CRC Health CORP - FORM 10-Q/A

CRC Health CORP - FORM 10-Q/A - October 17, 2011

Attached files

Attached files

CRC Health CORP Reports

file	filename
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - CRC Health CORP	d241738dex322.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - CRC Health CORP	d241738dex312.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - CRC Health CORP	d241738dex321.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - CRC Health CORP	d241738dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q /A

Amendment No.1 to Form 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2011

¨	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)

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 (§232.405 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 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):

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

The total number of shares of the registrant’s common stock, par value of $0.001 per share, outstanding as of October 17, 2011 was 1,000.

CRC HEALTH CORPORATION

INDEX


			Page No.

	Explanatory Note			3

Part I.	Financial Information
	Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of March 31, 2011 (Restated) and December 31, 2010		5
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2011(Restated) and 2010 (Restated)		6
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 (Restated) and 2010 (Restated)		7
		Notes to Condensed Consolidated Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk		42
	Item 4.	Controls and Procedures		42
Part II.	Other Information
	Item 1A.	Risk Factors		44
	Item 6.	Exhibits		44
Signature				45
Exhibit Index				46

Forward-Looking Statements

This Quarterly Report on Form 10-Q/A, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this Quarterly 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: effect of healthcare reform and other changes in government reimbursement for CRC’s services; reductions in the availability of governmental and private financial aid for CRC’s youth treatment programs; CRC’s substantial indebtedness; changes in applicable regulations or a government investigation or assertion that CRC has violated applicable regulations; attempts by local residents to force the closure or relocation of CRC’s facilities; the potentially difficult, unsuccessful or costly integration of acquired operations and future acquisitions; the potentially difficult, unsuccessful or costly opening and operating of new treatment programs; implementation of the strategic plan for improving performance of the Aspen business may not be successful; 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; Securities and Exchange Commission review of financial restatements; material weakness in our internal controls over financial reporting, 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 the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2010 filed on October 17, 2011, and that are otherwise described from time to time in CRC’s Securities and Exchange Commission filings after this Quarterly Report. CRC assumes no obligation and does not intend to update these forward-looking statements.

Explanatory Note

We are filing this Amended Quarterly Report on Form 10-Q/A (the “Amended Filing” or “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the three months ended March 31, 2011 (the “Original Filing”) to amend and restate our condensed consolidated financial statements, financial data and related disclosures as a result of errors identified in connection with an independent review initiated by our Board of Directors and management, as discussed in Note 2 to the accompanying restated condensed consolidated financial statements. The Original Filing was filed with the Securities and Exchange Commission (the “SEC”) on May 13, 2011. We have also filed an Amended Annual Report on Form 10-K/A for the year ended December 31, 2010 with the SEC on October 17, 2011 immediately preceding the filing of this report.

Restatement of Previously Issued Condensed Consolidated Financial Statements

On August 16, 2011, we announced that we were conducting a review of inconsistencies in the accounts at one of our recovery residential treatment facilities (the “Facility”). In 2009 and 2010, such Facility accounted for approximately 2.9% and 3.2%, respectively, of the Company’s total revenue. On October 4, 2011, the Board of Directors of the Company (the “Board”), in consultation with the Audit Committee of the Board (the “Audit Committee”) and management, adopted the conclusions of the investigation and concluded that our previously issued consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, along with the accompanying independent auditors’ reports and our previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011 should not be relied upon because of errors identified in such financial statements.

Management initially identified certain errors upon initiating an internal investigation after noting inconsistencies in accounting for certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review of accounting transactions at the Facility. The investigation is complete and the Audit Committee identified issues related to misconduct by a former employee of the Facility as well as errors in accounting for revenue, accounts receivable, bad debt expenses and general expenses. The investigation did not identify any instances in which patients or third party payors were incorrectly billed for services. As a result of these errors, we have restated our previously issued consolidated financial statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the fiscal quarter ended March 31, 2011.

We have also self-reported information concerning our review to the Securities and Exchange Commission (the “SEC”) and will cooperate with the SEC’s review of this matter.

The restated condensed consolidated financial statements for the three months ended March 31, 2011 and 2010, include adjustments to correct the following errors (in thousands):

•

$418 of revenue was improperly recognized in the three months ended March 31, 2011. $59 of revenue should have been recognized in the three months ended March 31, 2010. The revenue recognition issues resulted primarily from a failure by a former employee of the Facility to use correct billing rates and to accurately record services provided. We did not identify any instances in which patients or third party payors were incorrectly billed for services.

•

$185 and $85 of provision for doubtful accounts were understated for the three months ended March 31, 2011 and 2010, respectively. The understatement resulted primarily from errors in the processes used by a former employee of the Facility in aging the receivables and the application of allowance percentages.

•

$95 and $22 of operating expenses should have been recognized in the three months ended March 31, 2011, and 2010, respectively. These adjustments resulted primarily from errors in accruing for expenses and properly classifying and documenting prepaid assets.

•

$289 and $20 of income tax benefit for the tax effect of the items at the Facility in the three months ended March 31, 2011 and 2010, respectively.

The restated condensed consolidated financial statements reflect adjustments to correct other previously identified adjustments that had been previously considered immaterial and recorded so that they are now recorded in the proper period.

Internal Control Considerations

As a result of the errors discussed above, management has now determined that the Company had a material weakness in our internal control over financial reporting at March 31, 2011. The material weakness is described in Part I Item 4 of this Quarterly Report.

For the convenience of the reader, this Amended Filing sets forth the Original Filing in its entirety, as modified and superseded where necessary to reflect the restatement. The following items have been amended principally as a result of, and to reflect, the restatement:

•

Part I – Item 1. Financial Statements;

•

Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations;

•

Part I – Item 4. Controls and Procedures; and

•

Part II – Item 1A. Risk Factors;

•

Part II – Item 6. Exhibits.

In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

MARCH 31, 2011 AND DECEMBER 31, 2010

(In thousands, except share amounts)


	March 31, 2011		December 31, 2010
	(As Restated, see Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$	6,894	$	7,111
Restricted cash		897		546
Accounts receivable (net of allowance for doubtful accounts of $5,563 in 2011 and $5,408 in 2010)		35,564		31,873
Prepaid expenses		7,602		8,530
Other current assets		2,048		1,921
Income taxes receivable		974		470
Deferred income taxes		6,761		6,761
Current assets of discontinued operations		1,409		1,635

Total current assets		62,149		58,847
PROPERTY AND EQUIPMENT - Net		125,832		125,626
GOODWILL - Net		521,807		521,807
OTHER INTANGIBLE ASSETS - Net		308,549		314,032
OTHER ASSETS - Net		22,081		19,411

TOTAL ASSETS	$	1,040,418	$	1,039,723


LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,483	$	4,937
Accrued liabilities		30,922		30,856
Current portion of long-term debt		23,502		11,111
Other current liabilities		18,245		18,305
Current liabilities of discontinued operations		2,764		3,619

Total current liabilities		79,916		68,828

LONG TERM DEBT - Less current portion		587,967		598,915
OTHER LONG-TERM LIABILITIES		8,605		8,786
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS		3,077		3,142
DEFERRED INCOME TAXES		105,523		105,079

Total liabilities		785,088		784,750

COMMITMENTS AND CONTINGENCIES (Note 12)
CRC HEALTH CORPORATION STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value - 1,000 shares authorized, issued and outstanding at March 31, 2011 and December 31, 2010		-		-
Additional paid-in capital		463,163		462,970
Accumulated deficit		(206,778)		(205,891)
Accumulated other comprehensive loss		(1,055)		(2,106)

Total CRC Health Corporation stockholders’ equity		255,330		254,973

Total equity		255,330		254,973

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,040,418	$	1,039,723

See notes to unaudited condensed consolidated financial statements.

CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands)


	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
	(As Restated, see Note 2)		(As Restated, see Note 2)
NET REVENUE:
Net client service revenues	$	111,443	$	103,636

OPERATING EXPENSES:
Salaries and benefits		57,347		53,149
Supplies, facilities and other operating costs		32,846		29,441
Provision for doubtful accounts		1,856		1,905
Depreciation and amortization		4,902		5,553
Asset impairments		4,401		-

Total operating expenses		101,352		90,048

OPERATING INCOME		10,091		13,588
INTEREST EXPENSE, NET		(11,756)		(10,805)
OTHER INCOME		31		-

(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(1,634)		2,783
INCOME TAX (BENEFIT) EXPENSE		(713)		1,181

(LOSS) INCOME FROM CONTINUING OPERATIONS, NET OF TAX		(921)		1,602
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of tax benefit of ($26) and ($227) in the three months ended March 31, 2011 and March 31, 2010, respectively)		34		(360)

NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	(887)	$	1,242

See notes to unaudited condensed consolidated financial statements.

CRC HEALTH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(In thousands)


	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
	(As Restated, see Note 2)		(As Restated, see Note 2)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(887)	$	1,242
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		4,903		5,562
Amortization of debt discount and capitalized financing costs		1,016		1,053
Asset impairment		4,401		-
Gain on interest rate swap agreement		(38)		(118)
Gain on sale of property and equipment		(29)		(5)
Provision for doubtful accounts		1,870		1,956
Stock-based compensation		736		1,173
Changes in assets and liabilities:
Restricted cash		(351)		(724)
Accounts receivable		(5,515)		(2,772)
Prepaid expenses		981		31
Income taxes receivable and payable		(736)		940
Other current assets		(127)		105
Accounts payable		(446)		1,654
Accrued liabilities		(211)		(2,147)
Other current liabilities		1,678		(453)
Other long-term assets		(366)		(1,083)
Other long-term liabilities		(563)		(188)

Net cash provided by operating activities		6,316		6,226

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment		(3,996)		(2,875)
Proceeds from sale of property and equipment		42		14
Acquisition of businesses, net of cash acquired		(28)		(30)

Net cash used in investing activities		(3,982)		(2,891)

CASH FLOWS FROM FINANCING ACTIVITIES:
Capital (distributed to)/received from Parent		(543)		8
Debt financing costs		(3,195)		-
Borrowings under revolving line of credit		2,500		5,000
Repayments under revolving line of credit		-		(2,500)
Repayment of long-term debt		(1,313)		(8,656)

Net cash used in financing activities		(2,551)		(6,148)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(217)		(2,813)
CASH AND CASH EQUIVALENTS—Beginning of year		7,111		4,982

CASH AND CASH EQUIVALENTS—End of period	$	6,894	$	2,169


SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Payable related to acquisition	$	246	$	365

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	15,790	$	13,545

Cash paid for income taxes, net of refunds	$	49	$	13

See notes to unaudited condensed consolidated financial statements.

CRC HEALTH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND OVERVIEW

CRC Health Corporation (“the Company”) is a wholly owned subsidiary of CRC Health Group, Inc., referred to as “the Group” or “the Parent.” The Company is headquartered in Cupertino, California and through its wholly owned subsidiaries provides 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.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, without audit. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for annual financial statements. The unaudited condensed consolidated balance sheet as of December 31, 2010 has been derived from our audited financial statements.

In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company, its results of operations, and its cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2010.

2. RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On August 16, 2011, the Company announced that it was conducting a review of inconsistencies in the accounts at one of its recovery residential treatment facilities (the “Facility”). In 2009 and 2010, such Facility accounted for approximately 2.9% and 3.2%, respectively, of the Company’s total revenue. On October 4, 2011, the Board of Directors of the Company (the “Board”), in consultation with the Audit Committee of the Board (the “Audit Committee”) and management, adopted the conclusions of the investigation and concluded that the Company’s previously issued consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, along with the accompanying independent auditors’ reports and its previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011 should not be relied upon because of errors identified in such financial statements.

Management initially identified certain errors upon initiating an internal investigation after noting inconsistencies in accounting for certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review of accounting transactions at the Facility. The investigation is complete and the Audit Committee identified issues related to misconduct by a former employee of the Facility as well as errors in accounting for revenue, accounts receivable, bad debt expenses and general expenses. As a result of these errors, the Company has restated its previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011, and 2010, from amounts previously reported.

The Company also restated the accompanying condensed consolidated financial statements to correct other immaterial adjustments that had been previously recorded so such immaterial adjustments are recorded in the proper period.

The following table summarizes the impact of the restatement on the previously reported net income (loss) attributable to CRC Health Corporation:


	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
	(in thousands)
Net (loss) income attributable to CRC Health Corporation, as previously reported	$	(753)	$	861

Adjustments related to the Facility:
Net client service revenues		(418)		59
Provision for doubtful accounts		(185)		(85)
Supplies, facilities and other operating costs		(95)		(22)
Income tax effects		289		20

Facility adjustments after tax		(409)		(28)

Other Adjustments:
Salaries and benefits		-		254
Supplies, facilities and other operating costs		455		422
Income tax effects		(180)		(267)

Other adjustments after tax		275		409

Total adjustments		(134)		381

Net (loss) income attributable to CRC Health Corporation, as restated	$	(887)	$	1,242

The restated condensed consolidated financial statements for the three months ended March 31, 2011 and 2010, include adjustments to correct the following errors related to the Facility (in thousands):

•

$418 of revenue was improperly recognized in the three months ended March 31, 2011. In addition, $59 of revenue should have been recognized in the three months ended March 31, 2010. The revenue recognition issues resulted primarily from a failure by a former employee of the Facility to use correct billing rates and to accurately record services provided.

•

$289 and $20 of income tax benefit for the tax effect of the items at the Facility in the three months ended March 31, 2011 and 2010, respectively.

The restated condensed consolidated financial statements reflect adjustments to correct other previously identified adjustments that had been previously considered immaterial and recorded in the three months ended March 31, 2011 so that they are now recorded in the proper period.

The effects of the correction of these other errors in the three months ended March 31, 2011 are as follows (in thousands):

•

$455 accrual for supplies, facilities and other operating costs previously recorded in the three months ended March 31, 2011 should have been recorded as of December 31, 2007.

•

$180 of income tax expense for the tax effect of the items presented above.

The effects of the correction of these other errors in the three months ended March 31, 2010 are as follows (in thousands):

•

$254 reduction of salaries and benefits related to a correction of stock-based compensation expense that was previously recorded in the three months ended December 31, 2010.

•

$422 of supplies, facilities and other operating costs previously recorded in the three months ended March 31, 2010, that should have recorded in 2009.

•

$267 of income tax expense for the tax effect of items above.

In addition, the amounts shown in the line item “equity in loss of subsidiaries, net of tax” under the CRC Health Corporation column in the condensed consolidating statements of operations for the Company and its subsidiary guarantors for the three months ended March 31, 2011 and 2010, respectively, included in Note 14, previously presented after income (loss) from continuing operations have been correctly presented as a component of income (loss) from continuing operations.

The following table summarizes the effects of the restatement on the Company’s condensed consolidated balance sheet as of March 31, 2011 (in thousands):


	March 31, 2011
	As Previously Reported		Adjustments		As Restated

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6,894	$	-	$	6,894
Restricted cash		897		-		897
Accounts receivable, net		37,001		(1,437)		35,564
Prepaid expenses		7,728		(126)		7,602
Other current assets		2,085		(37)		2,048
Income taxes receivable		654		320		974
Deferred income taxes		6,547		214		6,761
Current assets of discontinued operations		1,409		-		1,409

Total current assets		63,215		(1,066)		62,149

PROPERTY AND EQUIPMENT - Net		125,832		-		125,832
GOODWILL - Net		521,807		-		521,807
OTHER INTANGIBLE ASSETS - Net		308,549		-		308,549
OTHER ASSETS - Net		22,081		-		22,081

TOTAL ASSETS	$	1,041,484	$	(1,066)	$	1,040,418


LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,503	$	(20)	$	4,483
Accrued liabilities		30,789		133		30,922
Current portion of long-term debt		23,502		-		23,502
Other current liabilities		18,245		-		18,245
Current liabilities of discontinued operations		2,764		-		2,764

Total current liabilities		79,803		113		79,916
LONG TERM DEBT - Less current portion		587,967		-		587,967
OTHER LONG-TERM LIABILITIES		8,605		-		8,605
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS		3,077		-		3,077
DEFERRED INCOME TAXES		105,700		(177)		105,523

Total liabilities		785,152		(64)		785,088

COMMITMENTS AND CONTIGENCIES
CRC HEALTH CORPORATION STOCKHOLDER’S EQUITY
Common stock, $0.001 par value - 1,000 shares authorized, issued and outstanding at March 31, 2011		-		-		-
Additional paid-in capital		463,163		-		463,163
Accumulated deficit		(205,776)		(1,002)		(206,778)
Accumulated other comprehensive loss		(1,055)		-		(1,055)

Total CRC Health Corporation Stockholders’ Equity		256,332		(1,002)		255,330

Total Equity		256,332		(1,002)		255,330

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,041,484	$	(1,066)	$	1,040,418

The following tables summarize the effects of the restatement on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2011, and 2010 (in thousands):


	Three months ended March 31, 2011
	As Previously Reported		Adjustments		As Restated


NET REVENUE:
Net client service revenues	$	111,861	$	(418)	$	111,443

OPERATING EXPENSES:
Salaries and benefits		57,347		-		57,347
Supplies, facilities and other operating costs		33,206		(360)		32,846
Provision for doubtful accounts		1,671		185		1,856
Depreciation and amortization		4,902		-		4,902
Asset impairments		4,401		-		4,401

Total operating expenses		101,527		(175)		101,352

OPERATING INCOME		10,334		(243)		10,091
INTEREST EXPENSE, NET		(11,756)		-		(11,756)
OTHER INCOME		31		-		31

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(1,391)		(243)		(1,634)
INCOME TAX (BENEFIT)		(604)		(109)		(713)

LOSS FROM CONTINUING OPERATIONS, NET OF TAX		(787)		(134)		(921)
DISCONTINUED OPERATIONS, NET OF TAX		34		-		34

NET LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	(753)	$	(134)	$	(887)


	Three Months Ended March 31, 2010
	As Previously Reported		Adjustments		As Restated


NET REVENUE:
Net client service revenues	$	103,577	$	59	$	103,636

OPERATING EXPENSES:
Salaries and benefits		53,403		(254)		53,149
Supplies, facilities and other operating costs		29,841		(400)		29,441
Provision for doubtful accounts		1,820		85		1,905
Depreciation and amortization		5,553		-		5,553

Total operating expenses		90,617		(569)		90,048

OPERATING INCOME		12,960		628		13,588
INTEREST EXPENSE, NET		(10,805)		-		(10,805)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		2,155		628		2,783
INCOME TAX EXPENSE		934		247		1,181

INCOME FROM CONTINUING OPERATIONS, NET OF TAX		1,221		381		1,602
LOSS FROM DISCONTINUED OPERATIONS		(360)		-		(360)

NET INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	861	$	381	$	1,242

AMOUNTS ATTRIBUTABLE TO CRC HEALTH CORPORATION:
INCOME FROM CONTINUING OPERATIONS, NET OF TAX	$	1,221	$	381	$	1,602
DISCONTINUED OPERATIONS, NET OF TAX		(360)		-		(360)

NET INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION	$	861	$	381	$	1,242

The following tables summarize the effects of the restatement on the Company’s condensed consolidated statements of cash flows for the three months ended March 31, 2011, and 2010 (in thousands):


	Three Months March 31, 2011
	As Previously Reported		Adjustments		As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(753)	$	(134)	$	(887)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,903		-		4,903
Amortization of debt discount and capitalized financing costs		1,016		-		1,016
Asset impairment		4,401		-		4,401
Gain on interest rate swap agreement		(38)		-		(38)
Gain on sale of property and equipment		(29)		-		(29)
Provision for doubtful accounts		1,685		185		1,870
Stock-based compensation		736		-		736
Changes in assets and liabilities:
Restricted cash		(351)		-		(351)
Accounts receivable		(5,935)		420		(5,515)
Prepaid expenses		948		33		981
Income taxes receivable and payable		(626)		(110)		(736)
Other current assets		(164)		37		(127)
Accounts payable		(446)		-		(446)
Accrued liabilities		220		(431)		(211)
Other current liabilities		1,678		-		1,678
Other long-term assets		(366)		-		(366)
Other long-term liabilities		(563)		-		(563)

Net cash provided by operating activities		6,316		-		6,316


CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash used in investing activities		(3,982)		-		(3,982)


CASH FLOWS FROM FINANCING ACTIVITIES:

Net cash used in financing activities		(2,551)		-		(2,551)


	Three Months March 31, 2010
	As Previously Reported		Adjustments		As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	861	$	381	$	1,242
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		5,562		-		5,562
Amortization of debt discount and capitalized financing costs		1,053		-		1,053
Gain on interest rate swap agreement		(118)		-		(118)
Gain on sale of property and equipment		(5)		-		(5)
Provision for doubtful accounts		1,871		85		1,956
Stock-based compensation		1,427		(254)		1,173
Changes in assets and liabilities:
Restricted cash		(724)		-		(724)
Accounts receivable		(2,714)		(58)		(2,772)
Prepaid expenses		4		27		31
Income taxes receivable and payable		693		247		940
Other current assets		105		-		105
Accounts payable		1,665		(11)		1,654
Accrued liabilities		(1,730)		(417)		(2,147)
Other current liabilities		(453)		-		(453)
Other long-term assets		(1,083)		-		(1,083)
Other long-term liabilities		(188)		-		(188)

Net cash provided by operating activities		6,226		-		6,226


CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash used in investing activities		(2,891)		-		(2,891)


CASH FLOWS FROM FINANCING ACTIVITIES:

Net cash used in financing activities		(6,148)		-		(6,148)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — The Company’s condensed 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 generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Recently Adopted 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 was effective for fiscal years (and interim periods within those years) that began after December 15, 2010. The Company adopted this guidance on January 1, 2011 and its adoption did not have any material impact on the condensed 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 was effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. The Company adopted this guidance on January 1, 2011 and its adoption did not have any material impact on the condensed 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 was 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 Company adopted this guidance on January 1, 2011 and its adoption did not have any material impact on the condensed 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 was effective for fiscal years beginning after December 15, 2010. Retrospective application and early adoption is permitted. The Company adopted this guidance on January 1, 2011 and its adoption did not have any material impact on the condensed 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. The disclosures that include information for activity that occurs during a reporting period was 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 Company’s adoption of this guidance did not have any material impact on the condensed 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 was 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 were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years). The Company’s adoption of this guidance did not have any material impact on the condensed consolidated financial statements.

4. BALANCE SHEET COMPONENTS

Balance sheet components at March 31, 2011 and December 31, 2010 consist of the following (in thousands):


	March 31, 2011		December 31, 2010
	As Restated
Accounts receivable-gross	$	41,127	$	37,281
Less allowance for doubtful accounts		(5,563)		(5,408)


	March 31, 2011		December 31, 2010
Accounts receivable-net	$	35,564	$	31,873

Other assets-net:
Capitalized financing costs-net	$	13,022	$	10,776
Deposits		644		662
Note receivable		8,415		7,973

Total other assets-net	$	22,081	$	19,411

Accrued liabilities:
Accrued payroll and related expenses	$	14,057	$	10,796
Accrued vacation		4,711		4,596
Accrued interest		3,350		8,153
Accrued expenses		8,804		7,311

Total accrued liabilities	$	30,922	$	30,856

Other current liabilities:
Deferred revenue	$	11,770	$	10,600
Client deposits		4,170		3,604
Interest rate swap liability		1,744		3,535
Other liabilities		561		566

Total other current liabilities	$	18,245	$	18,305

Loan program-The Company’s Loan Program allows students and/or patients (the “Borrowers”) who meet certain predetermined credit and underwriting standards such as high FICO scores, full documentation, verification and certain cosigning requirements, to obtain third-party financing to pay a portion of the cost of participating in certain of the Company’s programs. The balance of the loan program (net of reserves) was $8.4 million and $7.9 million at March 31, 2011 and December 31, 2010, respectively. Interest income related to the Loan Program notes was $0.2 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively.

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. The following schedule reflects activity associated with the Company’s loan loss reserve for the three months ended March 31, 2011 and 2010 (in thousands):


	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
Loan Loss Reserve Account
Balance—beginning of the period	$	916	$	219
Loan loss expense		149		160
Write-off of uncollectible accounts		—		—

Balance—end of the period	$	1,065	$	379

5. PROPERTY AND EQUIPMENT

Property and equipment at March 31, 2011 and December 31, 2010 consist of the following (in thousands):


	March 31, 2011		December 31, 2010
Land	$	21,373	$	21,373
Building and improvements		84,307		79,860
Leasehold improvements		17,468		19,203
Furniture and fixtures		12,608		12,639
Computer equipment		12,717		12,369
Computer software		17,693		17,472
Motor vehicles		5,492		5,660


	March 31, 2011		December 31, 2010
Field equipment		2,388		2,634
Construction in progress		6,409		8,370

		180,455		179,580
Less accumulated depreciation		(54,623)		(53,954)

Property and equipment-net	$	125,832	$	125,626

Depreciation expense was $3.5 million and $3.8 million for the three months ended March 31, 2011 and 2010, respectively.

As a result of the Company’s strategic plan to transition the services provided by the Aspen business within its healthy living division (see Note 15), the Company tested its long-lived assets at the eight affected facilities for impairment at March 31, 2011. The Company recognized a non-cash impairment charge of $0.3 million related to impairment of property and equipment which was included in the condensed consolidated statement of operations as asset impairment.

6. GOODWILL AND INTANGIBLE ASSETS

Changes to goodwill by reportable segments for the three months ended March 31, 2011 are as follows (in thousands):


	Recovery		Healthy Living		Total
Balance as of January 1, 2011
Goodwill	$	502,671	$	245,218	$	747,889
Accumulated impairment losses		(624)		(225,458)		(226,082)

		502,047		19,760		521,807
Activity during the year:
Goodwill addition from acquisition		—		—		—

Balance as of March 31, 2011
Goodwill		502,671		245,218		747,889
Accumulated impairment losses		(624)		(225,458)		(226,082)

	$	502,047	$	19,760	$	521,807

Intangible Assets

Total intangible assets at March 31, 2011 and December 31, 2010 consist of the following (in thousands):


	March 31, 2011								December 31, 2010
	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	$	19,231	$	(4,207)	$	15,024		20 years	$	20,834	$	(4,297)	$	16,537
Accreditations		20 years		8,358		(1,828)		6,530		20 years		8,899		(1,835)		7,064
Curriculum		20 years		4,915		(1,075)		3,840		20 years		5,483		(1,131)		4,352
Government including Medicaid contracts		15 years		34,967		(12,044)		22,923		15 years		34,967		(11,463)		23,504
Managed care contracts		10 years		14,400		(7,440)		6,960		10 years		14,400		(7,080)		7,320
Managed care contracts		5 years		100		(70)		30		5 years		100		(65)		35
Core developed technology		5 years		2,704		(2,695)		9		5 years		2,704		(2,663)		41
Covenants not to compete		3 years		152		(152)		—		3 years		152		(152)		—

Total intangible assets subject to amortization			$	84,827	$	(29,511)	$	55,316			$	87,539	$	(28,686)	$	58,853


	March 31, 2011					December 31, 2010
	Useful Life	Gross Carrying Amount	Accumulated Amortization	Net Carrying Amount		Useful Life	Gross Carrying Amount	Accumulated Amortization	Net Carrying Amount
Intangible assets not subject to amortization:
Trademarks and trade names					171,132					173,078
Certificates of need					44,600					44,600
Regulatory licenses					37,501					37,501

Total intangible assets not subject to amortization					253,233					255,179

Total intangible assets				$	308,549				$	314,032

As a result of the Company’s strategic plan to transition the services provided by the Aspen business within its healthy living division (See Note 15), the Company tested its finite-lived and infinite-lived intangible assets at the eight affected facilities for impairment at March 31, 2011. The Company recognized non-cash impairment charges of $2.1 million and $1.9 million related to the finite-lived and indefinite-lived intangible assets, respectively, which were included in the condensed consolidated statement of operations as asset impairment.

Total amortization expense of intangible assets subject to amortization was $1.4 million and $1.7 million for the three months ended March 31, 2011 and 2010, respectively.

Estimated future amortization expense related to the amortizable intangible assets at March 31, 2011 is as follows (in thousands):


Fiscal Year
2011 (remaining nine months)	$	4,072
2012		5,411
2013		5,396
2014		5,396
2015		5,396
Thereafter		29,645

Total	$	55,316

7. INCOME TAXES

The Company calculates its income tax expense for interim periods by applying the full year’s estimated effective tax rate in its financial statements for interim periods.

For the three months ended March 31, 2011, the Company’s tax benefit on continuing operations is $0.7 million, representing an effective tax rate of 43.7%. The effective tax rate differs from the U.S. federal statutory rate of 35.0% primarily because of state income taxes. For the three months ended March 31, 2010, the Company’s tax expense on continuing operations was $1.2 million, representing an effective tax rate of 42.4% on continuing operations.

There is no significant change on uncertain tax positions for the three months ended March 31, 2011. The Company files its income tax returns in various jurisdictions, including United State federal and state filings, United Kingdom and Canada filings. The Company is currently under examination by various state jurisdictions. There are different interpretations of tax laws and regulations and, as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. While the Company believes its positions comply with applicable laws, it periodically evaluates its exposures associated with its tax filing positions.

8. LONG-TERM DEBT

Long-term debt at March 31, 2011 and December 31, 2010 consists of the following (in thousands):


	March 31, 2011		December 31, 2010
Term loan	$	398,305	$	398,305
Revolving line of credit		36,500		34,000
Senior subordinated notes, net of discount of $1,276 in 2011 and $1,342 in 2010		176,020		175,954
Seller notes		566		1,680
Note payable, leasehold improvement		78		87

Total debt		611,469		610,026
Less current portion		(23,502)		(11,111)

Long-term debt-less current portion	$	587,967	$	598,915

Term Loans and Revolving Line of Credit — 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. The amendment was recognized as modification of debts.

Term Loans — 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: At March 31, 2011, the amount outstanding under Non-Extended Term Loans was $89.3 million and is payable on February 6, 2013. 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 March 31, 2011, the entire amount of Non-Extended Term Loans consisted of LIBOR loans and the interest rate thereon was 2.553%.

Extended Term Loans: The aggregate amount of $309.0 million is payable in quarterly principal installments of $0.9 million over the payment period March 31, 2013 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 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%. At March 31, 2011, the entire amount of the Non-Extended Term Loans consisted of LIBOR loans and the interest rate thereon was 4.803%.

The Company is required to apply a certain portion of excess cash to the principal amount of the Term Loan. Excess cash under the Second Amended and Restated Credit Agreement is defined as net income attributable to the Company adjusted for certain cash and non-cash items. The Company made a payment of $9.6 million in April 2011 related to excess cash flows.

Revolving Line of Credit — 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 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. At March 31, 2011, the amount outstanding under Non-Extended Revolving Line of Credit was $13.5 million.

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. At March 31, 2011, the amount outstanding under Extended Revolving Line of Credit was $23.0 million.

Interest expense (gross) on total debt was $12.1 million and $11.0 million for the three months ended March 31, 2011 and 2010.

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 effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2011, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

As of March 31, 2011, the Company had one remaining outstanding interest rate derivative with a $200.0 million notional amount that was designated as a cash flow hedge of interest rate risk. Under the terms of this derivative, (the “2008 Swap”), 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. The 2008 Swap has a maturity date of June 30, 2011. The Company’s other interest rate derivative (the “2006 Swap”), which converted $10.0 million of its floating-rate debt at 4.99%, matured on March 31, 2011.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the remaining term of the 2008 Swap, the Company estimates that an additional $1.7 million of the effective portion of this derivative will be reclassified as an increase to interest expense.

The table below presents the fair value of the Company’s derivative financial instruments at March 31, 2011 and December 31, 2010 (in thousands):


	Liability Derivatives
	Balance Sheet Location		Fair Value
			March 31, 2011		December 31, 2010
Derivatives designated as hedging instruments
Interest Rate Swaps		Other current liabilities	$	1,744	$	3,535

Total derivatives designated as hedging instruments			$	1,744	$	3,535

The table below presents the before-tax effect of the Company’s derivative financial instruments for the three months ending March 31, 2011 and 2010 (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)
	2011		2010				2011		2010				2011		2010
Interest Rate Swaps	$	(112)	$	(1,797)		Interest expense-net	$	(1,865)	$	(2,063)		Interest expense-net	$	1	$	(1)

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.

As of March 31, 2011, the liability due to counterparties to the derivative agreements is $1.8 million, which includes accrued interest but excludes any adjustment for nonperformance risk (“credit valuation adjustments”). As of March 31, 2011, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2010, it may be required to settle its obligations under the agreements at their termination value of $1.8 million. At March 31, 2011, the Company was in compliance with all agreements related to its debt and derivatives.

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 March 31, 2011 and December 31, 2010. 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 three months ended March 31, 2011 (in thousands):


	Three Months Ended March 31, 2011				Level Used to Determine New Cost Basis
	Impairment Charge		New Cost Basis		Level 1		Level 2		Level 3
Property and equipment	$	337	$	—	$	—	$	—	$	—
Referral network		1,251		—		—		—		—
Accreditation		423		—		—		—		—
Curriculum		444		—		—		—		—
Trademarks and trade names		1,946		5,100		—		—		5,100

Total	$	4,401		5,100	$	—	$	—	$	5,100

For the three months ended March 31, 2011, 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:

		Fair Value		Fair Value		Fair Value		Fair Value
	March 31, 2011				December 31, 2010
	(in thousands)
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Loan program notes	$	8,432	$	6,458	$	7,949	$	6,028
Liabilities
Senior subordinated notes	$	176,020	$	183,797	$	175,954	$	187,232
Term loan	$	398,305	$	384,861	$	398,305	$	377,778

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 value 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 three months ended March 31, 2011, the estimated fair value of loan program notes, senior subordinated notes and term loans was determined based on Level 3 inputs.

11. COMPREHENSIVE INCOME

Comprehensive income 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.

Comprehensive income for the three months ended March 31, 2011 and 2010 was as follows (in thousands):

		Ended March 31,		Ended March 31,
	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
Net (loss) income (restated)	$	(887)	$	1,242
Other comprehensive income:
Net change in unrealized gain on cash flow hedges (net of tax of $702 in 2011, and $106 in 2010)		1,051		160

Comprehensive income attributable to CRC Health Corporation (restated)	$	164	$	1,402

12. COMMITMENTS AND CONTINGENCIES

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 should they occur.

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 provides 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.

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 - As of March 31, 2011, the Company had purchased approximately $12.0 million in Loan Program notes with a weighted average interest rate of 6.8% and a maximum remaining amortization period of 20 years. At March 31, 2011, the Company had $0.8 million of outstanding loan purchase commitments related to its Loan Program.

13. STOCK-BASED COMPENSATION

Stock-based equity awards are made by the Group to certain employees of the Company. The Company incurs stock-based compensation expense related to the equity awards made by the Group to employees and consultants of the Company. For the three months ended March 31, 2011 and 2010, the Company recognized stock-based compensation expense of $0.7 million and $1.2 million, respectively. Stock-based compensation expense is recorded within salaries and benefits on the condensed consolidated statements of operations. The total income tax benefit recognized in the condensed consolidated statement of operations for stock-based compensation expense was $0.3 million and $0.6 million for the three months ended March 31, 2011 and 2010, respectively.

During the three months ended March 31, 2011, the Group granted 154,986 units, which represent 1,394,874 share options to purchase Class A common stock of the Group and 154,986 share options to purchase Class L common stock of the Group. At March 31, 2011 and 2010, the Company had 3,577,393 and 3,738,382 unvested option shares with per-share, weighted average grant date fair values of $3.56 and $3.63, respectively. Additionally, 383,855 option shares with a per-share weighted average grant date fair value of $5.20 vested during the three months ended March 31, 2011.

Activity under the Group’s Plans for the three months ended March 31, 2011 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, 2010		6,002,738	$	7.77				5.77
Granted		1,549,860		7.25		2.00		9.92
Exercised		—						—
Forfeited/cancelled/expired		(177,188)		9.29		3.94

Outstanding-March 31, 2011		7,375,410	$	7.62				6.41

Exercisable-March 31, 2011		3,798,018	$	6.79				5.08

Exercisable and expected to be exercisable		7,006,639	$	7.62				6.41

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of March 31, 2011, the Company had $177.3 million aggregate principal amount of the 10.75% Senior Subordinated Notes due 2016 (“the Notes”) outstanding. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by the Company’s wholly owned subsidiaries.

The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors as of March 31, 2011 and December 31, 2010, the condensed consolidating statements of operations for the three months ended March 31, 2011 and 2010, and the condensed consolidating statements of cash flows for the three months ended March 31, 2011 and 2010.

Condensed Consolidating Balance Sheet as of March 31, 2011

(In thousands) (Unaudited)


	CRC Health Corporation		Subsidiary Guarantors		Subsidiary Non-Guarantors		Eliminations			Consolidated

	As Restated		As Restated		As Restated		As Restated			As Restated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	-	$	6,524	$	370	$	-		$	6,894
Restricted cash		897		-		-		-			897
Accounts receivable—net of allowance for doubtful accounts		-		35,437		127		-			35,564
Prepaid expenses		4,064		3,376		162		-			7,602
Other current assets		485		1,452		111		-			2,048
Income taxes receivable		974		-		-		-			974
Deferred income taxes		6,761		-		-		-			6,761
Current assets of discontinued operations		-		1,409		-		-			1,409

Total current assets		13,181		48,198		770		-			62,149

PROPERTY AND EQUIPMENT—Net		9,428		115,330		1,074		-			125,832
GOODWILL		-		518,310		3,497		-			521,807
INTANGIBLE ASSETS—Net		-		308,549		-		-			308,549
OTHER ASSETS-Net		21,431		636		14		-			22,081
INVESTMENT IN SUBSIDIARIES		948,136		-		-		( 948,136	)		-

TOTAL ASSETS	$	992,176	$	991,023	$	5,355	$	( 948,136	)	$	1,040,418


LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	3,384	$	1,070	$	29	$	-		$	4,483
Accrued liabilities		13,715		16,619		588		-			30,922
Current portion of long-term debt		23,146		356		-		-			23,502
Other current liabilities		2,404		14,764		1,077		-			18,245
Current liabilities of discontinued operations		-		2,764		-		-			2,764

Total current liabilities		42,649		35,573		1,694		-			79,916

LONG-TERM DEBT—Less current portion		587,679		288		-		-			587,967
OTHER LONG-TERM LIABILITIES		995		7,469		141		-			8,605
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS		-		3,077		-		-			3,077
DEFERRED INCOME TAXES		105,523		-		-		-			105,523

Total liabilities		736,846		46,407		1,835		-			785,088
CRC HEALTH CORPORATION STOCKHOLDERS’ EQUITY		255,330		944,616		3,520		( 948,136	)		255,330

Total equity		255,330		944,616		3,520		( 948,136	)		255,330

TOTAL LIABILITIES AND EQUITY	$	992,176	$	991,023	$	5,355	$	( 948,136	)	$	1,040,418

Condensed Consolidating Balance Sheet as of December 31, 2010

(In thousands) (Unaudited)


	CRC Health Corporation		Subsidiary Guarantors		Subsidiary Non-Guarantors		Eliminations			Consolidated

	As Restated		As Restated		As Restated		As Restated			As Restated

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	-	$	6,826	$	285	$	-		$	7,111
Restricted cash		546		-		-		-			546
Accounts receivable—net of allowance for doubtful accounts		-		31,641		232		-			31,873
Prepaid expenses		4,488		3,862		180		-			8,530
Other current assets		585		1,333		3		-			1,921
Income taxes receivable		470		-		-		-			470
Deferred income taxes		6,761		-		-		-			6,761
Current assets of discontinued operations		-		1,635		-		-			1,635

Total current assets		12,850		45,297		700		-			58,847

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		953,587		-		-		( 953,587	)		-

TOTAL ASSETS	$	994,680	$	993,331	$	5,299	$	( 953,587	)	$	1,039,723


LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	3,850	$	1,046	$	41	$	-		$	4,937
Accrued liabilities		17,396		12,796		664		-			30,856
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		35,014		32,059		1,755		-			68,828

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		105,079		-		-		-			105,079

Total liabilities		739,707		43,111		1,932		-			784,750
CRC HEALTH CORPORATION STOCKHOLDERS’ EQUITY		254,973		950,220		3,367		( 953,587	)		254,973

Total equity		254,973		950,220		3,367		( 953,587	)		254,973

TOTAL LIABILITIES AND EQUITY	$	994,680	$	993,331	$	5,299	$	( 953,587	)	$	1,039,723

Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2011

(In thousands) (Unaudited)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
	As Restated			As Restated			As Restated			As Restated			As Restated

REVENUE:
Net client service revenue	$	43		$	108,994		$	2,406		$	-		$	111,443
Management fee revenue		21,049			-			-			( 21,049	)		-

Total net revenue		21,092			108,994			2,406			( 21,049	)		111,443


OPERATING EXPENSES:
Salaries and benefits		5,330			50,911			1,106			-			57,347
Supplies, facilities and other operating costs		2,886			28,757			1,203			-			32,846
Provision for doubtful accounts		-			1,842			14			-			1,856
Depreciation and amortization		1,053			3,755			94			-			4,902
Asset impairments		-			4,401			-			-			4,401
Management fee expense		-			20,298			751			( 21,049	)		-

Total operating expenses		9,269			109,964			3,168			( 21,049	)		101,352

OPERATING INCOME (LOSS)		11,823			( 970	)		( 762	)		-			10,091
INTEREST EXPENSE, NET		( 11,686	)		( 70	)		-			-			( 11,756 )
OTHER INCOME AND EXPENSE		31			-			-			-			31


INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		168			( 1,040	)		( 762	)		-			( 1,634 )
INCOME TAX EXPENSE (BENEFIT)		73			( 453	)		( 333	)		-			( 713 )
EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX		( 982	)								982			-

INCOME (LOSS) FROM CONTINUING OPERATIONS		( 887	)		( 587	)		( 429	)		982			( 921 )
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($26)		-			34			-			-			34

NET LOSS	$	( 887	)	$	( 553	)	$	( 429	)	$	982		$	( 887 )

Condensed Consolidating Statements of Operations

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)


	CRC Health Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
	As Restated			As Restated			As Restated			As Restated			As Restated

REVENUE:
Net client service revenue	$	50		$	101,837		$	1,749		$	-		$	103,636
Management fee revenue		18,451			-			-			( 18,451	)		-

Total net revenue		18,501			101,837			1,749			( 18,451	)		103,636


OPERATING EXPENSES:
Salaries and benefits		5,048			46,854			1,247			-			53,149
Supplies, facilities and other operating costs		1,747			26,304			1,390			-			29,441
Provision for doubtful accounts		-			1,812			93			-			1,905
Depreciation and amortization		928			4,504			121			-			5,553
Management fee expense		-			17,964			487			( 18,451	)		-

Total operating expenses		7,723			97,438			3,338			( 18,451	)		90,048

OPERATING INCOME (LOSS)		10,778			4,399			( 1,589	)		-			13,588
INTEREST EXPENSE, NET		( 10,704	)		169			( 270	)		-			( 10,805 )

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		74			4,568			( 1,859	)		-			2,783
INCOME TAX EXPENSE (BENEFIT)		32			1,938			( 789	)		-			1,181
EQUITY IN INCOME (LOSS) OF SUBSIDIARIES, NET OF TAX		1,200									( 1,200	)		-

INCOME (LOSS) FROM CONTINUING OPERATIONS		1,242			2,630			( 1,070	)		( 1,200	)		1,602
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($227)		-			( 360	)		-			-			( 360 )

NET INCOME (LOSS)	$	1,242		$	2,270		$	( 1,070	)	$	( 1,200	)	$	1,242

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2011

(In thousands) (Unaudited)

		Non-Guarantors		Non-Guarantors		Non-Guarantors		Non-Guarantors		Non-Guarantors
	CRC Health Corporation		Subsidiary Guarantors		Subsidiary Non-Guarantors		Eliminations		Consolidated
	As Restated		As Restated		As Restated		As Restated		As Restated

CASH FLOWS FROM OPERATING ACTIVITIES:

Net cash (used in) provided by operating activities	$	(2,240)	$	8,758	$	(202)	$	-	$	6,316


CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment		(1,453)		(2,463)		(80)		-		(3,996)
Proceeds from sale of property and equipment		-		42		-		-		42
Acquisition of business, net of cash acquired		(28)		-		-		-		(28)


Net cash used in investing activities		(1,481)		(2,421)		(80)		-		(3,982)


CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany transfers		4,978		(5,345)		367		-		-
Capital contributed from Parent		(543)		-		-		-		(543)
Capitalized financing costs		(3,195)								(3,195)
Borrowings under revolving line of credit		2,500		-		-		-		2,500
Repayments of term loan and seller notes		(19)		(1,294)		-		-		(1,313)


Net cash provided by (used in) financing activities		3,721		(6,639)		367		-		(2,551)


(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		-		(302)		85		-		(217)

CASH AND CASH EQUIVALENTS Beginning of period		-		6,826		285		-		7,111
										-

CASH AND CASH EQUIVALENTS End of period	$	-	$	6,524	$	370	$	-	$	6,894

Condensed Consolidating Statements of Cash Flows

For the Three Months Ended March 31, 2010

(In thousands) (Unaudited)

		Non-Guarantors		Non-Guarantors		Non-Guarantors		Non-Guarantors		Non-Guarantors
	CRC Health Corporation		Subsidiary Guarantors		Subsidiary Non-Guarantors		Eliminations		Consolidated
	As Restated		As Restated		As Restated		As Restated		As Restated

CASH FLOWS FROM OPERATING ACTIVITIES:

Net cash (used in) provided by operating activities	$	(2,843)	$	8,876	$	193	$	-	$	6,226


CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment		(1,001)		(1,843)		(31)		-		(2,875)
Proceeds from sale of property and equipment		-		14		-		-		14
Acquisition of business, net of cash acquired		(30)		-		-		-		(30)


Net cash used in investing activities		(1,031)		(1,829)		(31)		-		(2,891)


CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany transfers		10,022		(9,867)		(155)		-		-
Capital contributed from Parent		8		-		-		-		8
Borrowings under revolving line of credit		5,000		-		-		-		5,000
Repayments under revolving line of credit		(2,500)		-		-		-		(2,500)
Repayments of term loan and seller notes		(8,656)		-		-		-		(8,656)


Net cash provided by (used in) financing activities		3,874		(9,867)		(155)		-		(6,148)


(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		-		(2,820)		7		-		(2,813)

CASH AND CASH EQUIVALENTS Beginning of period		-		4,745		237		-		4,982
										-

CASH AND CASH EQUIVALENTS End of period	$	-	$	1,925	$	244	$	-	$	2,169

15. 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 three months ended March 31, 2011, the Company continued its activity under the FY08 plan related to employee severance payments and long-term lease commitments resulting from prior period employee terminations and facility closures. During the three months ended March 31, 2011, the Company reached settlements on contract terminations related to rental leases at some of the facilities affected by the FY08 plan. This resulted in reversals of expenses recognized previously.

A summary of restructuring activity under the FY08 plan, including those classified as discontinued operations, is shown in the table below:


	Workforce Reduction		Consolidation and Exit of Excess Facilities		Total
	(in thousands)
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

Expenses
Recovery division	$	—	$	(443)	$	(443)
Healthy living division		—		61		61
Corporate		—		—		—

Total expenses		—		(382)		(382)
Cash (payments) receipts
Recovery division		(46)		(71)		(117)
Healthy living division		(7)		(210)		(217)
Corporate		—		—		—

Total cash (payments) receipts		(53)		(281)		(334)
Restructuring reserve at March 31, 2011
Recovery division		(4)		1,664		1,660
Healthy living division		(15)		3,897		3,882
Corporate		—		—		—

Total restructuring reserve at March 31, 2011	$	(19)	$	5,561	$	5,542

On March 24, 2011, the Company announced a strategic plan (the “FY11 plan”) to transition the services provided by its Aspen business within its healthy living division to a more focused national network of services. This smaller network will allow the Company to apply its resources where there are the greatest needs and assure the best possible service for its students and families. In 2010, this business experienced difficulties as a result of declining economic conditions and the inability of families to access credit markets to fund tuition. As part of this strategic plan, the Company will be terminating operations at five facilities and consolidating services at three other facilities. The plan is intended to maximize the number of affected students who will be able to complete treatment and/or graduate and is expected to be implemented over a period of up to 6 months. In connection with this plan, the Company recognized employee termination costs of approximately $1.8 million during the three months ended March 31, 2011. The Company expects to recognize additional employee termination costs of approximately $1.1 million during the second and third quarters of 2011. The amount of additional costs associated with this plan may vary materially based on various factors including actual employee terminations, any contract termination payments, and the success of student transition plans.

A summary of restructuring activity under the FY11 plan, including those classified as discontinued operations, is shown in the table below:


	Workforce Reduction		Consolidation and Exit of Excess Facilities		Total
	(in thousands)
Restructuring reserve at December 31, 2010
Recovery division	$	—	$	—	$	—
Healthy living division		—		—		—
Corporate		—		—		—

Total restructuring reserve at December 31, 2010	$	—	$	—	$	—

Expenses
Recovery division	$	—	$	—	$	—
Healthy living division		1,808		—		1,808
Corporate		479		—		479

Total expenses		2,287		—		2,287
Cash (payments) receipts
Recovery division		—		—		—
Healthy living division		—		(14)		(14)
Corporate		(224)		—		(224)

Total cash (payments) receipts		(224)		(14)		(238)
Restructuring reserve at March 31, 2011
Recovery division		—		—		—
Healthy living division		1,808		(14)		1,794
Corporate		255		—		255

Total restructuring reserve at March 31, 2011	$	2,063	$	(14)	$	2,049

16. DISCONTINUED OPERATIONS

At March 31, 2011, the Company had closed or sold 16 facilities under discontinued operations compared to 15 facilities at March 31, 2010.

Activities related to discontinued operations are recognized in the Company’s condensed 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):


	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
Net revenue	$	—	$	503
Operating expenses		(61)		1,088
Interest expense		1		2
Income (loss) before income taxes		60		(587)
Tax expense (benefit)		26		(227)

Income (loss) from discontinued operations	$	34	$	(360)

17. 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.

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 March 31, 2011, the recovery segment operates 30 inpatient, 21 outpatient facilities, and 54 comprehensive treatment centers (“CTCs”) 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. 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.

As of March 31, 2011, the healthy living segment operates 24 adolescent and young adult programs in 8 states which provide a wide variety of therapeutic educational programs for underachieving young people. The healthy living segment also operates 18 weight management facilities. These facilities are located in 8 states in the United States (17 facilities), and in the United Kingdom (1 facility), with a focus on providing treatment services for eating disorders and weight management.

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.

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


	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
	As Restated		As Restated
Net revenue:
Recovery division	$	85,721	$	78,665
Healthy living division		25,679		24,920
Corporate		43		51

Total consolidated net revenue	$	111,443	$	103,636

Operating expenses:
Recovery division	$	57,555	$	53,263
Healthy living division		34,529		29,061
Corporate		9,268		7,724

Total consolidated operating expenses	$	101,352	$	90,048

Operating income (loss):
Recovery division	$	28,166	$	25,402
Healthy living division		(8,850)		(4,141)
Corporate		(9,225)		(7,673)

Total consolidated operating income		10,091		13,588
Interest expense-net		(11,756)		(10,805)
Other income		31		—

Total consolidated (loss) income from continuing operations before income taxes	$	(1,634)	$	2,783

Capital expenditures:
Recovery division	$	2,042	$	1,457
Healthy living division		501		417
Corporate		1,453		1,001

Total consolidated capital expenditures	$	3,996	$	2,875


	March 31, 2011		December 31, 2010
Total assets ⁽¹⁾ :
Recovery division	$	902,638	$	901,411
Healthy living division		91,516		94,516
Corporate		46,264		43,796

Total consolidated assets	$	1,040,418	$	1,039,723

(1)	Includes amounts related to discontinued operations

Item 2.

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

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this Quarterly 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 to CRC Health Corporation and its consolidated subsidiaries.

RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We are filing this Amended Quarterly Report on Form 10-Q/A (the “Amended Filing” or “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the three months ended March 31, 2011 (the “Original Filing”) to restate our condensed consolidated financial statements, financial data and related disclosures as a result of errors identified in connection with an independent review initiated by our Board of Directors and management, as discussed in Note 2 to the accompanying restated condensed consolidated financial statements. We have also filed an Amended Annual Report on Form 10-K/A for the year ended December 31, 2010 with the SEC on October 17, 2011 immediately preceding the filing of this report to correct errors resulting from the above-mentioned review.

The restated condensed consolidated financial statements also include adjustments to correct immaterial adjustments that had been previously recorded in 2009 and 2010 and the three months ended March 31, 2011, so such immaterial adjustments are recorded in the proper period.

The following table summarizes the impact of the restatement to the previously reported net (loss) income attributable to CRC Health Corporation.


	Three Months Ended March 31, 2011		Three Months Ended March 31, 2010
	(in thousands)
Net (loss) income attributable to CRC Health Corporation, as previously reported	$	(753)	$	861

Adjustments related to the Facility:
Net client service revenues		(418)		59
Provision for doubtful accounts		(185)		(85)
Supplies, facilities and other operating costs		(95)		(22)
Income tax effects		289		20

Facility adjustments after tax		(409)		(28)

Other Adjustments:
Salaries and benefits		-		254
Supplies, facilities and other operating costs		455		422
Income tax effects		(180)		(267)

Other adjustments after tax		275		409

Total adjustments		(134)		381

Net (loss) income attributable to CRC Health Corporation, as restated	$	(887)	$	1,242

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, the recovery division and the 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 to underachieving young people through residential schools and wilderness programs. Our healthy living division also provides treatment services through adolescent and adult weight management programs as well as eating disorder facilities. Our healthy living division and our recovery division are also our two reportable segments.

We have two operating segments: recovery division and healthy living division. As of March 31, 2011, our recovery division, which operates 30 inpatient, 21 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 March 31, 2011, 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. The healthy living segment also operates 18 weight management facilities. These facilities are located in 8 states in the United States (17 facilities), and in the United Kingdom (1 facility), 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).

EXECUTIVE SUMMARY

We generate revenue by providing substance abuse treatment services and youth treatment services. We also generate revenue by providing treatment services for other specialized behavioral disorders such as eating disorders. Revenue is recognized when rehabilitation and treatment services are provided to a client. 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 to youth 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, approximately nine months. Alumni fee revenue represents non-refundable upfront fees for post graduation services and these fees are deferred and recognized systematically over the contracted life. During the three months ended March 31, 2011 and 2010, we generated 78.9% and 78.9% of our net revenue from non-governmental sources, including 56.7% and 61.5% from self payors, respectively, and 22.2% and 17.4% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states under Medicaid and similar programs.

On March 24, 2011, we announced a strategic plan to transition the services provided by our Aspen business within our healthy living division to a more focused national network of services. This smaller network will allow us to apply our resources where there are the greatest needs and assure the best possible service for our students and families. In 2010, this business experienced difficulties as a result of declining economic conditions and the inability of families to access credit markets to fund tuition. As part of this strategic plan, we will be terminating operations at five facilities and consolidating services at three other facilities. The plan is intended to maximize the number of affected students who will be able to complete treatment and/or graduate and is expected to be implemented over a period of up to 6 months. In connection with this plan, we have recognized employee termination costs of $1.8 million during the three months ended March 31, 2011. We expect to recognize additional employee termination costs of approximately $1.1 million during the second and third quarters of 2011. The amount of additional costs associated with this plan may vary materially based on various factors including actual employee terminations, any contract termination payments, and the success of student transition plans.

During the three months ended March 31, 2011, our consolidated same-facility net revenue increased by $7.8 million or 7.5% respectively, when compared to the comparable periods in 2010. On a consolidated basis, same-facility operating expenses increased $7.6 million or 10.5%, respectively, during the three months ended March 31, 2011. “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, asset impairment, and goodwill impairment. 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The accompanying discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles of the United States (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures and discussed the development, selection and disclosure of significant estimates. To the extent that actual results differ from those estimates, our future results of operations may be affected. We believe that there have not been any significant changes during the three months ended March 31, 2011 to the items that we have previously reported in our critical accounting policies in management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2010 in our Annual Report on Form 10-K/A.

Recent Accounting Guidance

For a summary of recently adopted and recently issued accounting guidance, please see Note 3 to the condensed consolidated financial statements, as included herein.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

The following table presents our results of operations by segment for the three months ended March 31, 2011 and 2010 (numbers in thousands, except for percentages).


	Three Months Ended March 31, Total Facility
Statement of Operations Data:	2011		2010		2011 vs. 2010 $ Change		2011 vs. 2010 % Change
Net revenue:		Restated		Restated
Recovery division	$	85,721	$	78,665	$	7,056		9.0%
Healthy living division		25,679		24,920		759		3.0%
Corporate		43		51		(8)		(14.0)%

Total net revenue		111,443		103,636		7,807		7.5%
Operating expenses:
Recovery division		57,555		53,263		4,292		8.1%
Healthy living division⁽¹⁾		34,529		29,061		5,468		18.8%
Corporate		9,268		7,724		1,544		20.0%

Total operating expenses		101,352		90,048		11,304		12.6%
Operating income (loss):
Recovery division		28,166		25,402		2,764		10.9%
Healthy living division		(8,850)		(4,141)		(4,709)		(113.7)%
Corporate		(9,225)		(7,673)		(1,552)		(20.2)%

Total operating income		10,091		13,588		(3,497)		(25.7)%
Interest expense-net		(11,756)		(10,805)		(951)		(8.8)%
Other income		31		—		31		n/a

(Loss) income from continuing operations before income taxes		(1,634)		2,783		(4,417)		(158.7)%
Income tax (benefit) expense		(713)		1,181		(1,894)		160.4%

(Loss) income from continuing operations, net of tax		(921)		1,602		(2,523)		(157.5)%
Income(loss) from discontinued operations, (net of tax expense (benefit) of $26 and ($227) in the three months ended March 31, 2011 and 2010, respectively)		34		(360)		394		109.4%

Net (loss) income attributable to CRC Health Corporation	$	(887)	$	1,242	$	(2,129)		(171.4)%

(1)	Healthy living division operating expenses for the three months ended March 31, 2011 include $4.4 million of asset impairment.

The following table compares total facility statistics for the three months ended March 31, 2011 and 2010:


	Three Months Ended March 31, Total Facility
	2011		2010		% change

Recovery Division
Residential facilities
Revenue (in thousands) (restated)	$	55,941	$	50,236		11.4%
Patient days		150,210		139,532		7.7%
Net revenue per patient day (restated)	$	372.42	$	360.03		3.4%
CTCs
Revenue (in thousands)	$	29,780	$	28,429		4.8%
Patient days		2,377,284		2,345,490		1.4%
Net revenue per patient day	$	12.53	$	12.12		3.4%

Healthy Living Division
Residential facilities
Revenue (in thousands)	$	14,160	$	15,119		(6.3)%
Patient days		53,643		62,173		(13.7)%
Net revenue per patient day	$	263.97	$	243.18		8.5%
Outdoor programs
Revenue (in thousands)	$	5,391	$	4,780		12.8%
Patient days		11,766		11,052		6.5%
Net revenue per patient day	$	458.18	$	432.50		5.9%
Weight management programs
Revenue (in thousands)	$	6,124	$	5,015		22.1%
Patient days		15,735		15,284		3.0%
Net revenue per patient day	$	389.20	$	328.12		18.6%

Consolidated net revenue increased $7.8 million, or 7.5%, to $111.4 million for the three months ended March 31, 2011 from $103.6 million for the three months ended March 31, 2010. Of the total net revenue increase, the recovery division contributed an increase of $7.0 million and the healthy living division contributed an increase of $0.8 million. The $7.1 million, or 9.0%, increase within the recovery division was driven by increases of $5.7 million and $1.4 million within residential and CTC facilities, respectively. The $0.8 million, or 3.0%, increase within the healthy living division was driven by increases of $1.1 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $0.9 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 $11.3 million, or 12.6%, to $101.4 million for the three months ended March 31, 2011 from $90.0 million in the same period of 2010. The $11.3 million increase in operating expenses was primarily driven by the non-cash asset impairments of $4.4 million during the three months ended March 31, 2011 within the healthy living division. Without considering non-cash asset impairment charges, consolidated operating expenses increased $6.9 million, or 7.7%, over the same period of 2010. Of the $6.9 million increase, the recovery division, the healthy living division and corporate contributed an increase of $4.3 million, $1.1 million and $1.5 million, respectively.

Our consolidated operating margin was 9.1% in the three months ended March 31, 2011 compared to 13.1% in the same period of 2010. The decrease in operating margin resulted from the increase in non-cash asset impairments and other operating costs offset by an increase in revenues. Without considering non-cash asset impairment charges, consolidated operating margin was 13.0% in the three months ended March 31, 2011 compared to 13.1% in the same period of 2010. Recovery division margins for the three months ended March 31, 2011 were 32.9% compared to 32.2% in the same period of 2010. Healthy living division operating margin decreased to (34.5)% for the three months ended March 31, 2011 compared to operating margin of (16.6)% in the same period of 2010. Without considering non-cash asset impairment charges, healthy living division operating margin was (17.3)% for the three months ended March 31, 2011 compared to (16.6)% in the same period of 2010.

For the three months ended March 31, 2011, consolidated net income from continuing operations, net of tax, decreased by $2.5 million over the same period of 2010 resulting in a loss from continuing operations, net of tax, of $0.9 million compared to an income from continuing operations, net of tax, of $1.6 million in the same period of 2010. The decrease in income from continuing operations in 2011 compared to 2010 is primarily driven by increases in non-cash asset impairment charge of $4.4 million and other operating expenses of $6.9 million offset by an increase in revenues of $7.8 million.

The following table presents our same-facility results of operations for our recovery division and our healthy living division for the three months ended March 31, 2011 and 2010 (numbers in thousands, except for percentages).


	Three Months Ended March 31, Same Facility
Statement of Operations Data:	2011		2010		2011 vs. 2010 $ Change		2011 vs. 2010 % Change
Net revenue:		Restated		Restated
Recovery division	$	85,458	$	78,665	$	6,793		8.6%
Healthy living division		25,226		24,251		975		4.0%

Total net revenue		110,684		102,916		7,768		7.5%
Operating expenses:
Recovery division		51,912		48,019		3,893		8.1%
Healthy living division		28,727		24,980		3,747		15.0%

Total operating expenses		80,639		72,999		7,640		10.5%
Operating income (loss):
Recovery division		33,546		30,646		2,900		9.5%
Healthy living division		(3,501)		(729)		(2,772)		(380.2)%

Operating income		30,045		29,917		128		0.4%

The following table compares same facility statistics for the three months ended March 31, 2011 and 2010:

		00000000000000		00000000000000		00000000000000
	Three Months Ended March 31, Same Facility
	2011		2010		% change
Recovery Division
Residential facilities
Revenue (in thousands) (restated)	$	55,678	$	50,236		10.8%
Patient days		150,210		139,532		7.7%
Net revenue per patient day (restated)	$	370.67	$	360.03		3.0%
CTCs
Revenue (in thousands)	$	29,780	$	28,429		4.8%
Patient days		2,377,284		2,345,490		1.4%
Net revenue per patient day	$	12.53	$	12.12		3.4%

Healthy Living Division
Residential facilities
Revenue (in thousands)	$	13,711	$	14,456		(5.2)%
Patient days		51,527		59,134		(12.9)%
Net revenue per patient day	$	266.09	$	244.46		8.8%
Outdoor programs
Revenue (in thousands)	$	5,391	$	4,780		12.8%
Patient days		11,766		11,052		6.5%
Net revenue per patient day	$	458.18	$	432.50		5.9%
Weight management programs
Revenue (in thousands)	$	6,124	$	5,015		22.1%
Patient days		15,735		15,284		3.0%
Net revenue per patient day	$	389.20	$	328.12		18.6%

On a same-facility basis, recovery division net revenue increased $6.8 million, or 8.6%, to $85.5 million for the three months ended March 31, 2011 from $78.7 million in the same period of 2010. The same-facility revenue increases were due to increases of $5.4 million and $1.4 million within the residential and CTC facilities, respectively. Healthy living division same-facility revenue increased $1.0 million or 4.0% to $25.2 million for the three months ended March 31, 2011 from $24.2 million in the same period of 2010. The same-facility revenue increase within the healthy living division was driven by increases of $1.1 million and $0.6 million within weight management and outdoor programs, respectively, offset by a decrease of $0.7 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 $3.9 million driven by an increase of $2.8 million in residential facilities and an increase of $1.1 million in CTCs compared to the same period of 2010. Healthy living division same-facility operating expenses increased $3.7 million due to increases in asset impairment charges of $2.5 million, an increase in salaries and benefits of $1.8 million and an increase in supplies, facilities and other costs of $0.3 million, offset by decreases of $0.6 million and $0.3 million in depreciation and amortization and provision for doubtful accounts, respectively.

Sources and Uses of Cash


	Three Months Ended March 31,
	2011		2010
	(In thousands)
Net cash provided by operating activities	$	6,316	$	6,226
Net cash used in investing activities		(3,982)		(2,891)
Net cash used in financing activities		(2,551)		(6,148)

Net decrease in cash	$	(217)	$	(2,813)

Cash provided by operating activities was $6.3 million for the three months ended March 31, 2011 which was similar when compared to cash provided by operating activities of $6.2 million during the same period in 2010.

Cash used in investing activities was $4.0 million for the three months ended March 31, 2011 compared to $2.9 million in the same period of 2010. The increase in cash used in investing activities primarily relates to an increase in the additions of property and equipment during the three months ended March 31, 2011.

Cash used in financing activities was $2.6 million for the three months ended March 31, 2011 compared to cash used in financing activities of $6.1 million for the same period in 2010. The decrease in cash used in financing activities is primarily due to lower repayments of debt of $9.8 million offset by lower borrowings of $2.5 million and higher outflows related to financing costs of $3.2 million, during the three months ended March 31, 2011.

Financing and Liquidity

We 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 March 31, 2011, our senior secured credit facility was comprised of a $398.3 million senior secured term loan facility and a $100.0 million revolving credit facility. At March 31, 2011, the revolving credit facility had $54.5 million available for borrowing, $36.5 million outstanding and $9.0 million of letters of credit issued and outstanding. Of the $398.3 million of term loans outstanding at March 31, 2011, $309.0 million (“Extended Term Loans”) is payable in quarterly principal installments of $0.9 million over the payment period of March 31, 2013 through September 30, 2015, with the remainder due on the maturity date of November 16, 2015. Out of the remaining $89.3 million (“Non-Extended Term Loans’) of term loans outstanding at March 31, 2011, we made a payment of $9.6 million in April 2011 and the remainder is payable on February 6, 2013. Aggregate commitments of $37.0 million (“Non-Extended Revolving Line of Credit”) under the revolving credit facility mature on February 6, 2012. The remaining $63.0 million (“Extended Revolving Line of Credit”) mature on August 16, 2015 provided that if any of 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 Line of Credit commitments will be January 6, 2013. Of the $36.5 million outstanding at March 31, 2011 under the revolving credit facility, $13.5 million was classified on our balance sheet as current portion of long term debt. At March 31, 2011, we had $177.3 million in aggregate principal amount of 10.75% senior subordinated notes due 2016. We anticipate that cash generated by 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.

We may expand existing recovery and healthy living 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 or for other corporate purposes. We have historically made and currently intend to make payments to reduce borrowing under the revolving line of credit from operating cash flow. In addition, if future financings are executed, we expect that such 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. 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.

Under the terms of our borrowing arrangements, we are required to comply with various covenants, including the maintenance of certain financial ratios. As of March 31, 2011, 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.

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosure about Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K/A for the year ended December 31, 2010. As of March 31, 2011, our exposure to market risk has not changed materially since December 31, 2010.

Item 4.

Controls and Procedures

Background

On August 16, 2011, the Company announced that it was conducting a review of inconsistencies in the accounts at one of its recovery residential treatment facilities (the “Facility”). On October 4, 2011, the Board of Directors of the Company (the “Board”), in consultation with the Audit Committee of the Board (the “Audit Committee”) and management, adopted the conclusions of the investigation and concluded that the Company’s previously issued consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, along with the accompanying independent auditors’ reports and its previously issued condensed consolidated financial statements for the fiscal quarter ended March 31, 2011 should not be relied upon because of errors identified in such financial statements.

Management initially identified certain errors upon initiating an internal investigation after noting inconsistencies in accounting for certain transactions at the Facility. Following a briefing by management on the issues, the Audit Committee hired independent counsel to conduct a review of accounting transactions at the Facility. The investigation is complete and the Audit Committee identified issues related to misconduct by a former employee as well as errors in accounting for revenue, accounts receivable, bad debt expenses and general expenses. As a result of these errors, the Company has restated its previously issued consolidated financial statements for the years ended December 31, 2008, December 31, 2009 and December 31, 2010, including the quarterly data for the years 2009 and 2010, and for the fiscal quarter ended March 31, 2011.

Evaluation of Disclosure Controls and Procedures

After discovering the errors identified in this Form 10-Q/A, we, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, have reevaluated 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 Exchange Act, as of the end of the period covered by this report. This reevaluation identified a material weakness in our internal control over financial reporting. Based on the evaluation of this material weakness, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that 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 SEC 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.

Plan for Remediation of the Material Weaknesses in Internal Control Over Financial Reporting

Management has been actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness at facilities with manual accounting procedures. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance our overall financial control environment.

Management has already added new accounting staff at the Facility and plans to undertake the following actions to further address these issues in fiscal 2011:

•

the addition of more experienced accounting staff;

•

training programs for accounting and finance personnel;

•

a review of the processes and procedures, including appropriate segregation of duties, surrounding revenue recognition and accounting for accounts receivable, the allowance for doubtful accounts, accrued expenses and prepaid assets, as well as reconciliations of general ledger accounts at facilities with manual systems; and

•

an evaluation of our relevant accounting policies and procedures to ensure that they are documented and standardized across the Company, circulated to the appropriate constituencies and reviewed and updated on a periodic basis.

The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment to improve the overall effectiveness of internal control over financial reporting.

Management believes the measures described above and others that will be implemented will remediate the control deficiencies that we have identified and strengthen our internal control over financial reporting. As management continues to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

Inherent Limitations on Effectiveness of Controls

Our management, including our chief executive officer and chief financial officer, 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 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.

PART II. OTHER INFORMATION

Item 1A.

Risk Factors

As of March 31, 2011, there have been no material changes to the factors disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K/A for the year ended December 31, 2010.

Item 6.

Exhibits

The Exhibit Index beginning on page 46 of this report sets forth a list of exhibits.

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: October 17, 2011


CRC HEALTH CORPORATION (Registrant)

By		/s/ LEANNE M. STEWART
		LeAnne M. Stewart,
		Chief Financial Officer
		(Principal Financial Officer and duly authorized signatory)

CRC HEALTH CORPORATION

EXHIBIT INDEX


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 ‡

32.1		Section 1350 Certification of Principal Executive Officer †

32.2		Section 1350 Certification of Principal Financial Officer †

‡	Filed herewith.

†	Furnished herewith.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company