(2,049	)
Corporate		(271	)		(6	)		(277	)

Total cash (payments) receipts, net		(1,415	)		(2,090	)		(3,505	)
Restructuring reserve at December 31, 2009
Recovery division		19			2,107			2,126
Healthy living division		592			875			1,467
Corporate		—			—			—

Total restructuring reserve at December 31, 2009	$	611		$	2,982		$	3,593
Expenses
Recovery division		26			953			979
Healthy living division		84			3,961			4,045
Corporate		—			—			—

Total expenses		110			4,914			5,024
Cash (payments) receipts, net
Recovery division		(3	)		(882	)		(885	)
Healthy living division		(684	)		(790	)		(1,474	)
Corporate		—			—			—

Total cash (payments) receipts, net		(687	)		(1,672	)		(2,359	)
Restructuring reserve at December 31, 2010
Recovery division		42			2,178			2,220
Healthy living division		(8	)		4,046			4,038
Corporate		—			—			—

Total restructuring reserve at December 31, 2010	$	34		$	6,224		$	6,258

100

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the year ended December 31, 2010 and 2009, the Company recognized non-cash impairment charges of $1.3 million and $6.1 million, respectively, related to finite-lived intangible assets and $0.2 million and $3.2 million, respectively, related to indefinite lived intangible assets. These impairment charges were based on the Company’s decision to close certain healthy living program facilities and reduce the carrying value of finite-lived and indefinite lived intangible assets associated with these facilities to their estimated fair value.

19. DISCONTINUED OPERATIONS

As part of the FY08 Plan, the Company announced its intention to sell, dispose of or cease operations at certain facilities within each of its business divisions. At December 31, 2008, these facilities included one therapeutic boarding school and one eating disorder start-up in its healthy living division, and eight outpatient treatment clinics in its recovery division. During the year ended December 31, 2009, the Company classified five additional facilities as discontinued operations which included two outdoor programs and two therapeutic boarding schools within its healthy living division and one outpatient facility within its recovery division. For all periods presented, the Company had classified a total of sixteen facilities as discontinued operations. During the year ended December 31, 2009, the Company completed the sale of four facilities classified as held for sale and recognized an immaterial loss related to the sale.

Activities related to discontinued operations are recognized in the Company’s consolidated statements of operations under discontinued operations for all periods presented.

The results of operations for those facilities classified as discontinued operations are summarized below (in thousands):


	For the Year Ended December 31,
	2010			2009			2008
Net revenue	$	1,613		$	11,801		$	22,941
Operating expenses		8,269			16,455			27,210
Asset impairment		—			9,243			26,311
Goodwill impairment		—			—			624
Interest expense		6			9			18
Loss on disposals		—			263			74
Loss before income taxes		(6,662	)		(14,169	)		(31,296	)
Tax benefit		(2,576	)		(5,073	)		(10,870	)

Loss from discontinued operations	$	(4,086	)	$	(9,096	)	$	(20,426	)

20. SEGMENT INFORMATION

The Company has two identified operating segments under its organizational structure, which are also its reportable segments: recovery division and healthy living division.

Reportable segments are based upon the Company’s internal organizational structure, the manner in which the operations are managed and on the level at which the Company’s chief operating decision-maker allocates resources. The Company’s chief operating decision-maker is its Chief Executive Officer. The financial information used by the Company’s chief operating decision-maker includes net revenue, operating expenses, income (loss) from continuing operations and capital expenditures.

101

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the Company’s reportable segments are as follows:

Recovery — The recovery segment specializes in the treatment of chemical dependency and other behavioral health disorders both on an inpatient residential basis and on an outpatient basis. Services offered in this segment include: inpatient/residential care, partial/day treatment, intensive outpatient groups, therapeutic living/half-way house environments, aftercare centers and detoxification. As of December 31, 2010, the recovery segment provided substance abuse and behavioral health services to patients at 104 facilities located in 21 states.

Healthy Living — The healthy living segment provides a wide variety of adolescent therapeutic programs through settings and solutions that match individual needs with the appropriate learning and therapeutic environment. As of December 31, 2010, the healthy living segment operated 42 educational facilities in 14 states and two foreign countries. Its offerings include boarding schools, experiential outdoor education programs and summer camps as well as weight management and eating disorder services. Weight management and eating disorder services within the healthy living segment provide adult and adolescent treatment services for eating disorders and obesity, each a related behavioral disorder that may be effectively treated through a combination of medical, psychological and social treatment programs.

Corporate — In addition to the two reportable segments as described above, the Company has activities classified as corporate which represent revenue and expenses associated with eGetgoing, an online internet treatment option, certain corporate-level operating general and administrative costs (i.e., expenses associated with the corporate offices in Cupertino, California, which provides management, financial, human resources and information system support), and stock-based compensation expense that are not allocated to the segments.

Major Customers — No single customer represented 10% or more of the Company’s total net revenue in any period presented.

Geographic Information — The Company’s business operations are primarily in the United States.

102

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Selected segment financial information for the Company’s reportable segments was as follows (in thousands):


	Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Net revenue:
Recovery division	$	327,243		$	309,989		$	308,316
Healthy living division		116,270			117,515			144,507
Corporate		193			240			318

Total consolidated net revenue	$	443,706		$	427,744		$	453,141

Operating expenses:
Recovery division	$	218,025		$	212,208		$	223,342
Healthy living division		196,336			153,098			282,491
Corporate		31,170			31,635			29,184

Total consolidated operating expenses	$	445,531		$	396,941		$	535,017

Operating income (loss):
Recovery division	$	109,218		$	97,781		$	84,974
Healthy living division		(80,066	)		(35,583	)		(137,984	)
Corporate		(30,977	)		(31,395	)		(28,866	)

Total consolidated operating (loss) income	$	(1,825	)	$	30,803		$	(81,876	)

Income (loss) from continuing operations before income taxes:
Total consolidated operating (loss) income	$	(1,825	)	$	30,803		$	(81,876	)
Interest expense		(42,780	)		(44,158	)		(54,104	)
Gain on debt repurchase		—			—			8,086
Other income (expense)		(88	)		(82	)		1

Total consolidated loss from continuing operations before income taxes	$	(44,693	)	$	(13,437	)	$	(127,893	)

Capital expenditures⁽¹⁾:
Recovery division	$	12,670		$	7,370		$	12,525
Healthy living division		3,053			2,738			7,245
Corporate		6,265			2,891			5,509

Total consolidated capital expenditures	$	21,988		$	12,999		$	25,279


	December 31, 2010		December 31, 2009
Total assets⁽¹⁾
Recovery division	$	902,337	$	897,239
Healthy living division		94,516		171,580
Corporate		43,371		39,515

Total consolidated assets	$	1,040,224	$	1,108,334

(1)	Includes amounts related to discontinued operations

103

CRC HEALTH CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21. QUARTERLY SUMMARY (Unaudited)

The following tables represent certain unaudited consolidated quarterly financial information for each of the four quarters in 2010 and 2009. This quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments necessary to state fairly the information for the periods presented.


	Quarter Ended
	March 31			June 30			September 30			December 31
	(in thousands)
2010
Net revenue	$	103,577		$	114,257		$	118,953		$	106,919
Income (loss) from continuing operations, net of tax		1,221			(44,181	)		(1,445	)		4,831
Loss from discontinued operations, net of tax		(360	)		(273	)		(3,031	)		(422	)
Net income (loss)		861			(44,454	)		(4,476	)		4,409
Net income (loss) attributable to CRC Health Corporation		861			(44,454	)		(4,476	)		4,409

Amounts attributable to CRC Health Corporation:
Income (loss) from continuing operations, net of tax	$	1,221		$	(44,181	)	$	(1,445	)	$	4,831
Discontinued operations, net of tax		(360	)		(273	)		(3,031	)		(422	)

Net income (loss) attributable to CRC Health Corporation	$	861		$	(44,454	)	$	(4,476	)	$	4,409

2009
Net revenue	$	102,361		$	108,516		$	112,659		$	104,208
(Loss) income from continuing operations, net of tax		(258	)		2,872			(17,329	)		(2,850	)
Loss from discontinued operations, net of tax		(1,055	)		(541	)		(1,392	)		(6,108	)
Net (loss) income		(1,313	)		2,331			(18,721	)		(8,958	)
Less: net (loss) income attributable to the noncontrolling interest		(128	)		9			148			(91	)
Net (loss) income attributable to CRC Health Corporation		(1,185	)		2,322			(18,869	)		(8,867	)

Amounts attributable to CRC Health Corporation:
(Loss) income from continuing operations, net of tax	$	(135	)	$	2,863		$	(17,477	)	$	(2,759	)
Discontinued operations, net of tax		(1,050	)		(541	)		(1,392	)		(6,108	)

Net (loss) income attributable to CRC Health Corporation	$	(1,185	)	$	2,322		$	(18,869	)	$	(8,867	)

22. SUBSEQUENT EVENTS

On January 20, 2011, the Company entered into the Second Amendment Agreement that extended the maturity on a substantial portion of the Term Loan and revolving line of credit and made amendments to certain conditions of the Amended and Restated Credit Agreement providing the Company with greater flexibility to amend or refinance its Term Loan and revolving line of credit in the future. Certain financial covenants were also amended. See Note 8.

In March 2011, as a consequence of the economic conditions and their adverse effect on the admissions and average length of stay on certain programs, the Company decided to discontinue operations at five facilities and consolidate services at three other facilities, in its Aspen business within its healthy living division. In connection with this plan, the Company will recognize charges related to employee termination and certain contract termination costs in the first quarter of 2011.

104

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

ITEM 9A.

Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

We conducted an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c) Management’s report on internal control over financial reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2010. Management reviewed the results of their assessment with our audit committee.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

Inherent Limitations on Effectiveness of Controls

The Company’s management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be

105

faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

ITEM 9B.

Other Information

Not applicable

106

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance

All of our directors serve until a successor is duly elected and qualified or until the earlier of his death, resignation or removal. Our executive officers are appointed and serve at the discretion of our board of directors. There are no family relationships between any of our directors or executive officers.

Executive Officers and Directors

The following table sets forth information with respect to our directors and executive officers:


Name	Age		Position
R. Andrew Eckert		49	Chief Executive Officer
James Hudak		63	Chief Administrative Officer, Vice President (Resigned effective March 9, 2011)
Kevin Hogge		53	Chief Financial Officer, Vice President and Treasurer
Philip L. Herschman		63	President, Healthy Living Division
Jerome E. Rhodes		53	President, Recovery Division
Pamela B. Burke		43	Vice President, General Counsel and Secretary
Steven Barnes		50	Director
John Connaughton		45	Director
Chris Gordon		38	Director
Dr. Barry W. Karlin		56	Director
General Barry R. McCaffrey (ret.)		68	Director
Elliot Sainer		65	Director (Resigned as director effective August 7, 2010)

The following biographies describe the business experience of our executive officers and directors:

R. Andrew Eckert, Chief Executive Officer. Mr. Eckert has served our chief executive officer and a director of the Board since January 2011. From October 2009 to December 2010, Mr. Eckert served as a managing director of Symphony Technology Group, a private equity firm. From October 2005 to May 2009, Mr. Eckert served as chief executive officer and president of Eclipsys Corporation, a healthcare information management software provider. From 2004 to 2005, he served as chief executive officer of SumTotal Systems, Inc., an enterprise software provider. From 2002 to 2004, Mr. Eckert served as Chief Executive Officer of Docent Inc., an enterprise software provider and from 1997 to 2000, he served as chairman and chief executive officer of ADAC Laboratories, a medical imaging company. Mr. Eckert currently serves on the board of directors of Varian Medical Systems, Inc. and Thrasys, Inc. Mr. Eckert received a B.A. and M.B.A. from Stanford University.

James Hudak, Chief Administrative Officer. Mr. Hudak served as our chief administrative officer from July 2008 until March 2011. From 2006 to 2008, Mr. Hudak served as Chairman of the Board of Directors of MedAvant, Inc. From 2003 to 2006, Mr. Hudak served as chief operating officer and then as chief executive officer of United Behavioral Health. From 2000 to 2003, he served as Executive VP and chief executive officer of United Health Technologies. From 1980 to 2000, Mr. Hudak worked at Accenture (formerly Andersen Consulting) where he worked as a manager and then served as Global Managing Partner to the health services division. Mr. Hudak holds a B.A. from Yale University and a Master of Public Policy from the University of Michigan. Mr. Hudak resigned from his position as the Chief Administrative Officer at the Company effective March 4, 2011.

Kevin Hogge, Chief Financial Officer, Vice President and Treasurer. Mr. Hogge served as our chief financial officer from June 2003 until April 2011. From September 1999 to June 2003, Mr. Hogge was the chief financial officer for Epoch Senior Living, Inc., an assisted living and skilled nursing company. From April 1996 to January 1999, he served as controller of the hospital division of Horizon/CMS Healthcare Corporation, a

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provider of specialty healthcare services, maintaining his position following the acquisition of this division by Regency Health Services, Inc. and the subsequent acquisition of Regency Health Services, Inc. by Sun Healthcare Group, Inc. From October 1992 to April 1996, Mr. Hogge worked as vice president of planning for Tenet Healthcare Corporation, an owner and operator of acute care hospitals and related healthcare services. Prior to working in healthcare, Mr. Hogge was a certified public accountant with Ernst & Whinney. Mr. Hogge holds a B.S. in accounting from Virginia Polytechnic Institute. Mr. Hogge resigned from his positions at the Company effective April 1, 2011.

Philip L. Herschman, President, Health Living Division. Mr. Herschman has served as the president of our healthy living division since September 2007. From May 2002 to September 2007, Mr. Herschman served as president of our outpatient treatment division. From August 1993 to May 2002, Mr. Herschman served as chief executive officer of Behavioral Health Concepts, a national mental health management company which he founded in 1993. From 1984 to 1992, Mr. Herschman worked in operations and business development for Republic Health Corporation, a healthcare company, where he was responsible for implementing the company’s strategy of joint venturing its acute care hospitals with physician groups. During this time, Mr. Herschman was also responsible for the operations of three acute care hospitals with over 500 beds for OrNda Health Corp. Prior to OrNda/Republic, Mr. Herschman was a regional vice president of operations with Horizon Health Corporation, a multi-unit psychiatric management company. Mr. Herschman holds a Ph.D. in psychology from the University of California, Irvine and a B.A. from the University of California, San Diego.

Jerome E. Rhodes, President, Recovery Division. Mr. Rhodes has served as the president of our recovery division since September 2007. From January 2004 to September 2007, Mr. Rhodes served as president of our residential treatment division. From August 2003 to January 2004, he was president of our eastern division. From September 1993 to February 2003, Mr. Rhodes served as chief executive officer of Comprehensive Addiction Programs, Inc., a behavioral healthcare treatment company. We acquired Comprehensive Addiction Programs, Inc. in February 2003. From 1991 to 1993, Mr. Rhodes was the senior vice president of operations and from 1987 to 1991 he served as the senior vice president of acquisitions and development for Comprehensive Addiction Programs, Inc. From 1982 to 1987, Mr. Rhodes was the director of development for Beverly Enterprises, Inc., a publicly held nursing home company. From 1980 to 1982, Mr. Rhodes was the chief development consultant at Wilmot Bower and Associates, an architectural and development firm specializing in healthcare facilities. From 1978 to 1980, Mr. Rhodes was a project coordinator and analyst with Manor Care, Inc., a publicly held nursing home company. Rhodes serves as a director of Kentmere Nursing Home. Mr. Rhodes holds a B.A. in business administration from Columbia Union College.

Pamela B. Burke, Vice President, General Counsel and Secretary. Ms. Burke has served as our senior vice president, human resources and law, since 2010 and has served as general counsel and secretary since February 2005. Prior to joining us in February 2005, Ms. Burke was a partner at the law firm DLA Piper Rudnick Gray Cary US LLP, which she joined in September 1996. From September 1993 to April 1996, Ms. Burke worked for Ernst & Young in its National Tax Office. Ms. Burke received her B.A. in government from Cornell University and her J.D. from George Washington University.

Steven Barnes, Director. Mr. Barnes has served as a director since February 2006 and as Chairman of the Board since February 2011. Mr. Barnes has been associated with Bain Capital since 1988 and has been a Managing Director since 2000. In addition to working for Bain Capital, he also held senior operating roles of several Bain Capital portfolio companies including chief executive officer of Dade Behring, Inc., president of Executone Business Systems, Inc. and president of Holson Burnes Group, Inc. Mr. Barnes currently serves on several boards including Ideal Standard Bulgaria AD (IB) and Clear Channel (CC Media Holdings, Inc.), Inc. He also volunteers on several charitable organizations, the Chairman of the Board of Directors of Make-A-Wish Foundation of Massachusetts and Rhode Island, a Trustee of the Board of Directors at Syracuse University and a member of the Trust Board of Children’s Hospital. Mr. Barnes received a B.S. from Syracuse University.

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John Connaughton, Director. Mr. Connaughton has served as a director since February 2006. Mr. Connaughton has been a Managing Director of Bain Capital Partners, LLC since 1997 and a member of the firm since 1989. He has played a leading role in transactions in the medical, technology and media industries. Prior to joining Bain Capital, Mr. Connaughton was a consultant at Bain & Company, Inc., where he worked in the consumer products and business services industries. Mr. Connaughton currently serves as a director of Hospital Corporation of America (HCA:NYSE), Warner Chilcott (WCRX-NASDAQ), Quintiles Transnational Corp, Air Medical Holdings, Inc., Sungard Data Systems, Warner Music Group (NYSE-WMG), Clear Channel Communications Inc. and The Boston Celtics. He also volunteers for a variety of charitable organizations, serving as a member of Children’s Hospital Board of Overseers, The Berklee College of Music Board of Trustees and UVa McIntire Foundation Board of Trustees. Mr. Connaughton received a B.S. in commerce from the University of Virginia and an M.B.A. from Harvard Business School.

Chris Gordon, Director. Mr. Gordon has served as director since February 2006. Mr. Gordon is a managing director of Bain Capital and joined the firm in 1997. Prior to joining Bain Capital, Mr. Gordon was a consultant at Bain & Company, Inc. and currently serves as a director of Hospital Corporation of America (HCA:NYSE), Accellent, Inc., Quintiles Transnational Corporation, and Air Medical Holdings, Inc. He is also a founding Director of the Healthcare Private Equity Association. Mr. Gordon also volunteers for a variety of charitable organizations, currently serving on the Children’s Hospital Board of Overseers and the Boston Public Library Foundation Board of Directors. Mr. Gordon received an M.B.A. from Harvard Business School where he was a Baker Scholar and graduated magna cum laude with an A.B. in economics from Harvard College.

Dr. Barry W. Karlin, Director. Dr. Karlin has served as a member of the board of directors since January 2002. From January 2002 to December 2010, Dr. Karlin served as our chief executive officer and from January 2002 to February 2011, Dr. Karlin served as chairman of the Board of Directors. From January 2002 to June 2003, Dr. Karlin also served as our secretary, treasurer and chief financial officer. Before our formation in January 2002, Dr. Karlin was the chairman and chief executive officer of eGetgoing, Inc. and CRC Health Corporation from May 2000 and November 2000, respectively, to January 2002. Dr. Karlin also served as chairman and chief executive officer of CRC Recovery, Inc., the general partner of The Camp Recovery Centers, L.P. from July 1995 to January 2001. From 1993 to 1995, Dr. Karlin acted as an independent consultant providing strategic consulting services to Fortune 100 companies. From 1992 to 1993, Dr. Karlin served as chairman and chief executive officer of Karlin and Collins, Inc., an emerging growth high-technology company which he founded. In 1990, Dr. Karlin joined Corporate Technology Partners, a venture capital firm specializing in the wireless communications industry, where he served as a general partner until 1992. From 1984 to 1990, Dr. Karlin served as chairman and chief executive officer of Navigation Technologies, Inc., a provider of maps for vehicle navigation. Dr. Karlin began his career as a strategy management consultant in 1981, first with Strategic Decisions Group and subsequently with Decision Processes, Inc. Dr. Karlin holds Ph.D. and M.S. degrees from Stanford University in the department of engineering economic systems, specializing in decision analysis, and a B.S. in electrical engineering from University of Witwatersrand in South Africa.

General Barry R. McCaffrey (ret), Director. General McCaffrey has served as a director since August 2002. From March 2001 to the present, General McCaffrey has served as president of BR McCaffrey Associates, LLC, an international consulting firm. General McCaffrey served as the Director of the White House Office of National Drug Control Policy from March 1996 to March 2001, and as the Bradley Distinguished Professor of National Security Studies at the U.S. Military Academy from March 2001 to June 2005. General McCaffrey has also served as an analyst for NBC News since September 2001. During his time at the White House, General McCaffrey was a member of both the President’s Cabinet and the National Security Council for drug-related issues. General McCaffrey also serves on the board of directors of: DynCorp International; LLC, McNeil Technologies; Global Linguist Solutions; and HNTB Corporation. General McCaffrey graduated from the U.S. Military Academy at West Point. He holds an M.A. in civil government from American University and attended the Harvard University National Security Program as well as the Business School Executive Education Program.

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Elliot Sainer, Director. Mr. Sainer served as a director since November 2006 until August 2011. From November 2006 through September 31, 2007, Mr. Sainer served as the president of our youth division (now part of our healthy living division). From 1998 to 2006, he served as chief executive officer of Aspen Education Group, Inc. We acquired Aspen Education Group, Inc. in November 2006. From 1991 to 1998, Mr. Sainer was Chief Executive Officer of College Health Enterprises. Mr. Sainer serves as a director of Acadia Healthcare, LLC, Knowledge Delivery Systems, Inc. and StarPoint LLC Healthcare Group. He also serves as a member of the board of Alzheimers Association of Greater Los Angeles and Union Station Homeless Services. Mr. Sainer holds an M.B.A. in health care administration from George Washington University and a B.A. in Political Science from the University of Pittsburgh. Mr. Sainer resigned from his position as a director of the Company effective August 7, 2010.

Code of Conduct

The CRC Health Corporation Code of Business Conduct and Ethics is our code of ethics applicable to all employees, including all officers and directors with regard to company related activities. The code incorporates our policy to conduct our business affairs honestly and in an ethical manner. It also incorporates our expectations of all employees to provide accurate and timely disclosures in our filings with the SEC. A copy of our code is available on our website at www.crchealth.com under “Company,” “Code of Conduct.” We will post any amendments to our code, or waivers of the code for our executive officers, on our website at www.crchealth.com under “Company.”

We also maintain a Compliance Manual and Code of Conduct that focuses on our responsibilities to our patients and the high standards of ethics that we require from all employees. This Code of Conduct is compliant with the requirements of our accrediting bodies.

Section 16(a) Compliance

There is no established public trading market for our common stock. We are a wholly owned subsidiary of CRC Health Group, Inc., which holds all of our outstanding common stock. CRC Health Group, Inc. is a privately held corporation.

Audit Committee

The audit committee selects the independent auditors, reviews the independence of such auditors, approves the scope of the annual audit activities of the independent auditors, approves the audit fee payable to the independent auditors and reviews results of the annual audit with the independent auditors. The audit committee is currently composed of Steven Barnes and Chris Gordon. Chris Gordon serves as our “audit committee financial expert” as defined in Item 407(d) (5) of Regulation S-K.

ITEM 11.

Executive Compensation

Compensation Discussion and Analysis

This section discusses the principles underlying our executive compensation policies and decisions. In this section, we address the members and role of our compensation committee, our compensation setting process, our compensation philosophy and policies regarding executive compensation, the components of our executive compensation program and our compensation decisions for 2010. We address the compensation paid or awarded during 2010 to our chief executive officer, our chief financial officer and the three other most highly compensated executive officers in fiscal year 2010. We refer to these five executive officers as our named executive officers.

On February 6, 2006, we were acquired by investments funds managed by Bain Capital (the “Bain Merger”). We refer to Bain Capital Partners as our “Sponsor.” As discussed in more detail below, various aspects of the compensation of our named executive officers was negotiated and determined at the time of the Bain Merger. There is no established public trading market for our common stock. We are a wholly-owned subsidiary

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of CRC Health Group, Inc. which holds all of our outstanding common stock. CRC Health Group, Inc. is a privately held corporation. Our parent company’s outstanding capital stock consists of Class A common stock and Class L common stock. All references to options herein refer to options to purchase Class A common stock and Class L common stock of our parent company.

As previously announced, effective January 3, 2011, Dr. Barry Karlin resigned as our Chief Executive Officer and Mr. Andrew Eckert became our Chief Executive Officer. In addition, Mr. James Hudak resigned as our Chief Administrative Officer effective March 4, 2011 and Mr. Kevin Hogge resigned as our Chief Financial Officer effective as of April 1, 2011.

The Compensation Committee and Compensation Setting Practice

The compensation committee operates under a written charter adopted by our Board of Directors and has responsibility for discharging the responsibilities of the Board of Directors relating to the compensation of our executive officers and related duties. Compensation decisions are designed to promote our fundamental business objectives and strategy and align the interests of management with the interests of our stakeholders. Our chief executive officer works with senior management to evaluate employee performance, establish business performance targets and objectives and recommend salary levels and then presents cash and equity compensation recommendations to the Compensation Committee for its consideration and approval. We have not engaged a compensation consultant or benchmarked our compensation against other companies to date but may consider doing so in the future. The Compensation Committee reviews these proposals and makes all final compensation decisions for the executive officers by exercising its discretion in accepting, modifying or rejecting any management recommendations.

The Board of Directors created a compensation committee in January 2007. The current members of the compensation committee are John Connaughton, Steven Barnes and Chris Gordon.

Our Compensation Philosophy

Compensation decisions are designed to promote our fundamental business objectives and strategy and align the interests of management with the interests of our stakeholders. We believe that compensation should focus management on achieving strong short-term (annual) performance in a manner that supports and ensures our long-term success and profitability. We also believe that pay should be directly linked to performance and that pay should be at competitive levels necessary to attract and retain exceptional leadership talent. This philosophy has guided many compensation related decisions:

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A substantial portion of executive officer compensation is contingent on achievement of objective corporate, division and individual performance objectives.

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Our annual incentive bonus program and equity incentive bonus program emphasize performance-based compensation that promotes the achievement of short-term and long-term business objectives which are aligned with our long term strategic plan.

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Total compensation is higher for individuals with greater responsibility and greater ability to influence our achievement of targeted results and strategy; further, as position and responsibility increases, a greater portion of the executive officer’s total compensation is performance based pay and equity based pay, making a significant portion of their total compensation dependent on the achievement of performance objectives.

Components of Executive Compensation Plan

In 2010, the principal elements of annual compensation for our named executive officers consisted of base salary and performance based incentive bonuses, long term equity incentive compensation and benefits.

Base Salary. Base pay is a critical element of executive compensation because it provides executives with a base level of monthly income. In determining base salaries, we consider the executive’s qualification and experience, scope of responsibilities and future potential, the goals and objectives established for the executive,

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the executive’s past performance and competitive salary practices. Further, for our most senior executives, we establish base salaries at a level so that a significant portion of the total compensation that such executives can earn is performance based pay. Dr. Barry Karlin’s base salary was determined in his employment agreement which was negotiated at the time of the Bain Merger and was reviewed annually by the Compensation Committee. For Andrew Eckert, our new chief executive officer, his base salary was determined in his employment agreement which was negotiated at the time of his hiring. For all of our other named executive officers, base salary increases are at the discretion of the Compensation Committee. Base salary is reviewed annually at the beginning of the year and any increases are based on our overall performance and the executive’s individual performance during the preceding year. At its March 2011 meeting, the Compensation Committee reviewed recommendations for salary adjustments for all executive officers. Base salaries for our named executive officers will increase between 2% to 15%.

2010 Incentive Bonus Plan. Our 2010 Incentive Bonus Plan is designed to reward our employees for the achievement of 2010 EBITDA goals related to the business. EBITDA represents actual earnings before interest, taxes, depreciation and amortization and certain other adjustments as set forth in the Plan. The bonus payment for our Chief Executive Officer was governed by his employment agreement and was wholly dependent on the achievement of certain EBITDA targets. Pursuant to his employment agreement, our target annual incentive bonus for our Chief Executive Officer is 100% of his base salary in the event that our actual EBITDA is 100% of our budgeted EBITDA; he may earn an annual incentive bonus of up to a maximum 150% of his base salary in the event that our actual EBITDA is 110% of our budgeted EBITDA but also may earn nothing in the event that financial milestones are not achieved. The bonus plan for Kevin Hogge, Philip Herschman, Jerome Rhodes and James Hudak is based on our overall achievement of our EBITDA targets (target bonus assumes our actual EBITDA is 100% of budgeted EBITDA and the maximum bonus assumes that our actual EBITDA is 110% or greater than budgeted EBITDA), EBITDA margin and individual contributions. These officers have a target annual incentive bonus of 50% of base salary; they may earn a maximum annual incentive bonus of up to 75% of base salary but may also earn nothing in the event our financial milestones are not achieved. The bonus is paid after completion of our annual audit and the officer must be an employee at such time to receive a bonus payment.

If our actual EBITDA is less than 95% of our budgeted EBITDA, then the bonus pool is zero provided that the Compensation Committee may authorize bonuses in their sole discretion. In the event that our actual EBITDA for the year is less than 100% of our budgeted EBITDA but greater than 95% then the bonus pool may be prorated. If our actual EBITDA is greater than 100%, the Compensation Committee, in its discretion, may increase the bonus pool amount by up to 50% of the base bonus pool and employees would be eligible to earn an additional bonus. Ultimately, all bonus payment amounts are in the discretion of the Compensation Committee. Consistent with our focus on pay for performance, additional amounts can be earned when actual EBITDA exceeds our budgeted EBITDA. Actual EBITDA was less than 100% of budgeted EBITDA. The bonus amounts were in the discretion of the Compensation Committee. The Compensation Committee determined that discretionary bonuses would be provided to reward and provide future motivation for employees who had achieved or partially achieved their goals and for individual performance. The Compensation Committee approved an aggregate year end bonus pool of $2,400,000 (excluding special retention bonuses, sales commissions etc.) to be allocated and distributed by the CEO based on performance.

Equity Based Compensation. We believe that equity compensation is a critical tool in aligning the interests of our stockholders and executive officers in building share value and in retaining key executives. We have designed an equity plan that promotes the achievement of both short-term and long-term business objectives which are aligned with our strategic plan. We have elected to use stock options as the equity compensation vehicle.

Upon consummation of the Bain Merger, our parent company established the 2006 Executive Incentive Plan and the 2006 Management Incentive Plan. Options issued pursuant to the 2006 Executive Incentive Plan vest based, in part, on the passage of time and in part on the achievement of performance objectives. At the time of the Bain Merger, state securities laws restricted our use of performance based option plans. As a result, our

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parent company adopted the 2006 Management Incentive Plan pursuant to which options vest over a five year period. In 2007, the state securities laws were amended to allow for broader use of performance based plans. Our parent company established the 2007 Incentive Plan in September 2007. This plan is identical to our 2006 Executive Incentive Plan. These plans provide for the granting of either incentive stock options or nonincentive stock options to our key employees, directors, consultants and advisors. In determining the number of options to be granted to employees, we take into account the individual’s position, scope of responsibility, ability to affect profits and shareholder value and the individual’s historic and recent performance and the value of the stock options in relation to other elements of total compensation. All of our executive officers and generally any employee with profit and loss responsibility received options under the 2006 Executive Incentive Plan. All current options are granted under the 2007 Incentive Plan. Each option is an option to purchase a unit which consists of nine shares of Class A Stock and one share of Class L Stock. The options are exercisable only for whole units and cannot be separately exercised for the individual classes of stock. The grant date of the stock options is always the date of approval of the grants.

All stock options under our plans have the following features: the term of grant does not exceed 10 years, the grant price is not less than the fair market value on the date of grant, repricing of options is prohibited, unless approved by the shareholders, vesting is generally over a five year period and options generally will remain exercisable for three months following the participant’s termination of service other than for cause, except that if service terminates as a result of the participant’s death or disability, the option generally will remain exercisable for twelve months, but in any event not beyond the expiration of its term. In general, options granted under the Executive Plan and 2007 Incentive Plan vest and become exercisable at the rate of 10% on the one year anniversary of the date of grant and 5% on each six-month anniversary thereafter until 50% of the options granted are vested. An additional 25% shall vest upon our stock price reaching a certain level during a sale event or at certain times after an initial public offering. An additional 25% shall vest over a five year time horizon upon our EBITDA reaching certain levels or in the event that our stock price reaches a certain level during a sale event or at certain times after an initial public offering. In general, options granted under the Management Plan vest and become exercisable at the rate of 20% on the one year anniversary of the date of grant and 10% on each six-month anniversary thereafter until 100% of the options granted are vested. In 2010 in conjunction with the hiring of our new chief executive officer, the Company approved a new form of senior executive option agreement for options granted to senior executives pursuant to the 2007 Incentive Plan. Pursuant to the terms of the senior executive option agreement, one half of the options will be scheduled to vest over 5 years based on service and the remaining balance will vest upon the realization by the Company’s investors of cash proceeds between $135 and $270 per Unit. The options will be granted at an exercise price equal to the fair market value on the date of the grant.

Our parent company does not have a formal policy requiring stock ownership by management. However, our senior executives, including all named executive officers that were present at the time of the Bain Merger, have committed significant personal capital to CRC. In connection with the closing of the Bain Merger and the acquisition of Aspen Education Group, and pursuant to a rollover and subscription agreement, certain members of our management, including all of the named executive officers that were present at the time of the Bain Merger, converted options to purchase stock of our predecessor company into options to purchase stock of Holdings.

Other Compensation Information. We provide employees, including our named executive officers, with a variety of other benefits, including medical, dental and vision plans, life insurance and holidays and vacation. These benefits are generally provided to employees on a company-wide basis. We do not offer any retirement plans to our directors or executive officers, other than the 401(k) plan generally available to employees. Prior to 2009, for our 401(k) plan, we matched, in cash, a portion of an employee’s contribution. In February 2009, we amended the terms of our 401(k) plan to eliminate any company match to amounts contributed by employees to their 401(k) plans.

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Accounting and Tax Implications

The accounting and tax treatment of particular forms of compensation do not materially affect the Compensation Committee’s compensation decisions. However, we evaluate the effect of such accounting and tax treatment on an ongoing basis and will make appropriate modifications to compensation policies where appropriate.

Compensation Committee Report

The following report of the Compensation Committee is included in accordance with the rules and regulations of the Securities and Exchange Commission. It is not incorporated by reference into any of our registration statements under the Securities Act of 1933, as amended.

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Compensation Committee Report

The Committee has reviewed and discussed the Compensation Discussion and Analysis (CD&A) with management. Based upon the review and discussions, the Committee recommended to the Board of Directors, and the Board approved, that the CD&A be included in the Form 10-K for the year ended December 31, 2010.

Respectfully submitted on March 30, 2011 by the members of the Compensation Committee of the Board of Directors.

John Connaughton

Steven Barnes

Chris Gordon

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Summary Compensation Table

The following table summarizes the compensation paid to our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers, whom we refer to as our “named executive officers,” for the years ended December 31, 2010, 2009 and 2008. As of the date of this filing, Mr. Hudak and Mr. Hogge had resigned from their respective positions at the Company.


Name and Principal Position	Year		Salary ($)⁽¹⁾		Bonus ($)		Stock Awards		Option Awards ($)⁽²⁾		Non-equity Incentive Plan Compensation			Change in Pension Value and Nonqualified Deferred Compensation Earnings		All other Compensation ($)			Total ($)
Dr. Barry W. Karlin		2010		368,978		—		—		—		70,000	⁽³⁾		—		1,932,204	⁽⁶⁾		2,371,182
Chairman and former Chief Executive Officer		2009		642,735		—		—		—		200,000	⁽⁴⁾		—		33,335	⁽⁷⁾		876,070
Chairman and former Chief Executive Officer		2008		616,515		—		—		—		—			—		39,077	⁽⁸⁾		655,592

James Hudak		2010		301,930		—		—		—		150,000	⁽³⁾		—		25,955	⁽⁹⁾		477,885
Chief Administrative Officer		2009		307,395		—		—		—		93,000	⁽⁴⁾		—		10,865	⁽¹⁰⁾		411,260
Chief Administrative Officer		2008		124,097		—		—		1,071,400		—			—		3,796	⁽¹¹⁾		1,199,293

Philip L. Herschman		2010		301,930		—		—		—		40,000	⁽³⁾		—		72	⁽¹²⁾		342,002
President, Healthy Living Division		2009		307,395		—		—		—		80,000	⁽⁴⁾		—		2,867	⁽¹³⁾		390,262
President, Healthy Living Division		2008		294,855		—		—		—		—			—		2,852	⁽¹⁴⁾		297,707

Jerome E. Rhodes		2010		301,930				—		—		125,000	⁽³⁾		—		10,472	⁽¹⁵⁾		437,402
President, Recovery Division		2009		307,395		—		—		—		110,000	⁽⁴⁾		—		11,771	⁽¹⁶⁾		429,166
President, Recovery Division		2008		294,855		—		—		—		27,000	⁽⁵⁾		—		13,308	⁽¹⁷⁾		335,163

Kevin Hogge		2010		301,930		—		—		—		56,000	⁽³⁾		—		6,349	⁽¹⁸⁾		364,279
Chief Financial Officer, Vice President and Treasurer		2009		307,395		—		—		—		75,000	⁽⁴⁾		—		6,127	⁽¹⁹⁾		388,522
Chief Financial Officer, Vice President and Treasurer		2008		294,855		—		—		—		—			—		9,004	⁽²⁰⁾		303,859

Dr. Karlin and Mr. Hudak resigned as executive officers as of December 31, 2010 and March 4, 2011, respectively. Mr. Hogge has announced his resignation effective April 1, 2011.

(1)	Actual salaries for our named executive officers were as follows: Barry Karlin—$368,978 and for each of James Hudak, Kevin Hogge, Jerome E. Rhodes, Philip Herschman—$301,930. The numbers listed above for calendar year 2009 reflect a payroll cycle attributable to 2008 but paid in 2009.

(2)

The amounts included in this column reflect the compensation costs associated with stock option awards recognized as expense in our financial statements in accordance with SFAS 123(R). Under SFAS 123(R), the full grant date fair value of the option awards is recognized over a five year period. For a discussion of the assumptions made in the valuation, please see Note 14 to our Consolidated Financial Statements.

(3)	2010 annual incentive bonus to be paid in April 2011. Bonuses paid pursuant to the 2010 Incentive Bonus Plan are accrued in the year earned and paid in the following year.

(4)	2009 annual incentive bonus paid in February 2010. Bonuses paid pursuant to the 2009 Incentive Bonus Plan are accrued in the year earned and paid in the following year.

(5)	2008 annual incentive bonus paid in March 2009. Bonuses paid pursuant to the 2008 Incentive Bonus Plan are accrued in the year earned and paid in the following year.

(6)	Represents $72 for in life insurance contributions, $11,019 in medical, dental, vision and life insurance contributions, $31,113 in vacation payout and $1,890,000 in lump-sum payment pursuant to the Letter Agreement dated August 2010.

(7)	Represents $12,650 for premium costs on a life insurance policy for which the beneficiaries are his family, $20,060 in medical, dental, vision and life insurance contributions, and $625 in company contributions pursuant to our 401(k) Plan for 2009.

(8)	Represents $72 for in life insurance contributions, $12,000 for premium costs on a life insurance policy for which the beneficiaries are his family, $23,630 in medical, dental and vision contributions, and $3,375 in company contributions pursuant to our 401(k) Plan for 2008.

(9)	Represents $72 in life insurance contributions, $10,603 in medical, dental and vision contributions, and $15,280 in housing allowance for 2010.

(10)	Represents $10,865 in medical, dental, vision and life insurance contributions for 2009.

(11)	Represents $3,796 in medical, dental and vision contributions for 2008.

(12)	Represents $72 in life insurance contributions in 2010.

(13)	Represents $88 in life insurance contributions and $2,779 in company contributions pursuant to our 401(k) Plan.

(14)	Represents company contributions pursuant to our 401(k) Plan.

(15)	Represents $10,400 in car allowance during 2010, $72 in life insurance contributions for 2010.

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(16)	Represents $10,800 in car allowance during 2009, $88 in life insurance contributions and $883 in company contributions pursuant to our 401(k) Plan for 2009.

(17)	Represents $72 for in life insurance contributions, $10,400 in car allowance during 2008, $2,836 in company contributions pursuant to our 401(k) Plan for 2008.

(18)	Represents $72 in life insurance contributions, $6,277 in medical, dental, vision and life insurance contributions for 2010.

(19)	Represents $5,273 in medical, dental, vision and life insurance contributions and $854 in company contributions pursuant to our 401(k) Plan for 2009.

(20)	Represents $72 for in life insurance contributions, $5,346 in medical, dental and vision contributions and $3,586 in company contributions pursuant to our 401(k) Plan for 2008.

Grants of Plan-Based Awards in 2010

The following table contains information concerning grants of plan-based awards to our named executive officers during 2010:


Name	Grant Date⁽²⁾		Estimated Possible Payouts Under Non-Equity Incentive Plan Awards⁽¹⁾						Estimated Future Payouts Under Equity Incentive Plan Awards⁽²⁾						All Other Stock Awards: Number of Shares of Stock or Units (#)		All Other Option Awards: Number of Securities Underlying Options (#)		Exercise or Base Price of Option Awards ($/Sh)		Grant Date Fair Value of Stock and Option Awards ($)
Name	Grant Date⁽²⁾		Threshold ($)		Target ($)		Maximum ($)		Threshold (#)		Target (#)		Maximum (#)
Dr. Barry Karlin		1/1/10		0		618,930		928,395		—		—		—		—		—		—		—
Philip Herschman		1/1/10		0		150,965		226,447		—		—		—		—		—		—		—
Jerome Rhodes		1/1/10		0		150,965		226,447		—		—		—		—		—		—		—
Kevin Hogge		1/1/10		0		150,965		226,447		—		—		—		—		—		—		—
James Hudak		1/1/10		0		150,965		226,447		—		—		—		—		—		—		—

NOTES TO TABLE:

(1)

Amounts reflect cash awards pursuant to our 2010 Incentive Bonus Plan to which our named executive officers are eligible. Pursuant to our 2010 Incentive Bonus Plan, the amounts are based on the achievement of the EBITDA targets for the period January 1, 2010 through December 31, 2010. The Target amount equals 100% of achievement of the target and the Maximum amount assumes that our actual EBITDA exceeded 110% of budgeted EBITDA. The threshold amount equals 95% of achievement of the target; provided however, that they Compensation Committee, in their discretion, may award bonuses if there is 95% or less achievement of the targets. For the year ended December 31, 2010 Actual EBITDA was less than 100% of budgeted EBITDA. Bonus amounts were in the discretion of the Compensation Committee. See the Summary Compensation Table for bonuses received by our named executive officers.

(2)	The grant date provided is the date that the plan year began for the 2010 Incentive Bonus Plan.

The material terms of our stock option awards, 2010 Incentive Bonus Plan and our employment agreement with Dr. Barry Karlin are described in Compensation Discussion and Analysis.

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Outstanding Equity Awards at Fiscal Year-End 2010

The following table sets forth certain information with respect to the value of all unexercised options and unvested stock awards previously awarded to our named executive officers as of December 31, 2010. As noted earlier, as of the date of this filing, Mr. Hudak and Mr. Hogge had resigned from their positions at the Company.


	Option Awards⁽¹⁾												Stock Awards
Name	Number of Securities Underlying Unexercised Options Exercisable (#)			Number of Securities Underlying Unexercised Options Unexercisable (#)			Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)		Equity Incentive Plan Awards: Market or Payout Value of unearned Shares, Units or Other Rights That Have Not Vested ($)
Dr. Barry Karlin		55,207	⁽²⁾⁽³⁾		18,400	⁽²⁾		—		90.00		2/6/16		—		—		—		—
		61,554	⁽⁴⁾		—			—		8.77		12/14/14		—		—		—		—
Philip Herschman		20,625	⁽²⁾⁽³⁾		21,890	⁽²⁾		—		90.00		2/6/16		—		—		—		—
		11,079	⁽⁴⁾		—			—		8.77		12/14/14		—		—		—		—
Jerome Rhodes		20,625	⁽²⁾⁽³⁾		21,890	⁽²⁾		—		90.00		2/6/16		—		—		—		—
		11,079	⁽⁴⁾		—			—		8.77		12/14/14		—		—		—		—
Kevin Hogge		20,625	⁽²⁾⁽³⁾		21,890	⁽²⁾		—		90.00		2/6/16		—		—		—		—
		11,079	⁽⁴⁾		—			—		8.77		12/14/14		—		—		—		—
James Hudak		4,000	⁽⁵⁾		16,000			—		112.287		09/11/17		—		—		—		—

NOTES TO TABLE:

(1)	All information in this table relates to nonqualified stock options. We have not granted any incentive stock options or stock appreciation rights. Each option is an option to purchase one Unit consisting of 9 shares of Class A Common Stock and one share of Class L Common Stock.

(2)

Option issued pursuant to the 2006 Executive Incentive Plan. The exercisable options include all options that have vested. All unexercisable options have not yet vested. Pursuant to such plan, options vest as follows: (i) 50% of the option (the Tranche 1 Options) is time based and vests over five years with 20% vesting on February 6, 2007, one year from the date of grant, and 10% of the remaining balance vesting every 6 months thereafter, (ii) 25% of the option is performance based and vests based on the attainment of a certain value of the Company (the Tranche 2 Options), as discussed in the Compensation Discussion and Analysis and (iii) the remaining 25% (the Tranche 3 Options) of the option is performance based and vests on the attainment of certain annual goals for the Company during the 5 year period beginning January 1, 2006, as discussed in the Compensation Discussion and Analysis.

(3)	Vested options represents 50% of the Tranche 1 Options vesting based on time and 14.04% of the Tranche 3 Options vesting based on achievement of EBITDA milestones.

(4)

Rollover options are fully vested. To the extent that outstanding options were not cancelled in the Bain Merger, such options converted into fully vested options to purchase equity units in our parent company. Each rollover option is an option to purchase one Unit consisting of 9 shares of Class A Common Stock and 1 share of Class L Common Stock.

(5)	Vested options represents 50% of the Tranche 1 Options vesting based on time.

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Option Exercises and Stock Vested in 2010

The following table sets forth information about stock options exercised by the named executives in fiscal year 2010 and stock awards that vested or were paid in fiscal year 2010 to the named executives.

Name

Option Awards
Number of Shares
Acquired on Exercise
(#)

Value Realized
on Exercise
($)

Stock Awards
Number of Shares
Acquired on Vesting
(#)

Value Realized
on Vesting
($)

Dr. Barry Karlin

—

Philip Herschman

—

Jerome Rhodes

—

Kevin Hogge

—

James Hudak

—

Pension Benefits

None of the Named Executive Officers receive nonqualified deferred compensation benefits.

Potential Payments Upon Termination or a Change in Control

Employment Agreement

Pursuant to our employment agreement with Mr. Eckert, we will provide him with an annual base salary of at least $650,000, annual incentive bonus opportunities with a maximum of 150% of base salary and a target of 100% (subject to certain guarantees in 2011), and participation in other benefit programs. Upon termination by the employer other than for cause or resignation for good reason, as defined in the employment agreement, Mr. Eckert would be entitled to receive separation pay equal to 1¹/2 the sum of his base salary plus average annual bonus, along with payments over 18 months equal to the employer portion of health and dental coverage premiums on a grossed-up basis. These benefits would be increased by 6 months’ worth of payments for a qualifying termination occurring within 12 months following a change in control. Termination benefits would be subject to Mr. Eckert’s timely execution of a release that was not thereafter revoked. Mr. Eckert would also be subject to non-competition and non-solicitation restrictions for a period of 18 months following the termination of his employment.

Pursuant to our employment agreement with Dr. Karlin, in the event of Dr. Karlin’s termination without cause or his resignation for good reason (both defined in his employment agreement), we were obligated to pay Dr. Karlin a lump sum equal to his base salary for a period of 36 months and provided further that if Dr. Karlin signed a general release of all claims, we would also pay to Dr. Karlin for a period of 18 months all premiums due for COBRA premiums for Dr. Karlin and his insured dependents, and all premiums relating to his life insurance policy, an aggregate amount of approximately $1.9 million calculated as of December 31, 2009. In the event of a termination due to death, disability or cause or if Dr. Karlin resigned without good reason, we would pay Dr. Karlin any base salary earned but not paid through the date of termination, any vacation time accrued but not used through the date of termination, any bonus compensation earned but unpaid on the date of termination and any business expenses incurred but un-reimbursed on the date of termination. This agreement was terminated pursuant to a Letter Agreement between Dr. Karlin and the Company dated July 30, 2010. Pursuant to the terms of the Letter Agreement, Dr. Karlin agreed to remain as Chief Executive Officer until the earliest of (i) December 31, 2010; (ii) the date the Company engages a new CEO; and (iii) the date the Board removes Mr. Karlin from the position of CEO. Dr. Karlin will remain as non-executive Chairman of the Board of Directors. In addition, pursuant to the Letter Agreement, the Company and Mr. Karlin agreed that he would be paid his salary and be eligible for a pro rata portion of his bonus through August 2, 2010 and was entitled to receive a lump sum payment of One Million Eight Hundred Ninety Thousand Dollars ($1,890,000) payable 60 days following August 2, 2010. The letter agreement also provided for a revised future vesting schedule for a portion of Dr. Karlin’s stock options.

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We have no employment agreements with Kevin Hogge, James Hudak, Philip Herschman or Jerome Rhodes. As noted earlier, as of the date of this filing, Mr. Hudak and Mr. Hogge had resigned from their respective positions at the Company.

2010 Incentive Bonus Plan

An employee was only eligible to receive a bonus pursuant to the 2010 Annual Incentive Bonus plan if such employee was an employee of CRC or a subsidiary of CRC at the time of bonus payout in April 2011.

Stock Options

In general, option grants under the Executive Plan and 2007 Incentive Plan stipulate that in the event of a change in control of our parent company in which Bain Capital achieves liquidity, up to 100% of the options will vest; provided however, that options that did not vest in years prior to the change of control because of the failure to attain the EBITDA targets do not vest upon the change of control unless the stock price reaches $360 per unit in a change of control transaction. In general, option grants under the Management Plan stipulate that in the event of a change in control of our parent company in which Bain Capital achieves liquidity, up to 100% of the options will vest. In the event of a change of control in which Bain Capital does not achieve liquidation, options issued to our executive officers will fully vest in the event that there is a termination or constructive termination of employment of the executive within 12 months after the change in control.

The successor entity may assume or continue in effect options outstanding under the Executive Plan or Management Plan or substitute substantially equivalent options for the successor’s stock. Any options which are not assumed or continued in connection with a change in control or exercised prior to the change in control will terminate effective as of the time of the change in control. The Executive Plan and Management Plan also authorize the administrator to treat as satisfied any vesting condition in the event of a change of control.

Restrictions Upon Termination or a Change of Control

During the course of employment and for a period of 18 months following the end of employment, Mr. Eckert may not participate in any other chemical or alcohol dependency business or any behavioral health business in a field in which we have plans to become engaged. For the same period, Mr. Eckert may also not solicit any of our employees, customers, referral sources or suppliers.

During the course of employment and for a period of 18 months following the end of employment, Dr. Karlin may not participate in any other chemical or alcohol dependency business or any behavioral health business in a field in which we have plans to become engaged. For the same period, Dr. Karlin may also not solicit any of our employees, customers, referral sources or suppliers.

Director Compensation

None of our directors except General Barry McCaffrey and Elliot Sainer received compensation for serving as a director. The members of our board of directors are not separately compensated for their services as directors, other than reimbursement for out-of-pocket expenses incurred in connection with rendering such services. As noted earlier, Mr. Sainer resigned from his position as a director of the Company effective August 7, 2011.

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The following table contains compensation received by General Barry McCaffrey and Elliot Sainer during the year ended December 31, 2010 for serving as a director of, and providing consulting services to, CRC and Holdings.


Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)		Total ($)
General Barry McCaffrey ⁽¹⁾		120,000		—		—		—		—		—		120,000
Elliot Sainer ⁽²⁾		28,000		—		—		—		—		—		28,000

NOTES TO TABLE:

(1)	General McCaffrey receives a salary of $10,000 per month for consulting services rendered to us. He does not receive cash payments for attendance at board meetings.

(2)	Elliot Sainer received a consulting fee of $4,000 per month for consulting services rendered to us. He did not receive cash payments for attendance at board meetings. As noted earlier, Mr. Sainer resigned from his position as a director of the Company effective August 7, 2010.

Compensation Committee Interlocks and Insider Participation

Our Compensation Committee is currently comprised of Messrs. Connaughton, Barnes and Gordon. Messrs. Connaughton and Barnes have not been at any time an officer or employee of CRC or an affiliate of CRC. During 2010, we had no compensation committee “interlocks” — meaning that it was not the case that an executive officer of ours served as a director or member of the compensation committee of another entity and an executive officer of the other entity served as a director or member of our Compensation Committee.

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Beneficial Ownership

All of our outstanding common stock is held by our parent company. Our parent company’s outstanding capital stock consists of Class A common shares and Class L common shares.

The table below sets forth, as of March 1, 2010, the number and percentage of shares of our parent company’s common stock beneficially owned by (i) each person known by us to beneficially own more than 5% of the outstanding shares of common stock of our parent company, (ii) each of our directors, (iii) each of our named executive officers and (iv) all our directors and executive officers as a group.

Notwithstanding the beneficial ownership of common stock presented below, our stockholders agreement governs the stockholders exercise of their voting rights with respect to election of directors and certain other material events. The parties to our stockholders agreement have agreed to vote their shares to elect the board of directors as set forth therein. In addition, our stockholders agreement governs certain stockholders’ exercise of voting rights with respect to effecting a change of control transaction. See “Certain Relationships and Related Party Transactions.”

The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

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Except as described in the agreements mentioned above or as otherwise indicated in a footnote, each of the beneficial owners listed has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock. Unless otherwise indicated in a footnote, the address for each individual listed below is c/o CRC Health Corporation, 20400 Stevens Creek Boulevard, Suite 600, Cupertino, California 95014.


Name and Address	Shares of Class A Common Stock		Percent of Class A Common Stock			Shares of Class L Common Stock		Percent of Class L Common Stock
Bain Capital Partners VIII, L.P. and Related Funds ⁽¹⁾		32,547,498		93.9	%		3,616,388		93.9	%
R. Andrew Eckert		—		—			—		—
Dr. Barry W. Karlin ⁽²⁾		1,050,757		3.0	%		116,761		3.0	%
James Hudak⁽³⁾		45,000		*			5,000		*
Philip L. Herschman ⁽⁴⁾		304,471		*			33,849		*
Jerome E. Rhodes ⁽⁵⁾		304,471		*			33,849		*
Kevin Hogge ⁽⁶⁾		304,471		*			33,849		*
Barry R. McCaffrey ⁽⁷⁾		7,189		*			799		*
Steven Barnes ⁽⁸⁾		—		—			—		—
John Connaughton ⁽⁸⁾		—		—			—		—
Chris Gordon ⁽⁸⁾		—		—			—		—
All directors and executive officers as a group		2,080,720		6.0	%		231,257		6.0	%

*	indicates less than 1% of common stock

(1)

Represents shares owned by the following groups of investment funds affiliated with Bain Capital Partners, LLC: (i) 27,861,389.88 shares of Class A common stock and 3,095,709.94 shares of Class L common stock owned by Bain Capital Fund VIII, LLC, a Delaware limited liability company (“BCF VIII”), whose sole member is Bain Capital Fund VIII, L.P., a Cayman Islands exempted limited partnership (“BCF VIII Cayman”), whose sole general partner is Bain Capital Partners VIII, L.P., a Cayman Islands exempted limited partnership (“BCP VIII”), whose sole general partner is Bain Capital Investors, LLC, a Delaware limited liability company (“BCI”); (ii) 3,666,862.04 shares of Class A common stock and 407,429.12 shares of Class L common stock owned by Bain Capital VIII Coinvestment Fund, LLC, a Delaware limited liability company (“BC VIII Coinvest”), whose sole member is Bain Capital VIII Coinvestment Fund, L.P., a Cayman Islands exempted limited partnership (“BC VIII Coinvest Cayman”), whose sole general partner is BCP VIII; (iii) 10,287.59 shares of Class A common stock and 1,143.08 shares of Class L common stock owned by BCIP Associates-G (“BCIP-G”), whose managing partner is BCI; (iv) 787,645.94 shares of Class A common stock and 69,256.98 shares of Class L common stock owned by BCIP Associates III, LLC, a Delaware limited liability company (“BCIP IIP”), whose sole member is BCIP Associates III, a Cayman Islands partnership (“BCIP III Cayman”), whose managing partner is BCI; (v) 118,584 shares of Class A common stock and 31,435.32 shares of Class L common stock owned by BCIP T Associates III, LLC a Delaware limited liability company (“BCIP T III”), whose sole member is BCIP Trust Associates III, a Cayman Islands partnership (“BCIP T III Cayman”), whose managing partner is BCI; (vi) 65,975.32 shares of Class A common stock and 9,482.95 shares of Class L common stock owned by BCIP Associates III-B, LLC, a Delaware limited liability company (“BCIP III-B”), whose sole member is BCIP Associates III-B, a Cayman Islands partnership (“BCIP III-B Cayman”), whose managing partner is BCI and (vii) 36,754 shares of Class A common stock and 1,931.37 shares of Class L common stock owned by BCIP T Associates III-B, LLC, a Delaware limited liability company (“BCIP T III-B” and together with BCF VIII, BC VIII Coinvest, BCIP-G, BCIP III, BCIP T III and BCIP III-B, the “Bain Funds”), whose sole member is BCIP Trust Associates III-B, a Cayman Islands partnership (“BCIP T III-B Cayman”), whose sole general partner is BCI.

BCF VIII Cayman, BCP VIII and BCI, by virtue of the relationships described above, may be deemed to beneficially own the shares held by BCF VIII. BCF VIII Cayman, BCP VIII and BCI disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein.

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BCF VIII Coinvest Cayman, BCP VIII and BCI, by virtue of the relationships described above, may be deemed to beneficially own the shares held by BCP VIII Coinvest. BCF VIII Coinvest Cayman, BCP VIII and BCI disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein.

BCI, by virtue of the relationships described above, may be deemed to beneficially own the shares held by BCIP-G. BCI disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein.

BCIP III Cayman and BCI, by virtue of the relationships described above, may be deemed to beneficially own the shares held by BCIP III. BCIP III Cayman and BCI disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein.

BCIP T III Cayman and BCI, by virtue of the relationships described above, may be deemed to beneficially own the shares held by BCIP T III. BCIP T III Cayman and BCI disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein.

BCIP III-B Cayman and BCI, by virtue of the relationships described above, may be deemed to beneficially own the shares held by BCIP III-B. BCIP III-B Cayman and BCI disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein.

BCIP T III-B Cayman and BCI, by virtue of the relationships described above, may be deemed to beneficially own the shares held by BCIP T III-B. BCIP T II1-B Cayman and BCI disclaim beneficial ownership of such shares except to the extent of their pecuniary interest therein.

(2)	Represents options to purchase 116,761 Units consisting of 1,050,757 shares of Class A common stock issuable pursuant to options exercisable within 60 days and 116,761 shares of Class L common stock issuable pursuant to options exercisable within 60 days.

(3)	Represents options to purchase 5,000 Units consisting of 45,000 shares of Class A common stock issuable pursuant to options exercisable within 60 days and 5,000 shares of Class L common stock issuable pursuant to options exercisable within 60 days.

(4)	Represents options to purchase 33,849 Units consisting of 304,471 shares of Class A common stock issuable pursuant to options exercisable within 60 days and 33,849 shares of Class L common stock issuable pursuant to options exercisable within 60 days.

(5)	Represents options to purchase 33,849 Units consisting of 304,471 shares of Class A common stock issuable pursuant to options exercisable within 60 days and 33,849 shares of Class L common stock issuable pursuant to options exercisable within 60 days.

(6)	Represents options to purchase 33,849 Units consisting of 304,471 shares of Class A common stock issuable pursuant to options exercisable within 60 days and 33,849 shares of Class L common stock issuable pursuant to options exercisable within 60 days.

(7)	Represents options to purchase 799 Units consisting of 7,189 shares of Class A common stock issuable pursuant to options exercisable within 60 days and 799 shares of Class L common stock issuable pursuant to options exercisable within 60 days.

(8)

Mr. Barnes, Mr. Connaughton and Mr. Gordon are each a managing director of Bain Capital Partners, LLC. They disclaim any beneficial ownership of any shares beneficially owned by any entity affiliated with Bain Capital Partners, LLC in which they do not have a pecuniary interest. Mr. Barnes, Mr. Connaughton and Mr. Gordon each have an address c/o Bain Capital Partners, LLC, 111 Huntington Avenue, Boston, Massachusetts 02199.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table summarizes the securities authorized for issuance as of December 31, 2010 under our 2006 Executive Incentive Plan, our 2006 Management Incentive Plan, and our 2007 Incentive Plan, the number of shares of our Class A common stock and Class L common stock issuable upon the exercise of outstanding options, the weighted average exercise price of such options and the number of additional shares of our common stock still authorized for issuance under such plans. Each of the 2006 Executive Incentive Plan, our 2006 Management Incentive Plan and our 2007 Incentive Plan have been approved by our shareholders.


	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights						(b) Weighted-average exercise price of outstanding options, warrants and rights				(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category	Class A common stock			Class L common stock			Class A common stock		Class L common stock		Class A common stock			Class L common stock
2006 Executive Incentive Plan		3,921,847	⁽¹⁾		435,762	⁽¹⁾	$	0.40	$	25.43		—	⁽²⁾		—	⁽²⁾
2006 Management Incentive Plan		384,597			42,733		$	1.04	$	81.46		—	⁽²⁾		—	⁽²⁾
2007 Incentive Plan		1,096,018			121,786		$	1.28	$	87.78		—	⁽²⁾		—	⁽²⁾
Equity compensation plans not approved by security holders		—			—			—		—		—			—

(1)

This amount consists of 995,637 shares of Class A common stock and 110,626 shares of Class L common stock that were issued in connection with rolled over options at the time of the Bain Merger and Aspen Acquisition. It also includes 2,926,210 shares of Class A common stock and 325,135 shares of Class L common stock issued pursuant to the 2006 Executive Incentive Plan.

(2)	The number of securities remaining available for future issuance under either the 2007 Incentive Plan, the 2006 Executive Incentive Plan or the 2006 Management Incentive Plan is an aggregate of 1,327,228 shares of Class A common stock and 147,463 shares of Class L common stock.

ITEM 13.

Certain Relationships and Related Transactions and Director Independence

Pursuant to our Code of Conduct, all employees and directors (including our named executive officers) who have, or whose immediate family members have, any financial interests in other entities where such involvement is or may appear to cause a conflict of interest situation are required to report to us the conflict. If the conflict involves a director or executive officer or is considered material, the situation will be reviewed by the audit committee. The audit committee will determine whether a conflict exists or will exist, and if so, what action should be taken to resolve the conflict or potential conflict.

Arrangements with Our Investors

On February 6, 2006, investment funds managed by Bain Capital Partners, LLC and certain members of our management entered into a stockholders agreement related to the purchase of shares of capital stock of Holdings. The stockholders agreement contains agreements among the parties with respect to the election of our directors and the directors of our direct parent company, restrictions on the issuance or transfer of shares, including tag-along rights and drag-along rights, other special corporate governance provisions (including the right to approve various corporate actions), registration rights (including customary indemnification provisions) and call options. Three of our directors, Steven Barnes, John Connaughton and Chris Gordon, hold the position of managing director or principal with Bain Capital Partners, LLC.

Rollover of Certain Management Equity Interests

In connection with the closing of the Bain Merger on February 6, 2006, and pursuant to a rollover and subscription agreement, certain members of our management converted options to purchase stock of our predecessor company into options to purchase stock of Holdings with an aggregate value of approximately $9.1

124

million. Dr. Barry W. Karlin, Jerome E. Rhodes, Kevin Hogge, Philip L. Herschman, and Pamela B. Burke converted options with a value of $5.0 million, $0.9 million, $0.9 million, $0.9 million and $125,000, respectively.

In connection with the closing of the Aspen Acquisition on November 17, 2006 and pursuant to a rollover and subscription agreement, certain employees of Aspen Education Group, Inc. converted options to purchase stock of Aspen Education Group, Inc. into options to purchase stock of the Group with an aggregate value of approximately $1.8 million. Mr. Elliot Sainer converted options with a value of $0.6 million.

Management Agreement

Upon the consummation of the Bain Merger, we and our parent companies entered into a management agreement with an affiliate of Bain Capital Partners, LLC pursuant to which such entity or its affiliates will provide management services. Pursuant to such agreement, an affiliate of Bain Capital Partners, LLC will receive an aggregate annual management fee of $2.0 million, and reimbursement for out-of-pocket expenses incurred in connection with the Transactions prior to the closing of the Transactions and in connection with the provision of services pursuant to the agreement. In addition, pursuant to such agreement, an affiliate of Bain Capital Partners, LLC also received aggregate transaction fees of approximately $7.2 million in connection with services provided by such entity related to the Transactions. The management agreement has a five year, evergreen term; however, in certain circumstances, such as an initial public offering or change of control of Holdings, we may terminate the management agreement and buy out our remaining obligations under the agreement to Bain Capital Partners, LLC and its affiliates. In addition, the management agreement provides that an affiliate of Bain Capital Partners, LLC may receive fees in connection with certain subsequent financing and acquisition transactions. In connection with the Aspen Acquisition and the related amending and restating of our then existing senior secured credit facility, an affiliate of Bain Capital Partners, LLC received aggregate transaction fees of $3,200,000. The management agreement includes customary indemnification provisions in favor of Bain Capital Partners, LLC and its affiliates.

Director Independence

CRC is a privately held corporation. None of our directors meet the standards for “independent directors” of a national stock exchange.

ITEM 14.

Principal Accountant Fees and Services

For the fiscal years ended December 31, 2010 and 2009, Deloitte & Touche LLP, and its affiliates, the Company’s independent registered public accounting firm and principal accountant, billed the fees set forth below (in thousands).


	Year Ended December 31, 2010		Year Ended December 31, 2009
Audit Fees ⁽¹⁾	$	2,025	$	1,800
Audit-Related Fees		—		—
Tax Fees ⁽²⁾		—		—
All Other Fees ⁽³⁾		—		—

Total Fees	$	2,025	$	1,800

(1)

Audit Fees billed in the fiscal years ended December 31, 2010 and 2009 represented fees for the following services: the audit of the Company’s annual financial statements, reviews of the Company’s quarterly financial statements, and other services normally provided in connection with statutory and regulatory filings.

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(2)	The Company did not incur any Tax Fees for the years ended December 31, 2010 and 2009 with its principal independent registered accounting firm.

(3)	The Company did not incur any “All Other Fees” in the fiscal years ended December 31, 2010 and 2009 with its principal independent registered accounting firm.

The audit committee was formed in May 2006. All audit and non-audit services performed after such date have been pre-approved by the audit committee.

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PART IV

ITEM 15.

Exhibits and Financial Statement Schedules

(a) Financial Statements

The financial statements are filed as part of this Annual Report on Form 10-K under Item 8—“Financial Statements and Supplementary Data.”

(b) Financial Statement Schedules

Financial statement schedules have been omitted since they are either not required, not applicable, or the information is presented in the consolidated financial statements and the notes thereto in Item 8 above.

(c) Exhibit Index


2.1		Agreement and Plan of Merger among CRCA Holdings, Inc., CRCA Merger Corporation and CRC Health Group, Inc. dated as of October 8, 2005 (incorporated by reference to Exhibit 2.1 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

2.1a		Agreement and Plan of Merger dated as of September 22, 2006, by and among Aspen Education Group, Inc., Frazier Healthcare II, L.P., as Shareholders’ Representative, Madrid Merger Corporation and CRC Health Corporation (incorporated by reference to Exhibit 2.1 of Form 8-K (File No. 333-135172) filed September 28, 2006)

3.1		Certificate of Incorporation of CRC Health Corporation, with amendments (incorporated by reference to Exhibit 3.1 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

3.2		By-Laws of CRC Health Corporation (incorporated by reference to Exhibit 3.3 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

4.1		Indenture, dated as of February 6, 2006, by and among CRCA Merger Corporation, CRC Health Corporation, the Guarantors named therein and U.S. Bank National Association, as Trustee, with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 of Form S-4 (File No. 333-135172) filed June 21, 2006)

4.1a		First Supplemental Indenture dated as of July 7, 2006, by and among CRC Health Corporation, the Guarantors named therein, the New Guarantors named therein and U.S. Bank National Association, as Trustee, with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.4 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

4.1b		Second Supplemental Indenture dated as of September 28, 2006, by and among CRC Health Corporation, the Guarantors named therein, the New Guarantors named therein and U.S. Bank National Association, as Trustee, with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 of Form 10-Q filed November 14, 2006)

4.1c		Third Supplemental Indenture dated as of October 24, 2006, by and among CRC Health Corporation, the Guarantors named therein, the New Guarantors named therein and U.S. Bank National Association, as Trustee, with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 of Form 10-Q filed November 14, 2006)

4.1d		Fourth Supplemental Indenture dated as of November 17, 2006 among CRC Health Corporation, a Delaware corporation (the “Company”), the Guarantors, the New Guarantors named therein and U.S. Bank National Association, as trustee with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

4.1e		Fifth Supplemental Indenture dated as of April 27, 2007 among CRC Health Corporation, a Delaware corporation (the “Company”), the Guarantors, the New Guarantors named therein and U.S. Bank National Association, as trustee with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 of Form 10-Q filed May 15, 2007)

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4.1f		Sixth Supplemental Indenture dated as of July 26, 2007 among CRC Health Corporation, a Delaware corporation (the “Company”), the Guarantors, the New Guarantors named therein and U.S. Bank National Association, as trustee with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 of Form 10-Q filed November 13, 2007)

4.1g		Seventh Supplemental Indenture dated as of May 23, 2008 among CRC Health Corporation, a Delaware corporation (the “Company”), the Guarantors, the New Guarantors named therein and U.S. Bank National Association, as trustee with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.1 of Form 10-Q filed August 13, 2008)

4.1h		Release of Guarantee dated as of July 25, 2008 by and among US Bank National Association, as Trustee, CRC Health Corporation, Adirondack Leadership Expeditions, LLC and LoneStar Expeditions, Inc. (incorporated by reference to 4.1 of Form 10-Q filed November 14, 2008).

4.1i		Form of Eighth Supplemental Indenture dated as of November , 2008 among CRC Health Corporation, a Delaware corporation (the “Company”), the Guarantors, CRC Holdings, LLC, a Delaware limited liability company (the “New Guarantor”) and U.S. Bank National Association, as trustee with respect to the 10³/4% Senior Subordinated Notes due 2016 (Incorporated by reference to Exhibit 4.1H of Form 10K filed March 27, 2009).

4.1j		Form of Ninth Supplemental Indenture dated as of April , 2009 among CRC Health Corporation, a Delaware corporation (the “Company”), the Guarantors, CRC Holdings, LLC, a Delaware limited liability company (the “New Guarantor”) and U.S. Bank National Association, as trustee with respect to the 10³/4% Senior Subordinated Notes due 2016 (Incorporated by reference to Exhibit 4.li of Form 10Q filed May 15, 2009).

4.1k		Form of Tenth Supplemental Indenture dated as of December , 2009 among CRC Health Corporation, a Delaware corporation (the “Company”), the Guarantors, CRC Holdings, LLC, a Delaware limited liability company (the “New Guarantor”) and U.S. Bank National Association, as trustee with respect to the 10³/4% Senior Subordinated Notes due 2016 (incorporated by reference to Exhibit 4.lk of Form 10K filed March 24, 2010).

4.2		Registration Rights Agreement, dated as of February 6, 2006, by and among CRCA Merger Corporation, CRC Health Corporation, the Guarantors named therein and the Initial Purchasers named therein (incorporated by reference to Exhibit 4.2 of Form S-4 (File No. 333-135172) filed June 21, 2006)

4.3		Form of 10³/4% Senior Subordinated Notes due 2016 (contained in Exhibit 4.1) (incorporated by reference to Exhibit 4.3 of Form S-4 (File No. 333-135172) filed June 21, 2006)

10.1		Credit Agreement, dated as of February 6, 2006, by and among CRC Health Group, Inc. (to be renamed CRC Health Corporation), CRC Intermediate Holdings, Inc., Citibank, N.A., the other lenders party thereto, JPMorgan Chase Bank, N.A., as syndication agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse as co-documentation agents and Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. as co-lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.1 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

10.1a		Amendment No. 1 to Credit Agreement, dated as of May 19, 2006 among CRC Intermediate Holdings, Inc., CRC Health Corporation and Citibank, N.A. in its capacity as administrative agent for the Lenders and as collateral agent for the Secured Parties (incorporated by reference to Exhibit 10.15 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

10.1b		AMENDMENT AGREEMENT, dated as of November 17, 2006 among CRC Health Group, Inc., CRC Health Corporation, the Subsidiary Guarantors, as defined therein, and Citibank, N.A., in its capacity as administrative agent for the Lenders and as collateral agent for the Secured Parties, and the lenders party hereto and under the Credit Agreement dated as of February 6, 2006 (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

128


10.1c		AMENDED AND RESTATED CREDIT AGREEMENT (“Agreement”) entered into as of November 17, 2006, among CRC Health Group, Inc., CRC Health Corporation, Citibank, N.A., as administrative agent, collateral agent, swing line lender and L/C issuer, each lender from time to time party thereto, JPMorgan, Chase Bank, N.A., as Syndication Agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as documentation agent (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.1d		AMENDMENT NO. 2 to Credit Agreement dated as of April 16, 2007, among CRC HEALTH GROUP, INC., a Delaware corporation (“Holdings”), CRC HEALTH CORPORATION, a Delaware corporation (the “Borrower”), CITIBANK, N.A., in its capacity as administrative agent for the Lenders and as collateral agent for the Secured Parties (incorporated by reference to Exhibit 10.1 of Form 10-Q filed May 15, 2007)

10.1e		Second Amendment Agreement, dated as of January 20, 2011 among CRC Health Group, Inc., CRC Health Corporation, the Subsidiary Guarantors and Citibank, N.A., in its capacity as administrative agent for the lenders and as collateral agent for the Secured Parties, and the lenders party hereto and under the Credit Agreement dated as of February 6, 2006 (as amended and restated as of November 17, 2006)

10.1f		SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as January 20, 2011, among CRC Health Corporation, CRC Health Group Inc., Citibank, N.A., as administrative agent, collateral agent, Swing Line Lender and L/C Issuer, the other lenders party hereto, J.P. Morgan Chase Bank, N.A., as syndication agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Second Restatement Arrangers, and Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, G.E.Capital Markets, Inc. and Credit Suisse Securities (USA) LLC, as joint bookrunners.

10.2		Security Agreement, dated as of February 6, 2006, between CRC Health Group, Inc. (to be renamed CRC Health Corporation), CRC Intermediate Holdings, Inc., the Subsidiaries identified therein and Citibank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

10.2a		Form of SUPPLEMENT NO. 1 dated as of June 22, 2006, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Intermediate Holdings, Inc., and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Collateral Agent for the Secured Parties as defined therein (Incorporated by reference to Exhibit 4.li of Form 10K filed April 2, 2007).

10.2b		Form of SUPPLEMENT NO. 2 dated as of June 22, 2006, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Intermediate Holdings, Inc., and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Collateral Agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.2c		Form of SUPPLEMENT NO. 3 dated as of September 27, 2006, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.) and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Collateral Agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.2d		Form of SUPPLEMENT NO. 4 dated as of October 18, 2006, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.) and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Collateral Agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

129


10.2e		SUPPLEMENT NO. 5 dated as of November 17, 2006, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.2f		SUPPLEMENT NO. 6 dated as of April 27, 2007, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein (incorporated by reference to Exhibit 10.2 of Form 10-Q filed May 15, 2007)

10.2g		SUPPLEMENT NO. 7 dated as of July 26, 2007, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 13, 2007)

10.2h		SUPPLEMENT NO. 8 dated as of May 23, 2008, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein (incorporated by reference to Exhibit 10.2 of Form 10-Q filed August 13, 2008)

10.2i		Form of SUPPLEMENT NO. 9 dated as of November , 2008, to the Security Agreement dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein (Incorporated by reference to Exhibit 10.2i of Form 10K filed March 27, 2009)

10.2j		Form of SUPPLEMENT NO. 10 dated as of April 27, 2009 to the Security Agreement among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein (Incorporated by reference to Exhibit 10.2j of Form 10Q filed May 15, 2009)

10.2k		Form of SUPPLEMENT NO. 11 dated as of December , 2009 to the Security Agreement among CRC Health Corporation (f/k/a CRC Health Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.), and the Subsidiaries of the Borrower identified therein and Citibank, N.A., as collateral Agent for the Secured Parties, as defined therein (incorporated by reference to Exhibit 4.lk of Form 10K filed March 24, 2010).

10.3		Guarantee Agreement, dated as of February 6, 2006, among CRC Health Group, Inc. (to be renamed CRC Health Corporation), CRC Intermediate Holdings, Inc., the Subsidiaries named therein and Citibank, N.A. as administrative agent (incorporated by reference to Exhibit 10.3 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

10.3a		Form of SUPPLEMENT NO. 1 dated as of June 22, 2006, to the Guarantee Agreement dated as of February 6, 2006, among CRC Intermediate Holdings, Inc., CRC Health Corporation, the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.3b		Form of SUPPLEMENT NO. 2 dated as of June 22, 2006, to the Guarantee Agreement dated as of February 6, 2006, among CRC Intermediate Holdings, Inc., CRC Health Corporation, the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

130


10.3c		Form of SUPPLEMENT NO. 3 dated as of September 27, 2006, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.3d		Form of SUPPLEMENT NO. 4 dated as of October 18, 2006, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.3e		SUPPLEMENT NO. 5 dated as of November 17, 2006, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)

10.3f		SUPPLEMENT NO. 6 dated as of April 27, 2007, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of Form 10-Q filed May 15, 2007)

10.3g		SUPPLEMENT NO. 7 dated as of July 26, 2007, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 13, 2007)

10.3h		SUPPLEMENT NO. 8 dated as of May 23, 2008, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of Form 10-Q filed August 13, 2008)

10.3i		Form of SUPPLEMENT NO. 9 dated as of November , 2008, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3i of Form 10-Q filed August 13, 2008).

10.3i		Release of Guarantee and Collateral Dated as of July 25, 2008 by and among Citibank, NA, as Administrative Agent and Collateral Agent, CRC Health Corporation, Adirondack Leadership Expeditions, LLC and LoneStar Expeditions, Inc. (incorporated by reference to Exhibit 10.3i of Form 10-Q filed November 14, 2008).

10.3j		Form of SUPPLEMENT NO. 10 dated as of April 27, 2009, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 of Form 10-Q filed May 15, 2007)

10.3k		Form of SUPPLEMENT NO. 11 dated as of December , 2009, to the Guarantee Agreement dated as of February 6, 2006, among CRC Health Group, Inc., CRC Health Corporation, the Subsidiaries of the Borrower, as defined herein and Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 4.lk of Form 10K filed March 24, 2010).

10.4		Management Agreement dated as of February 6, 2006, by and among CRCA Holdings, Inc. (to be renamed CRC Health Group, Inc.), CRC Intermediate Holdings, Inc., CRCA Merger Corporation and Bain Capital Partners, LLC (incorporated by reference to Exhibit 10.4 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

10.5		Employment Agreement between Dr. Barry W. Karlin, CRC Health Group, Inc. and CRC Health Corporation, dated February 6, 2006 (incorporated by reference to Exhibit 10.5 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

131


10.5a		Letter Agreement dated July 30, 2010 by and between Dr. Barry W. Karlin, CRC Health Group, Inc. and CRC Health Corporation (incorporated by reference to Exhibit 10.20 of Form 8-K filed August 5, 2010).

10.6		Stockholders Agreement among CRC Health Group, Inc. (f/k/a CRCA Holdings, Inc.), CRC Intermediate Holdings, Inc., CRC Health Corporation (f/k/a CRC Health Group, Inc.), the Investors, Other Investors, and Managers named therein, dated as of February 6, 2006 (incorporated by reference to Exhibit 10.6 of Form S-4 (File No. 333-1351712) filed June 21, 2006)

10.6a		Amended and Restated Stockholders Agreement among CRC Health Group, Inc. (f/k/a CRCA Holdings, Inc.), CRC Intermediate Holdings, Inc., CRC Health Corporation (f/k/a CRC Health Group, Inc.), the Investors, Other Investors, and Managers named therein, dated as of February 6, 2006 and as amended and restated on August 13, 2008 (incorporated by reference to Exhibit 10.6a of Form 10-K filed March 27, 2009).

10.7		Form of Executive Letter Agreement re: Fair Market Value Determination of Shares dated February 6, 2006 (incorporated by reference to Exhibit 10.7 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.8		2006 Executive Incentive Plan of CRC Health Group, Inc. (incorporated by reference to Exhibit 10.8 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.8a		2006 Executive Incentive Plan of CRC Health Group, Inc., as amended (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)*

10.9		2006 Management Incentive Plan of CRC Health Group, Inc. (incorporated by reference to Exhibit 10.9 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.9a		2006 Management Incentive Plan of CRC Health Group, Inc., as amended (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)*

10.10		Form of Senior Executive Option Certificate (incorporated by reference to Exhibit 10.10 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.10a		Form of 2007 Senior Executive Option Certificate, as amended (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)*

10.11		Form of Executive Option Certificate (incorporated by reference to Exhibit 10.11 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.11a		Form of 2007 Executive Option Certificate, as amended (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)*

10.11b		Form of Amended and Restated 2007 Executive Option Certificate (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 13, 2007)*

10.11c		Form of Amended and Restated Executive Option Certificate (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 13, 2007)*

10.12		Form of Management Time Vesting Option Certificate (incorporated by reference to Exhibit 10.12 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.13		Form of Substitute Option Certificate (incorporated by reference to Exhibit 10.13 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.14		Rollover and Subscription Agreement, dated as of February 6, 2006, between CRCA Holdings, Inc. and the investors in CRC Health Group, Inc. listed therein (incorporated by reference to Exhibit 10.14 of Form S-4 (File No. 333-1351712) filed June 21, 2006)*

10.15		EMPLOYMENT AGREEMENT dated as of February 1, 2004, between Aspen Education Group, Inc. and Elliot A. Sainer (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)*

132


10.16		FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of November 17, 2006, made and entered into by and between Aspen Education Group, Inc. and Elliot A Sainer (incorporated by reference to Exhibit 4.1 of Form 10-K filed April 2, 2007)*

10.17		2007 Incentive Plan of CRC Health Group, Inc. (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 13, 2007)*

10.18		Form of 2007 Incentive Plan Option Certificate (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 13, 2007)*

10.18a		Form of 2008 Incentive Plan Option Certificate (Incorporated by reference to Exhibit 10.18a of form 10K filed April 7, 2008)

10.19		Agreement dated as of September 20, 2007 between Elliot A. Sainer, CRC Health Group, Inc., CRC Health Corporation and Aspen Education Group (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 13, 2007)*

10.20		Employment Agreement dated December 13, 2010 by and between CRC Health Group, Inc., CRC Health Corporation and R. Andrew Eckert.‡*

10.21		Form of 2010 Senior Executive Option Agreement.‡*

12		Statement of Computation of Ratio of Earnings to Fixed Charges‡

21		Subsidiaries of CRC Health Corporation‡

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer‡

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer and Principal Accounting Officer‡

32.1		Section 1350 Certification of Principal Executive Officer†

32.2		Section 1350 Certification of Principal Financial Officer and Principal Accounting Officer†

‡	Filed herewith.

†	Furnished herewith.

*	Management contract or compensatory plan or arrangement.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: March 30, 2010


CRC HEALTH CORPORATION (Registrant)

By		/s/ KEVIN HOGGE
		Kevin Hogge, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer and duly authorized signatory)

Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 30, 2011


Signature		Title
Principal Executive Officer:

/s/ R. ANDREW ECKERT R. Andrew Eckert		Chief Executive Officer

Principal Financial and Accounting Officer:

/s/ KEVIN HOGGE Kevin Hogge		Chief Financial Officer

/s/ BARRY KARLIN Barry Karlin		Director

/s/ STEVEN BARNES Steven Barnes		Director

/s/ JOHN CONNAUGHTON John Connaughton		Director

/s/ CHRIS GORDON Chris Gordon		Director

/s/ BARRY R. MCCAFFREY Barry R. McCaffrey		Director

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CRC Health CORP - FORM 10-K - March 30, 2011

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