UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







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, 2009




or




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




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




Indicate
by check mark whether the registrant is a shell company (as defined 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 May 15, 2009 was 1,000.







CRC
HEALTH CORPORATION




INDEX




Page No.Part I.
            Financial
      InformationItem 1.
            Financial
      Statements (Unaudited)Condensed Consolidated Balance Sheets as of March 31, 2009 and
      December 31, 2008
            
            
            2Condensed Consolidated Statements of Operations for the
      three months ended March 31, 2009 and
      2008
            
            
            3Condensed Consolidated Statement of Changes in Equity
      for the three months ended March 31, 2009
            
            
            4Condensed Consolidated Statements of Cash Flows for
      the three months ended March 31, 2009 and 2008
            
            
            5Notes to Condensed Consolidated Financial
      Statements
            
            
            6Item
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            
            22Item
      3.
            Quantitative and Qualitative Disclosure About Market
      Risk
            
            
            26Item 4T.
            Controls and Procedures
            
            
            26Part II.
            Other
      InformationItem 1A.
            Risk Factors
            
            
            27Item 6.
            Exhibits
            
            
            27Signature
            
            
            28Exhibit Index
            
            
            29




Forward-Looking
Statements




This
Quarterly Report on Form 10-Q, 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: 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; the possibility that commercial
payors for CRC’s services may undertake future cost containment initiatives; the
limited number of national suppliers of methadone used in CRC’s outpatient
treatment clinics; the failure to maintain established relationships or
cultivate new relationships with patient referral sources; shortages in
qualified healthcare workers; natural disasters such as hurricanes, earthquakes
and floods; competition that limits CRC’s ability to grow; the potentially
costly implementation of new information systems to comply with federal and
state initiatives relating to patient privacy, security of medical information
and electronic transactions; the potentially costly implementation of accounting
and other management systems and resources in response to financial reporting
and other requirements; the loss of key members of CRC’s management; claims
asserted against CRC or lack of adequate available insurance; and certain
restrictive covenants in CRC’s debt documents and other risks that are described
herein, including but not limited to the items discussed in “Risk Factors” in
the Company’s Annual Report on Form 10-K for the year ended December 31,
2008 filed on March 27, 2009, 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.




1


CRC
HEALTH CORPORATION




CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


MARCH
31, 2009 AND DECEMBER 31, 2008


(In
thousands, except share amounts)




March
      31,
              2009
            
            
            December
      31,
              2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            530
            
            
            $
            2,540Accounts
      receivable, net of allowance for doubtful accounts of $5,371 in 2009 and
      $5,409 in 2008
            
            
            32,119
            
            
            
            30,826Prepaid
      expenses
            
            
            7,712
            
            
            
            7,703Other
      current assets
            
            
            1,071
            
            
            
            1,618Income
      taxes receivable
            
            
            859
            
            
            
            ––Deferred
      income taxes
            
            
            4,029
            
            
            
            4,029Current
      assets of discontinued operations, facility exits
            
            
            14,879
            
            
            
            14,125Total
      current assets
            
            
            61,199
            
            
            
            60,841PROPERTY
      AND EQUIPMENT—Net
            
            
            127,797
            
            
            
            129,728GOODWILL
            
            
            604,127
            
            
            
            604,078INTANGIBLE
      ASSETS—Net
            
            
            351,203
            
            
            
            354,463OTHER
      ASSETS
            
            
            19,117
            
            
            
            20,065TOTAL
      ASSETS
            
            $
            1,163,443
            
            
            $
            1,169,175LIABILITIES
      AND EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            5,779
            
            
            $
            6,165Accrued
      liabilities
            
            
            27,811
            
            
            
            29,061Income
      taxes payable
            
            
            ––
            
            
            
            1,201Current
      portion of long-term debt
            
            
            6,570
            
            
            
            6,522Other
      current liabilities
            
            
            28,773
            
            
            
            31,657Current
      liabilities of discontinued operations, facility exits
            
            
            767
            
            
            
            703Total
      current liabilities
            
            
            69,700
            
            
            
            75,309LONG-TERM
      DEBT—Less current portion
            
            
            644,345
            
            
            
            646,630OTHER
      LONG-TERM LIABILITIES
            
            
            7,654
            
            
            
            7,553OTHER
      LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS, FACILITY EXITS
            
            
            1,853
            
            
            
            1,909DEFERRED
      INCOME TAXES
            
            
            134,492
            
            
            
            134,331Total
      liabilities
            
            
            858,044
            
            
            
            865,732COMMITMENTS
      AND CONTINGENCIES (Note 11)EQUITY:CRC
      HEALTH CORPORATION STOCKHOLDER'S EQUITY:Common
      stock, $0.001 par value—1,000 shares authorized; 1,000 shares issued and
      outstanding at March 31, 2009 and December 31, 2008
            
            
            —
            
            
            
            —Additional
      paid-in capital
            
            
            446,484
            
            
            
            444,275Accumulated
      (deficit) retained earnings
            
            
            (135,949
            )
            
            
            (134,764
            )Accumulated
      other comprehensive (loss)
            
            
            (5,224
            )
            
            
            (6,289
            )Total
      CRC Health Corporation stockholder’s equity
            
            
            305,311
            
            
            
            303,222NONCONTROLLING INTEREST
            
            
            88
            
            
            
            221Total
      equity
            
            
            305,399
            
            
            
            303,443TOTAL
      LIABILITIES AND EQUITY
            
            $
            1,163,443
            
            
            $
            1,169,175




See notes
to unaudited condensed consolidated financial statements.






2


CRC
HEALTH CORPORATION
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (In
thousands)
  Three Months
                Ended
                March
      31,
                2009
              
              
              Three Months
                Ended
                March
      31,
                2008NET
      REVENUE:Net
      client service revenue
              
              $
              104,009
              
              
              $
              111,979Other revenue
              
              
              1,888
              
              
              
              1,971Total
      net revenue
              
              
              105,897
              
              
              
              113,950OPERATING
      EXPENSES:Salaries
      and benefits
              
              
              57,474
              
              
              
              59,387Supplies,
      facilities and other operating costs
              
              
              31,516
              
              
              
              33,412Provision
      for doubtful accounts
              
              
              1,533
              
              
              
              1,651Depreciation
      and amortization
              
              
              5,762
              
              
              
              5,464Total
      operating expenses
              
              
              96,285
              
              
              
              99,914OPERATING
      INCOME
              
              
              9,612
              
              
              
              14,036INTEREST
      EXPENSE, NET
              
              
              (11,952
              )
              
              
              (14,517
              )OTHER
      EXPENSE
              
              
              (82
              )
              
              
              (1,618
              )LOSS
      FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
              
              
              (2,422
              )
              
              
              (2,099
              )INCOME
      TAX BENEFIT
              
              
              (2,195
              )
              
              
              (956
              )LOSS
      FROM CONTINUING OPERATIONS, NET OF TAX
              
              
              (227
              )
              
              
              (1,143
              )LOSS
      FROM DISCONTINUED OPERATIONS (net of tax benefit of ($649) and ($363)
      in the three months ended March 31, 2009 and 2008,
      respectively)
              
              
              (1,086
              )
              
              
              (684
              )NET
      LOSS
              
              
              (1,313
              )
              
              
              (1,827
              )LESS:
      NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
              
              
              (128
              )
              
              
              (303
              )NET
      LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION
              
              $
              (1,185
              )
              
              $
              (1,524
              )AMOUNTS
      ATTRIBUTABLE TO CRC HEALTH CORPORATION:LOSS FROM
      CONTINUING OPERATIONS, NET OF TAX
              
              $
              (103
              )
              
              $
              (840
              )DISCONTINUED
      OPERATIONS, NET OF TAX
              
              
              (1,082
              )
              
              
              (684
              )NET
      LOSS ATTRIBUTABLE TO CRC HEALTH CORPORATION
              
              $
              (1,185
              )
              
              $
              (1,524
              )


See notes
to unaudited condensed consolidated financial statements.




3


CRC
HEALTH CORPORATION
  CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY(UNAUDITED)
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009
 (In
thousands, except share amounts)


Accumulated
                    
                    
                    Accumulated
                    
                    
                    TotalAdditional
                    
                    
                    (Deficit)
                    
                    
                    Other
                    
                    
                    CRC
      Health CorporationCommon
      Stock
                    
                    
                    Paid-in
                    
                    
                    Retained
                    
                    
                    Comprehensive
                    
                    
                    Stockholder's
      Equity
                    
                    
                    Comprehensive
                    
                    
                    NoncontrollingShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    (Loss)
                    
                    
                    (Deficit)
                    
                    
                    Income
      (Loss)
                    
                    
                    InterestBALANCE
      December 31, 2008
                    
                    1,000
                    
                    
                    $
                    —
                    
                    
                    $
                    444,275
                    
                    
                    $
                    (134,764
                    )
                    
                    $
                    (6,289
                    )
                    
                    $
                    303,222
                    
                    
                    $
                    (148,194
                    )
                    
                    $
                    221Capital contributed by Parent, net
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,209
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,209Net (loss) for the quarter ended March 31, 2009
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,185
                    )
                    
                    
                    
                    
                    
                    
                    (1,185
                    )
                    
                    
                    (1,185
                    )
                    
                    
                    (128
                    )Other comprehensive (loss)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,065
                    
                    
                    
                    1,065
                    
                    
                    
                    1,065Noncontrolling interest buyout
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5
                    )BALANCE
      March 31, 2009
                    
                    1,000
                    
                    
                    $
                    —
                    
                    
                    $
                    446,484
                    
                    
                    $
                    (135,949
                    )
                    
                    $
                    (5,224
                    )
                    
                    $
                    305,311
                    
                    
                    $
                    (120
                    )
                    
                    $
                    88










See notes to
unaudited condensed consolidated financial statements.











4


CRC
HEALTH CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008


(In
thousands)




Three Months
              Ended
              March
      31,
              2009
            
            
            Three Months
              Ended
              March
      31,
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,313
            )
            
            $
            (1,827
            )Adjustments
      to reconcile net loss to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
            
            
            5,771
            
            
            
            5,574Amortization
      of debt discount and capitalized financing costs
            
            
            1,078
            
            
            
            1,101Loss
      on interest rate swap agreement
            
            
            —
            
            
            
            1,618Asset
      impairment
            
            
            1,417
            
            
            
            ––Loss/(gain)
      on disposition of property and equipment
            
            
            294
            
            
            
            (46
            )Provision
      for doubtful accounts
            
            
            1,559
            
            
            
            1,654Stock-based
      compensation
            
            
            1,395
            
            
            
            1,238Deferred
      income taxes
            
            
            (555
            )
            
            
            (517
            )Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (2,841
            )
            
            
            (1,026
            )Income
      taxes receivable
            
            
            (597
            )
            
            
            (792
            )Prepaid
      expenses
            
            
            (21
            )
            
            
            (558
            )Other
      current assets
            
            
            343
            
            
            
            108Accounts
      payable
            
            
            (413
            )
            
            
            (717
            )Accrued
      liabilities
            
            
            (1,152
            )
            
            
            (11,512
            )Income
      taxes payable
            
            
            (1,201
            )
            
            
            ––Other
      current liabilities
            
            
            (1,101
            )
            
            
            199Other
      long term assets
            
            
            (17
            )
            
            
            ––Other
      long term liabilities
            
            
            45
            
            
            
            (546
            )Net
      cash provided by (used in) operating activities
            
            
            2,691
            
            
            
            (6,049
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Additions
      of property and equipment
            
            
            (2,314
            )
            
            
            (5,783
            )Proceeds
      from sale of property and equipment
            
            
            126
            
            
            
            49Acquisition
      adjustments
            
            
            (59
            )
            
            
            (33
            )Payments
      made under earnout arrangements
            
            
            —
            
            
            
            (2,066
            )Net
      cash used in investing activities
            
            
            (2,247
            )
            
            
            (7,833
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Capital (distributed
      to)/contributed from Parent
            
            
            (12
            )
            
            
            24Capitalized
      financing costs
            
            
            (40
            )
            
            
            (40
            )Noncontrolling interest
      buyout
            
            
            (89
            )
            
            
            —Repayment
      of capital lease obligations
            
            
            (4
            )
            
            
            (6
            )Net
      borrowings under revolving line of credit
            
            
            —
            
            
            
            14,000Repayments
      of long-term debt
            
            
            (2,309
            )
            
            
            (2,590
            )Net
      cash (used in) provided by financing activities
            
            
            (2,454
            )
            
            
            11,388NET DECREASE
      IN CASH AND CASH EQUIVALENTS
            
            
            (2,010
            )
            
            
            (2,494
            )CASH
      AND CASH EQUIVALENTS—Beginning of period
            
            
            2,540
            
            
            
            5,118CASH
      AND CASH EQUIVALENTS—End of period
            
            $
            530
            
            
            $
            2,624


SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING ACTIVITIES:Notes
      payable issued in connection with earnout arrangements
            
            $
            —
            
            $
            
            897Payable
      for contingent consideration
            
            $
            —
            
            $
            
            224SUPPLEMENTAL
      DISCLOSURE OF NONCASH FINANCING ACTIVITIES:Payable
      in conjunction with repurchase of parent stock
            
            $
            —
            
            $
            
            86SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
            
            $
            15,023
            
            $
            
            19,061Cash
      paid for income taxes, net of refunds
            
            $
            490
            
            $
            
            ––






See notes
to unaudited condensed consolidated financial statements.




5


CRC
HEALTH CORPORATION




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)




1.
            BASIS
      OF PRESENTATION


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 balance sheets of CRC Health Corporation, as
of March 31, 2009,  and December 31, 2008, the condensed consolidated
statements of operations for the three months ended March 31, 2009 and
2008, the condensed consolidated statement of changes in equity at March
31, 2009, and the condensed consolidated statements of cash flows for the three
months ended March 31, 2009 and March 31, 2008 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 balance sheet as of December 31, 2008 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,
2008.
  The unaudited
condensed consolidated income statements and unaudited condensed consolidated
balance sheets have been presented to include the effects of discontinued
operations for all periods presented. See Note 16.


2.
            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
consolidated financial statements and accompanying notes. Actual results could
differ materially from those estimates.




Noncontrolling Interest—The
Company through the acquisition of Aspen acquired a 75% interest in certain
weight loss programs. Additionally, a former employee maintains a 10%
interest in one adolescent treatment program, within the
Company's healthy living division, as a result of a prior agreement in
place from the Aspen acquisition. The Company consolidates its investment for
financial reporting purposes.




Business Segments—Effective January 1, 2009, the Company
realigned its operations and internal organizational structure by combining
its "youth division" with its "healthy living division",  formerly
included as a component of "corporate/other."  Performance of the Company’s
two reportable segments (recovery division and healthy living division) is
evaluated based on profit or loss from operations (“segment profit”). Management
uses segment profit information for internal reporting and control purposes and
considers it important in making decisions regarding the allocation of capital
and other resources, risk assessment and employee compensation, among other
matters. Intersegment sales and transfers are insignificant.




Recent Accounting
Pronouncements—In December 2007, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 141
(revised 2007), Business Combinations  (“SFAS 141(R)”).
SFAS 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141(R) and was adopted by the Company effective
January 1, 2009. During the three months ended March 31, 2009, there was no
material impact to the Company's consolidated financial statements as a result
of adopting SFAS 141(R).


The Company has adopted
FASB Staff Position 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"), issued
February 2008. FSP 157-2 delayed the effective date of Statement of
Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"), for non-financial
assets and non-financial liabilities until January 1, 2009. The provisions of
SFAS 157 for non-financial assets and non-financial liabilities were applied as
of January 1, 2009.


In December 2007, the FASB
issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160
establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners inclusive of requiring retroactive adoption of the presentation and
disclosure requirements for existing noncontrolling interests. All other
requirements shall be applied prospectively. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The Company adopted SFAS 160 effective
January 1, 2009.




On March 19, 2008, the
FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities. These enhanced
disclosures will discuss (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years beginning after November 15, 2008. The
Company adopted SFAS 161 effective January 1, 2009.


6


3.
            BALANCE
      SHEET COMPONENTS




Balance
sheet components at March 31, 2009 and December 31, 2008 consist of the
following (in thousands):




March
      31,
              2009
            
            
            December 31,
              2008Accounts
      receivable—gross
            
            $
            37,490
            
            
            $
            36,235Less
      allowance for doubtful accounts
            
            
            (5,371
            )
            
            
            (5,409
            )Accounts
      receivable—net
            
            $
            32,119
            
            
            $
            30,826Other
      assets:Capitalized
      financing costs—net
            
            $
            17,717
            
            
            $
            18,688Deposits
            
            
            919
            
            
            
            912Note
      receivable
            
            
            481
            
            
            
            465Total
      other assets
            
            $
            19,117
            
            
            $
            20,065Accrued
      liabilities:Accrued
      payroll and related expenses
            
            $
            11,640
            
            
            $
            7,864Accrued
      vacation
            
            
            5,730
            
            
            
            5,613Accrued
      interest
            
            
            3,310
            
            
            
            8,289Accrued
      expenses
            
            
            7,131
            
            
            
            7,295Total
      accrued liabilities
            
            $
            27,811
            
            
            $
            29,061Other
      current liabilities:Deferred
      revenue
            
            $
            10,089
            
            
            $
            10,249Client
      deposits
            
            
            5,314
            
            
            
            5,114Insurance
      premium financing
            
            
            1,251
            
            
            
            2,226Interest
      rate swap liability
            
            
            10,329
            
            
            
            12,110Other
      liabilities
            
            
            1,790
            
            
            
            1,958Total
      other current liabilities
            
            $
            28,773
            
            
            $
            31,657






4.
            PROPERTY
      AND EQUIPMENT






Property
and equipment at March 31, 2009 and December 31, 2008 consist of the
following (in thousands):




March
      31,
              2009
            
            
            December 31,
              2008Land
            
            $
            21,373
            
            
            $
            21,373Building
      and improvements
            
            
            72,103
            
            
            
            65,733Leasehold
      improvements
            
            
            22,728
            
            
            
            22,147Furniture
      and fixtures
            
            
            12,125
            
            
            
            11,556Computer
      equipment
            
            
            9,680
            
            
            
            9,474Computer
      software
            
            
            11,217
            
            
            
            9,495Motor
      vehicles
            
            
            5,704
            
            
            
            5,568Field
      equipment
            
            
            2,749
            
            
            
            2,901Construction
      in progress
            
            
            3,817
            
            
            
            12,013161,496
            
            
            
            160,260Less
      accumulated depreciation
            
            
            (33,699
            )
            
            
            (30,532
            )Property
      and equipment—net
            
            $
            127,797
            
            
            $
            129,728




Depreciation
expense was $3.9 million and $3.4 million for the three months ended March
31, 2009 and 2008, respectively.




5.
            GOODWILL
      AND INTANGIBLE ASSETS




Changes
to goodwill by reportable segments for the three months ended March 31, 2009 are
as follows (in thousands):
  Recovery
              
              
              Healthy Living
              
              
              TotalGoodwill
      December 31, 2008
              
              $
              501,531
              
              
              $
              102,547
              
              
              $
              604,078Goodwill
      adjustments
              
              
              49
              
              
              
              —
              
              
              
              49Goodwill
      March 31, 2009
              
              $
              501,580
              
              
              $
              102,547
              
              
              $
              604,127
 
  Goodwill
adjustments
  During
the three months ended March 31, 2009, the Company made an immaterial adjustment
to its recovery division goodwill as a result of purchase price accounting for
an acquisition completed in fiscal 2007. There is no material effect on the
Company's condensed consolidated financial statements as a result of the
purchase price adjustment.
  7




Total intangible
assets at March 31, 2009 and December 31, 2008 consist of the following (in
thousands):
  March
      31, 2009
              
              December 31,
      2008Useful
                Life
              
              Gross
                Carrying
                Amount
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                Amount
              
              Useful
                Life
              
              Gross
                Carrying
                Amount
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                AmountIntangible
      assets subject to amortization:Referral
      network
              20 years
              
              $
              35,115
              
              
              $
              (4,178
              )
              
              $
              30,937
              
              20 years
              
              $
              35,914
              
              
              $
              (3,823
              )
              
              $
              32,091Accreditations
              20
      years
              
              
              16,118
              
              
              
              (1,923
              )
              
              
              14,195
              
              20
      years
              
              
              16,118
              
              
              
              (1,722
              )
              
              
              14,396Curriculum
              20
      years
              
              
              8,486
              
              
              
              (1,008
              )
              
              
              7,478
              
              20
      years
              
              
              8,743
              
              
              
              (929
              )
              
              
              7,814Government
      includingMedicaid
      contracts
              15 years
              
              
              34,975
              
              
              
              (7,385
              )
              
              
              27,590
              
              15 years
              
              
              34,979
              
              
              
              (6,806
              )
              
              
              28,173Managed
      care contracts
              10
      years
              
              
              14,400
              
              
              
              (4,560
              )
              
              
              9,840
              
              10
      years
              
              
              14,400
              
              
              
              (4,200
              )
              
              
              10,200Managed
      care contracts
              5
      years
              
              
              100
              
              
              
              (30
              )
              
              
              70
              
              5
      years
              
              
              100
              
              
              
              (25
              )
              
              
              75Core
      developed technology
              5
      years
              
              
              2,704
              
              
              
              (1,717
              )
              
              
              987
              
              5
      years
              
              
              2,704
              
              
              
              (1,582
              )
              
              
              1,122Covenants
      not to compete
              3
      years
              
              
              —
              
              
              
              —
              
              
              
              —
              
              3
      years
              
              
              152
              
              
              
              (152
              )
              
              
              —Total
      intangible assets subject to amortization:
              
              
              $
              111,898
              
              
              $
              (20,801
              )
              
              
              91,097
              
              
              
              $
              113,110
              
              
              $
              (19,239
              )
              
              
              93,871Intangible
      assets not subject to amortization:Trademarks
      and trade names
              
              
              
              
              
              
              
              
              
              
              
              176,415
              
              
              
              
              
              
              
              
              
              
              
              
              176,587Certificates
      of need
              
              
              
              
              
              
              
              
              
              
              
              44,600
              
              
              
              
              
              
              
              
              
              
              
              
              44,600Regulatory
      licenses
              
              
              
              
              
              
              
              
              
              
              
              39,091
              
              
              
              
              
              
              
              
              
              
              
              
              39,405Total
      intangible assets not subject to amortization
              
              
              
              
              
              
              
              
              
              
              
              260,106
              
              
              
              
              
              
              
              
              
              
              
              
              260,592Total
      intangible assets
              
              
              
              
              
              
              
              
              
              
              $
              351,203
              
              
              
              
              
              
              
              
              
              
              
              $
              354,463
 Intangible
assets subject to amortization
  During
the three months ended March 31, 2009, the Company continued its restructuring
activities initiated in 2008 (the "FY08 Plan").  For the three months ended
March 31, 2009, the Company determined that certain intangible assets
subject to amortization within its healthy living division were
impaired. Under the provisions of SFAS 144, the Company recognized a non-cash
charge of $1.0 million which is included in the condensed consolidated
statement of operations under results from discontinued operations. These
impairment charges are based on the Company's decision to close one of its
healthy living outdoor program facilities and reduce the carrying value
of certain
of its intangible assets subject to amortization to their estimated fair
value.
  Intangible
assets not subject to
amortization
  Additionally,
 pursuant to the FY08 Plan, during the three months ended March 31, 2009,
the Company determined that certain of its intangible assets not subject to amortization were impaired due to
the Company's decision to close one of its healthy living division program
facilities classified as discontinued operations. Subsequently, the Company
recognized a non-cash impairment charge of approximately $0.4
million during the three months ended March 31, 2009.Chargesrelated to impairment
of intangible
assets for discontinued operations are included in the Company's condensed
consolidated statement of operations under results of discontinued operations.
 Total
amortization expense of intangible assets subject to amortization was $1.8
million and $2.1 million for the three months ended March 31, 2009 and 2008,
respectively.
  Estimated
future amortization expense related to the amortizable intangible assets at
March 31, 2009 is as follows (in thousands):
  Fiscal
      Year2009
      (remaining nine months)
              
              $
              5,4882010
              
              
              7,3182011
              
              
              6,8182012
              
              
              6,7722013
              
              
              6,756Thereafter
              
              
              57,945Total
              
              $
              91,097




6.
            INCOME
      TAXES


The
Company determines 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, 2009, the Company's tax benefit on continuing
operations is $2.2 million, representing an effective tax rate of 90.6%.
The effective tax rate differs from the U.S. federal statutory rate of 35%
because of a discrete item and state income taxes. The discrete item of $1.1
million is due to a significant California tax law change. As a result of the
enacted legislation, the Company expects that in years 2011 and
beyond its income subject to tax in California will be less than under
prior tax law because the future reversal of existing taxable temporary
differences will be valued at a lower apportionment in California.  The
Company therefore, recorded
a net discrete tax benefit of $1.1 million related to a decrease in deferred tax
liability that existed as of December 31, 2008.  The Company will
continue to assess the value of
reversal items on its California deferred tax liability in future
periods.
 The
continuing operations income tax benefit for the three months ended
March 31, 2008 was $1.0 million, reflecting an effective tax rate of 45.5%,
there were no discrete items for the three months ended March 31,
2008.
 8
  
 The
Company files its income tax returns in various jurisdictions, including United
State federal and state filings and United Kingdom filings. The Company is
currently under examination by the Internal Revenue Service for the 2006 tax
year, as well as 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.


7.
            LONG-TERM
      DEBT




Long-term
debt at March 31, 2009 and December 31, 2008 consists of the following (in
thousands):




March
      31,
              2009
            
            
            December 31,
              2008Term
      loan
            
            $
            408,793
            
            
            $
            409,841Revolving
      line of credit
            
            
            61,500
            
            
            
            61,500Senior
      subordinated notes, net of discount of $1,804 in 2009 and $1,870 in
      2008
            
            
            175,492
            
            
            
            175,426Seller
      notes
            
            
            4,974
            
            
            
            6,216Lessor
      financing, leasehold improvements
            
            
            148
            
            
            
            157Capital
      lease obligations
            
            
            8
            
            
            
            12Total
      debt
            
            
            650,915
            
            
            
            653,152Less
      current portion
            
            
            (6,570
            )
            
            
            (6,522
            )Long-term
      debt—less current portion
            
            $
            644,345
            
            
            $
            646,630




Interest
expense on total debt was $12.1 million for the three months ended March 31,
2009 inclusive of $0.1 million of capitalized interest, and $14.5 million for
the three months ended March 31, 2008.




8.
            FINANCIAL
      INSTRUMENTS




Derivatives
      -Interest Rate
      Swaps




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 derivatives designated and that qualify
as cash flow hedges is recorded in accumulated other comprehensive income and is
subsequently reclassified into earnings in the period that the hedged forecasted
transaction affects earnings. During the three months ending March 31, 2009,
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,
2009, the Company had two outstanding interest rate derivatives with a combined
$250.0 million notional amounts that were designated as cash flow hedges of
interest rate risk. One of the derivatives (the "2006 Swap") with a
maturity date of March 31, 2011, converts $50.0 million of its
floating-rate debt to fixed-rate debt at 4.99%. For the second derivative (the
"2008 Swap") with a maturity date of July 1, 2011,  the Company receives an
 interest rate equal to 3-month LIBOR and in exchange pays a fixed
rate of 3.875% on the $200.0 million notional amount.
  Amounts
reported in accumulated other comprehensive income related to derivatives will
be reclassified to interest expense as interest payments are made on the
Company’s variable-rate debt. During the next twelve months, the Company
estimates that an additional $5.6 million of the effective portion of its
derivatives 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, 2009 (in thousands):
 
 Asset
      Derivatives
                        
                        Liability
      DerivativesBalance
      Sheet Location
                        
                        Fair
      Value
                        
                        Balance
      Sheet Location
                        
                        Fair
      ValueDerivatives
      designated as hedging instrumentsInterest
      Rate Swaps
                        Other
      assets
                        
                        $
                        —
                        
                        Other current
      liabilities
                        
                        $
                        10,329Total
      derivatives designated as hedging instruments
                        
                        
                        $
                        —
                        
                        
                        
                        $
                        10,329
 9
 The
tables below present the before-tax effect of the Company’s derivative
financial instruments for the three months ending March 31, 2009 (in
thousands):
  Derivatives
      in SFAS 133 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)Interest
      Rate Swaps
                    
                    $
                    270
                    
                    Interest
      expense, net
                    
                    $
                    (1,510
                    )
                    Other
      income/expense
                    
                    $
                    (228
                    )
 
 Credit-risk-related
Contingent Features
 
 The
Company has agreements with one of its derivative counterparties that contains 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, 2009, the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk
("credit valuation
adjustments") related to these agreements
was $13.2 million. As of March 31, 2009, the Company has not posted any
collateral related to these agreements. If the Company
had breached any of these provisions
at March 31, 2009, it may be required to settle its obligations under the
agreements at their termination value of $13.2
million. At March 31, 2009, the Company was in compliance with all
agreements related to its debt and derivatives.


9.
            FAIR
      VALUE MEASUREMENTS





The
Company adopted the financial asset and financial liability provisions of SFAS
157 on January 1, 2008. SFAS 157 applies to all assets and liabilities that
are being measured and reported on a fair value basis. As defined in SFAS 157,
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. SFAS 157 also establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
fair value hierarchy, under the provisions of SFAS 157, also requires an entity
to maximize the use of quoted market prices and minimize the use of unobservable
inputs. 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.


Financial Assets and
      Liabilities


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. These instruments
are allocated to Level 2 on the SFAS 157 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. The valuation
models utilized by the Company incorporate variables




Non-Financial Assets and
      Liabilities
 
 The
Company measures its goodwill and ndefinite-lived
intangible assets at fair value for impairment assessment
under Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). Nonfinancial
long-lived assets are measured
at fair value forimpairment
assessment under Statement of Financial Accounting
Standards Statement No. 144, Accounting for the
impairment
or Disposal of
Long-Lived Assets ("SFAS 144"). The
Company conducts its testing under SFAS
142 on an
annual basis during the fourth quarter, or earlier, should there be
indicators of impairment or triggering events in accordance with
the standards. N onfinancial
liabilities for exit or disposal activities
are
measured at fairvalue in
accordance with  Statement of Financial Accounting Standards No.
146, Accounting forCosts Associated withExit
or Disposal Activities("SFAS 146").


The
following table presents the non-financial assets that were measured and
recorded at fair value on a nonrecurring basis as of March 31, 2009 (in
thousands):
 Three Months
      Ended March 31, 2009Level
      Used to Determine New Cost BasisImpairment
                                                                            
                                                                            
                                                                            New
      Cost
                                                                            
                                                                            
                                                                            Level 1
                                                                            
                                                                            
                                                                            Level 2
                                                                            
                                                                            
                                                                            Level 3Charge
                                                                            
                                                                            
                                                                            BasisReferral
      network
                                                                            
                                                                            
                                                                            $
                                                                            702
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            $
                                                                            —
                                                                            
                                                                            
                                                                            $
                                                                            —
                                                                            
                                                                            
                                                                            $
                                                                            —Curriculum
                                                                            
                                                                            
                                                                            
                                                                            227
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —Regulatory
      licenses
                                                                            
                                                                            
                                                                            
                                                                            315
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —Trademarks
      and trade names
                                                                            
                                                                            
                                                                            173
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            
                                                                            —Total
                                                                            
                                                                            $
                                                                            1,417
                                                                            
                                                                            
                                                                            
                                                                            —
                                                                            
                                                                            
                                                                            $
                                                                            —
                                                                            
                                                                            
                                                                            $
                                                                            —
                                                                            
                                                                            
                                                                            $
                                                                            —
 In accordance with SFAS
142, the Company recognized a charge of approximately $1.4 million related to
the impairment of certain intangible assets. The carrying value of the
assets prior to the impairment was approximately $1.4 million. As of March
31, 2009, the estimated fair value of the assets was zero and was determined
based on level 3
inputs
 10





10.
            COMPREHENSIVE
      INCOME (LOSS)





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


Comprehensive
income (loss) for the three months ended March 31, 2009 and 2008 was as
follows (in thousands):





Three Months
                Ended
                March 31,
                2009
              
              
              Three Months
                Ended
                March
      31,
                2008Net loss
              
              $
              (1,313
              )
              
              $
              (1,827
              )Other comprehensive income:Net change in unrealized (loss) on cash flow hedges (net of
      tax)
              
              
              (1,065
              )
              
              —Other
      comprehensive income attributable to noncontrolling
    interest
              
              
              —
              
              
              
              —Total
      comprehensive loss
              
              $
              (2,378
              )
              
              $
              (1,827
              )Comprehensive
      income attributable to noncontrolling interest
              
              $
              (128
              )
              
              $
              (303
              )Comprehensive
      income attributable to CRC Health Corporation
              
              $
              (2,250
              )
              
              $
              (1,524
              )






11.
            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.






12.
            STOCK-BASED
      COMPENSATION




For
the three months ended March 31, 2009 and 2008, the Company recognized
stock-based compensation expense of $1.4 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
option-based compensation expense was $0.5 million for the three months
ended March 31, 2009 and 2008.


During
the three months ended March 31, 2009, the Group granted 16,120 units,
which represent 145,082 option shares to purchase Class A common stock of
the Group and 16,122 option shares to purchase Class L common stock of the
Group. Activity under the Plans for the three months ended March 31, 2009 is
summarized below:


Option Shares
            
            
            Weighted-
              Average
              Exercise
              Price
              Per Share
            
            
            Weighted-
              Average
              Remaining
              Contractual Term
              (In
      Years)Balance
      at December 31, 2008
            
            
            7,310,873
            
            
            $
            7.97
            
            
            
            7.44Granted
            
            
            161,204
            
            
            
            9.00
            
            
            
            9.00Exercised
            
            
            —
            
            
            
            —Forfeited/cancelled/expired
            
            
            (40,274
            )
            
            
            10.99Outstanding—March
      31, 2009
            
            
            7,431,803
            
            
            $
            7.98
            
            
            
            7.49Exercisable—March
      31, 2009
            
            
            2,794,053
            
            
            $
            5.94
            
            
            
            7.24Exercisable
      and expected to be exercisable
            
            
            7,060,213
            
            
            $
            7.98
            
            
            
            7.49







11


13.
            RELATED
      PARTY TRANSACTIONS




In
connection with the Bain Merger, the Company and its security holders entered
into a stockholders agreement. The stockholders agreement contains agreements
among the parties with respect to the election of the Company’s directors and
the directors of the Parent, restrictions on the issuance or transfer of shares,
including tag-along rights and drag-along rights, other special corporate
governance provisions (including the right to approve various corporate
actions), registration rights (including customary indemnification provisions)
and call options. Three of the Company’s five directors are employees of Bain
Capital, the Company’s principal shareholder.
  Upon the
consummation of the Bain Merger, the Company entered into a management agreement
with an affiliate of Bain Capital Partners, LLC pursuant to which such entity or
its affiliates will provide management services.  The management agreement
has a five year, evergreen term, however, in certain circumstances, such as an
initial public offering or change of control of the Group, the Company may
terminate the management agreement and buy out its remaining obligations under
the agreement to Bain Capital Partners, LLC and affiliates. In addition, the
management agreement provides that an affiliate of Bain Capital Partners, LLC
may receive fees in connection with certain subsequent financing and acquisition
transactions. The management agreement includes customary indemnification
provisions in favor of Bain Capital Partners, LLC and its affiliates. The
Company under this agreement paid management fees of $0.6 million during
the three months ended March 31, 2009 and 2008 which are included
in supplies, facilities and other operating costs in the Company's consolidated
statement of operations.
  Two
Directors receive compensation for their services to the Company as consultants.
One Director was granted options to purchase 13,435 shares of Class A common
stock and 1,492 shares of Class L common stock and receives a salary of $10,000
per month in consideration for his services to the Company as a consultant. The
other Director receives a salary of $4,000 per month for consulting services
rendered to the Company. Additionally, he retains an aggregate of 49,885 options
for Class A common shares and 5,543 options for Class L common shares, with
24,942 options for Class A common shares and 2,771 options for Class L common
shares in consideration for his services as a member of the Board of Directors
and 24,942 options for Class A common shares and 2,771 options for Class L
common shares in consideration for his services as a consultant.


14.
            CONDENSED
      CONSOLIDATING FINANCIAL INFORMATION




As of
March 31, 2009, 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.




Subsequent
to the issuance of  financial statements as of March 31, 2008,
management determined that allocations including intercompany management fee
revenue should be allocated to the Parent.  As a result, the March 31, 2008
condensed consolidating statement of operations and condensed consolidating
statement of cash flows have been
restated from amounts previously reported to properly reflect allocations. There
is no effect to the consolidated financial statements as the allocations are
eliminated in
consolidation.




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




12


Condensed
Consolidating Balance Sheet as of March 31, 2009


(In
thousands) (Unaudited)




CRC
      Health
              Corporation
            
            
            Subsidiary
              Guarantors
            
            
            Subsidiary
              Non-Guarantors
            
            
            Eliminations
            
            
            ConsolidatedASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            —
            
            
            $
            148
            
            
            $
            382
            
            
            $
            —
            
            
            $
            530Accounts
      receivable—net of allowance
            
            
            2
            
            
            
            31,672
            
            
            
            445
            
            
            
            —
            
            
            
            32,119Prepaid
      expenses
            
            
            3,951
            
            
            
            3,508
            
            
            
            253
            
            
            
            —
            
            
            
            7,712Other
      current assets
            
            
            20
            
            
            
            1,016
            
            
            
            35
            
            
            
            —
            
            
            
            1,071Income
      taxes receivable
            
            
            859
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            859Deferred
      income taxes
            
            
            4,029
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,029Current
      assets of discontinued operations, facility exits
            
            
            —
            
            
            
            14,879
            
            
            
            —
            
            
            
            —
            
            
            
            14,879Total
      current assets
            
            
            8,861
            
            
            
            51,223
            
            
            
            1,115
            
            
            
            —
            
            
            
            61,199PROPERTY
      AND EQUIPMENT—Net
            
            
            8,542
            
            
            
            116,828
            
            
            
            2,427
            
            
            
            —
            
            
            
            127,797GOODWILL
            
            
            —
            
            
            
            592,329
            
            
            
            11,798
            
            
            
            —
            
            
            
            604,127INTANGIBLE
      ASSETS—Net
            
            
            —
            
            
            
            351,203
            
            
            
            —
            
            
            
            —
            
            
            
            351,203OTHER
      ASSETS
            
            
            17,860
            
            
            
            1,238
            
            
            
            19
            
            
            
            —
            
            
            
            19,117INVESTMENT
      IN SUBSIDIARIES
            
            
            1,076,226
            
            
            
            —
            
            
            
            —
            
            
            
            (1,076,226
            )
            
            
            —TOTAL
      ASSETS
            
            $
            1,111,489
            
            
            $
            1,112,821
            
            
            $
            15,359
            
            
            $
            (1,076,226
            )
            
            $
            1,163,443LIABILITIES
      AND EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            3,637
            
            
            $
            1,985
            
            
            $
            157
            
            
            $
            —
            
            
            $
            5,779Accrued
      liabilities
            
            
            10,300
            
            
            
            16,556
            
            
            
            955
            
            
            
            —
            
            
            
            27,811Current
      portion of long-term debt
            
            
            4,193
            
            
            
            2,377
            
            
            
            —
            
            
            
            —
            
            
            
            6,570Other
      current liabilities
            
            
            11,827
            
            
            
            16,146
            
            
            
            800
            
            
            
            —
            
            
            
            28,773Current
      liabilities of discontinued operations, facility exits
            
            
            —
            
            
            
            767
            
            
            
            ––
            
            
            
            ––
            
            
            
            767Total
      current liabilities
            
            
            29,957
            
            
            
            37,831
            
            
            
            1,912
            
            
            
            —
            
            
            
            69,700LONG-TERM
      DEBT—Less current portion
            
            
            641,593
            
            
            
            2,752
            
            
            
            —
            
            
            
            —
            
            
            
            644,345OTHER
      LONG-TERM LIABILITIES
            
            
            136
            
            
            
            7,488
            
            
            
            30
            
            
            
            —
            
            
            
            7,654OTHER
      LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS, FACILITY
      EXITS
            
            
            —
            
            
            
            1,853
            
            
            
            —
            
            
            
            —
            
            
            
            1,853DEFERRED
      INCOME TAXES
            
            
            134,492
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            134,492Total
      liabilities
            
            
            806,178
            
            
            
            49,924
            
            
            
            1,942
            
            
            
            —
            
            
            
            858,044EQUITY:CRC
      HEALTH CORPORATION STOCKHOLDER'S EQUITY
            
            
            305,311
            
            
            
            1,062,897
            
            
            
            13,329
            
            
            
            (1,076,226
            )
            
            
            305,311NONCONTROLLING INTEREST
            
            
            —
            
            
            
            —
            
            
            
            88
            
            
            
            —
            
            
            
            88Total
      equity
            
            
            305,311
            
            
            
            1,062,897
            
            
            
            13,417
            
            
            
            (1,076,226
            )
            
            
            305,399TOTAL
      LIABILITIES AND EQUITY
            
            $
            1,111,489
            
            
            $
            1,112,821
            
            
            $
            15,359
            
            
            $
            (1,076,226
            )
            
            $
            1,163,443




13


Condensed
Consolidating Balance Sheet as of December 31, 2008


(In
thousands)




CRC
      Health
              Corporation
            
            
            Subsidiary
              Guarantors
            
            
            Subsidiary
              Non-Guarantors
            
            
            Eliminations
            
            
            ConsolidatedASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            —
            
            
            $
            2,180
            
            
            $
            360
            
            
            $
            —
            
            
            $
            2,540Accounts
      receivable—net of allowance for doubtful accounts
            
            
            2
            
            
            
            30,390
            
            
            
            434
            
            
            
            —
            
            
            
            30,826Prepaid
      expenses
            
            
            4,420
            
            
            
            3,204
            
            
            
            79
            
            
            
            —
            
            
            
            7,703Other
      current assets
            
            
            31
            
            
            
            1,543
            
            
            
            44
            
            
            
            —
            
            
            
            1,618Deferred
      income taxes
            
            
            4,029
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,029Current
      assets of discontinued operations, facility exits
            
            
            —
            
            
            
            14,125
            
            
            
            —
            
            
            
            —
            
            
            
            14,125Total
      current assets
            
            
            8,482
            
            
            
            51,442
            
            
            
            917
            
            
            
            —
            
            
            
            60,841PROPERTY
      AND EQUIPMENT—Net
            
            
            8,712
            
            
            
            118,358
            
            
            
            2,658
            
            
            
            —
            
            
            
            129,728GOODWILL
            
            
            —
            
            
            
            592,280
            
            
            
            11,798
            
            
            
            —
            
            
            
            604,078INTANGIBLE
      ASSETS—Net
            
            
            —
            
            
            
            354,463
            
            
            
            —
            
            
            
            —
            
            
            
            354,463OTHER
      ASSETS
            
            
            18,778
            
            
            
            1,266
            
            
            
            21
            
            
            
            —
            
            
            
            20,065INVESTMENT
      IN SUBSIDIARIES
            
            
            1,082,757
            
            
            
            —
            
            
            
            —
            
            
            
            (1,082,757
            )
            
            
            —TOTAL
      ASSETS
            
            $
            1,118,729
            
            
            $
            1,117,809
            
            
            $
            15,394
            
            
            $
            (1,082,757
            )
            
            $
            1,169,175LIABILITIES
      AND EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            3,636
            
            
            $
            2,424
            
            
            $
            105
            
            
            $
            —
            
            
            $
            6,165Accrued
      liabilities
            
            
            14,819
            
            
            
            13,514
            
            
            
            728
            
            
            
            —
            
            
            
            29,061Income
      taxes payable
            
            
            1,201
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,201Current
      portion of long-term debt
            
            
            4,193
            
            
            
            2,329
            
            
            
            —
            
            
            
            —
            
            
            
            6,522Other
      current liabilities
            
            
            14,603
            
            
            
            16,354
            
            
            
            700
            
            
            
            —
            
            
            
            31,657Current
      liabilities of discontinued operations, facility exits
            
            
            —
            
            
            
            703
            
            
            
            —
            
            
            
            —
            
            
            
            703Total
      current liabilities
            
            
            38,452
            
            
            
            35,324
            
            
            
            1,533
            
            
            
            —
            
            
            
            75,309LONG-TERM
      DEBT—Less current portion
            
            
            642,575
            
            
            
            4,055
            
            
            
            —
            
            
            
            —
            
            
            
            646,630OTHER
      LONG-TERM LIABILITIES
            
            
            149
            
            
            
            7,378
            
            
            
            26
            
            
            
            —
            
            
            
            7,553OTHER
      LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS, FACILITY
      EXITS
            
            
            —
            
            
            
            1,909
            
            
            
            —
            
            
            
            —
            
            
            
            1,909DEFERRED
      INCOME TAXES
            
            
            134,331
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            134,331Total
      liabilities
            
            
            815,507
            
            
            
            48,666
            
            
            
            1,559
            
            
            
            —
            
            
            
            865,732EQUITY:CRC
      HEALTH CORPORATION STOCKHOLDER'S EQUITY
            
            
            303,222
            
            
            
            1,069,143
            
            
            
            13,614
            
            
            
            (1,082,757
            )
            
            
            303,222NONCONTROLLING INTEREST
            
            
            —
            
            
            
            —
            
            
            
            221
            
            
            
            —
            
            
            
            221Total
      Equity
            
            
            303,222
            
            
            
            1,069,143
            
            
            
            13,835
            
            
            
            (1,082,757
            )
            
            
            303,443TOTAL
      LIABILITIES AND EQUITY
            
            $
            1,118,729
            
            
            $
            1,117,809
            
            
            $
            15,394
            
            
            $
            (1,082,757
            )
            
            $
            1,169,175




14


Condensed Consolidating Statements of
Operations


For
the Three Months Ended March 31, 2009


(In
thousands) (Unaudited)




CRC
      Health
              Corporation
            
            
            Subsidiary
              Guarantors
            
            
            Subsidiary
              Non-Guarantors
            
            
            Eliminations
            
            
            ConsolidatedNET
      REVENUE:Net
      client service revenue
            
            $
            6
            
            
            $
            100,923
            
            
            $
            3,080
            
            
            $
            —
            
            
            $
            104,009Other
      revenue
            
            
            4
            
            
            
            1,884
            
            
            
            —
            
            
            
            —
            
            
            
            1,888Management
      fee revenue
            
            
            20,063
            
            
            
            —
            
            
            
            —
            
            
            
            (20,063
            )
            
            
            —Total
      net revenue
            
            
            20,073
            
            
            
            102,807
            
            
            
            3,080
            
            
            
            (20,063
            )
            
            
            105,897OPERATING
      EXPENSES:Salaries
      and benefits
            
            
            5,176
            
            
            
            50,543
            
            
            
            1,755
            
            
            
            —
            
            
            
            57,474Supplies,
      facilities and other operating costs
            
            
            1,903
            
            
            
            27,710
            
            
            
            1,903
            
            
            
            —
            
            
            
            31,516Provision
      for doubtful accounts
            
            
            —
            
            
            
            1,520
            
            
            
            13
            
            
            
            —
            
            
            
            1,533Depreciation
      and amortization
            
            
            891
            
            
            
            4,705
            
            
            
            166
            
            
            
            —
            
            
            
            5,762Management
      fee expense
            
            
            —
            
            
            
            19,334
            
            
            
            729
            
            
            
            (20,063
            )
            
            
            —Total
      operating expenses
            
            
            7,970
            
            
            
            103,812
            
            
            
            4,566
            
            
            
            (20,063
            )
            
            
            96,285OPERATING
      INCOME (LOSS)
            
            
            12,103
            
            
            
            (1,005
            )
            
            
            (1,486
            )
            
            
            —
            
            
            
            9,612INTEREST
      EXPENSE, NET
            
            
            (11,821
            )
            
            
            (131
            )
            
            
            —
            
            
            
            —
            
            
            
            (11,952
            )OTHER
      EXPENSE
            
            
            (82
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (82
            )INCOME
      (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
            
            
            200
            
            
            
            (1,136
            )
            
            
            (1,486
            )
            
            
            —
            
            
            
            (2,422
            )INCOME
      TAX EXPENSE (BENEFIT)
            
            
            181
            
            
            
            (1,030
            )
            
            
            (1,346
            )
            
            
            —
            
            
            
            (2,195
            )INCOME
      (LOSS) FROM CONTINUING OPERATIONS, NET OF TAX
            
            
            19
            
            
            
            (106
            )
            
            
            (140
            )
            
            
            —
            
            
            
            (227
            )LOSS
      FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($649)
            
            
            —
            
            
            
            (1,086
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,086
            )NET
      INCOME (LOSS)
            
            
            19
            
            
            
            (1,192
            )
            
            
            (140
            )
            
            
            —
            
            
            
            (1,313
            )LESS:
      NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
            
            
            —
            
            
            
            (4
            )
            
            
            (124
            )
            
            
            —
            
            
            
            (128
            )EQUITY
      IN INCOME OF SUBSIDIARIES, NET OF TAX
            
            
            (1,204
            )
            
            
            —
            
            
            
            —
            
            
            
            1,204
            
            
            
            —NET
      (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH CORPORATION
            
            $
            (1,185
            )
            
            $
            (1,188
            )
            
            $
            (16
            )
            
            $
            1,204
            
            
            $
            (1,185
            )






15


Condensed Consolidating Statements of
Operations


For
the Three Months Ended March 31, 2008


(In
thousands) (Unaudited) (Restated)




CRC
      Health
              Corporation
            
            
            Subsidiary
              Guarantors
            
            
            Subsidiary
              Non-Guarantors
            
            
            Eliminations
            
            
            ConsolidatedNET
      REVENUE:Net
      client service revenue
            
            $
            10
            
            
            $
            109,340
            
            
            $
            2,629
            
            
            $
            —
            
            
            $
            111,979Other
      revenue
            
            
            2
            
            
            
            1,969
            
            
            
            —
            
            
            
            —
            
            
            
            1,971Management
      fee revenue
            
            
            21,479
            
            
            
            —
            
            
            
            —
            
            
            
            (21,479
            )
            
            
            —Total
      net revenue
            
            
            21,491
            
            
            
            111,309
            
            
            
            2,629
            
            
            
            (21,479
            )
            
            
            113,950OPERATING
      EXPENSES:Salaries
      and benefits
            
            
            4,210
            
            
            
            53,593
            
            
            
            1,584
            
            
            
            —
            
            
            
            59,387Supplies,
      facilities and other operating costs
            
            
            2,010
            
            
            
            29,356
            
            
            
            2,046
            
            
            
            —
            
            
            
            33,412Provision
      for doubtful accounts
            
            
            8
            
            
            
            1,587
            
            
            
            56
            
            
            
            —
            
            
            
            1,651Depreciation
      and amortization
            
            
            521
            
            
            
            4,835
            
            
            
            108
            
            
            
            —
            
            
            
            5,464Management
      fee expense
            
            
            —
            
            
            
            20,981
            
            
            
            498
            
            
            
            (21,479
            )
            
            
            —Total
      operating expenses
            
            
            6,749
            
            
            
            110,352
            
            
            
            4,292
            
            
            
            (21,479
            )
            
            
            99,914OPERATING
      INCOME (LOSS)
            
            
            14,742
            
            
            
            957
            
            
            
            (1,663
            )
            
            
            —
            
            
            
            14,036INTEREST
      EXPENSE, NET
            
            
            (14,329
            )
            
            
            (188
            )
            
            
            —
            
            
            
            —
            
            
            
            (14,517
            )OTHER
      EXPENSE
            
            
            (1,618
            )
            
            
            ––
            
            
            
            —
            
            
            
            —
            
            
            
            (1,618
            )(LOSS)
      INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
            
            
            (1,205
            )
            
            
            769
            
            
            
            (1,663
            )
            
            
            —
            
            
            
            (2,099
            )INCOME
      TAX (BENEFIT) EXPENSE
            
            
            (549
            )
            
            
            350
            
            
            
            (757
            )
            
            
            —
            
            
            
            (956
            )(LOSS) INCOME
      FROM CONTINUING OPERATIONS, NET OF TAX
            
            
            (656
            )
            
            
            419
            
            
            
            (906
            )
            
            
            —
            
            
            
            (1,143
            )LOSS
      FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF ($363)
            
            
            —
            
            
            
            (684
            )
            
            
            —
            
            
            
            —
            
            
            
            (684
            )NET
      (LOSS) INCOME
            
            
            (656
            )
            
            
            (265
            )
            
            
            (906
            )
            
            
            —
            
            
            
            (1,827
            )LESS: NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING
      INTEREST
            
            
            ––
            
            
            
            —
            
            
            
            (303
            )
            
            
            —
            
            
            
            (303
            )EQUITY
      IN INCOME OF SUBSIDIARIES, NET OF TAX
            
            
            (868
            )
            
            
            —
            
            
            
            —
            
            
            
            868
            
            
            
            —NET (LOSS) INCOME ATTRIBUTABLE TO CRC HEALTH
      CORPORATION
            
            $
            (1,524
            )
            
            $
            (265
            )
            
            $
            (603
            )
            
            $
            868
            
            
            $
            (1,524
            )




16


Condensed Consolidating Statements of Cash
Flows


For
the Three Months Ended March 31, 2009
 (In
thousands) (Unaudited)
  CRC
      Health
                Corporation
              
              
              Subsidiary
                Guarantors
              
              
              Subsidiary
                Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      cash (used in) provided by operating activities
              
              $
              (5,715
              )
              
              $
              8,173
              
              
              $
              233
              
              
              $
              ––
              
              
              $
              2,691CASH
      FLOWS FROM INVESTING ACTIVITIES:Additions
      of property and equipment
              
              
              (712
              )
              
              
              (1,285
              )
              
              
              (317
              )
              
              
              ––
              
              
              
              (2,314
              )Proceeds
      from sale of property and equipment
              
              
              110
              
              
              
              16
              
              
              
              ––
              
              
              
              ––
              
              
              
              126Acquisition
      adjustments
              
              
              (59
              )
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              
              (59
              )Net
      cash used in investing activities
              
              
              (661
              )
              
              
              (1,269
              )
              
              
              (317
              )
              
              
              —
              
              
              
              (2,247
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Intercompany
      transfers
              
              
              8,826
              
              
              
              (8,932
              )
              
              
              106
              
              
              
              ––
              
              
              
              —Capital
      distributed to Parent
              
              
              (12
              )
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              
              (12
              )Capitalizedfinancing
      costs
              
              
              (40
              )
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              
              (40
              )Noncontrolling interest buyout
              
              
              (89
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (89
              )Repayments
      of capital lease obligations
              
              
              ––
              
              
              
              (4
              )
              
              
              ––
              
              
              
              ––
              
              
              
              (4
              )Repayments
      of long-term debt
              
              
              (2,309
              )
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              
              (2,309
              )Net
      cash provided by (used in) financing activities
              
              
              6,376
              
              
              
              (8,936
              )
              
              
              106
              
              
              
              ––
              
              
              
              (2,454
              )(DECREASE)
      INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              —
              
              
              
              (2,032
              )
              
              
              22
              
              
              
              —
              
              
              
              (2,010
              )CASH
      AND CASH EQUIVALENTS Beginning of period
              
              
              —
              
              
              
              2,180
              
              
              
              360
              
              
              
              —
              
              
              
              2,540CASH
      AND CASH EQUIVALENTS End of period
              
              $
              —
              
              
              $
              148
              
              
              $
              382
              
              
              $
              —
              
              
              $
              530
  17




Condensed Consolidating Statements of Cash
Flows
 For
the Three Months Ended March 31, 2008
 (In
thousands) (Unaudited) (Restated)
  CRC
      Health
                Corporation
              
              
              Subsidiary
                Guarantors
              
              
              Subsidiary
                Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      cash used in operating activities
              
              $
              (4,624
              )
              
              $
              (953
              )
              
              $
              (472
              )
              
              $
              —
              
              
              $
              (6,049
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Additions
      of property and equipment-net
              
              
              (1,381
              )
              
              
              (4,296
              )
              
              
              (106
              )
              
              
              —
              
              
              
              (5,783
              )Proceeds
      from sale of property and equipment
              
              
              ––
              
              
              
              49
              
              
              
              ––
              
              
              
              —
              
              
              
              49Prior
      period acquisition adjustments
              
              
              —
              
              
              
              (33
              )
              
              
              ––
              
              
              
              —
              
              
              
              (33
              )Payments
      made under earnout arrangements
              
              
              ––
              
              
              
              (2,066
              )
              
              
              ––
              
              
              
              —
              
              
              
              (2,066
              )Net
      cash used in investing activities
              
              
              (1,381
              )
              
              
              (6,346
              )
              
              
              (106
              )
              
              
              —
              
              
              
              (7,833
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Intercompany
      transfers
              
              
              (5,389
              )
              
              
              4,748
              
              
              
              641
              
              
              
              —
              
              
              
              —Capital
      contributed by parent
              
              
              24
              
              
              
              ––
              
              
              
              ––
              
              
              
              —
              
              
              
              24Capitalized
      financing costs
              
              
              (40
              )
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              
              (40
              )Repayments
      of capital lease obligations
              
              
              ––
              
              
              
              (6
              )
              
              
              ––
              
              
              
              —
              
              
              
              (6
              )Net
      borrowingsunder
      revolver line of credit
              
              
              14,000
              
              
              
              ––
              
              
              
              ––
              
              
              
              —
              
              
              
              14,000Repayments
      of long-term debt
              
              
              (2,590
              )
              
              
              ––
              
              
              
              ––
              
              
              
              —
              
              
              
              (2,590
              )Net
      cash provided by financing activities
              
              
              6,005
              
              
              
              4,742
              
              
              
              641
              
              
              
              —
              
              
              
              11,388NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              —
              
              
              
              (2,557
              )
              
              
              63
              
              
              
              —
              
              
              
              (2,494
              )CASH
      AND CASH EQUIVALENTS-Beginning of period
              
              
              —
              
              
              
              4,929
              
              
              
              189
              
              
              
              —
              
              
              
              5,118CASH
      AND CASH EQUIVALENTS-End of period
              
              $
              —
              
              
              $
              2,372
              
              
              $
              252
              
              
              $
              —
              
              
              $
              2,624
  18


15.
            RESTRUCTURING


During the three months
ended March 31, 2009, the Company continued its restructuring under the FY08
Plan. Actions under the FY08 Plan are focused on those facilities which
have been negatively impacted by the economic crisis and the depressed credit
market and include facility consolidations and exits as well as certain
workforce reductions. During the three months ended March 31, 2009, the
Company closed one program facility within its healthy living division and
eliminated employee positions across all divisions.
  Facility exit actions
include the closure, sale, or disposal of certain facilities across all
divisions and are expected to be substantially completed by the end of
2009.
 Workforce
      Reduction
              
              
              Consolidation
      and Exit of Excess Facilities
              
              
              Total(in
      thousands)Restructuring
      reserve as of December 31, 2008
              
              $
              176
              
              
              $
              3,104
              
              
              $
              3,280Expenses
              
              
              328
              
              
              
              974
              
              
              
              1,302Cash
      (payments) receipts, net
              
              
              (346
              )
              
              
              (136
              )
              
              
              (482
              )Restructuring
      reserve as of March 31, 2009
              
              $
              158
              
              
              $
              3,942
              
              
              
              4,100
 Under the FY08 Plan, the
Company recorded non-cash impairment charges of $0.4 million for intangible
assets not subject to amortization, $1.0 million for intangible assets
subject to amortization, and $0.1 million for write-off of property and
equipment during the three months ended March 31,
2009.
  Restructuring related
impairment charges attributable to those facilities recognized as discontinued
operations under the FY08 Plan totaled $1.4 million for the three months ended
March 31, 2009. Excluding asset impairment charges and write-off of
property and equipment, the Company recognized restructuring charges of
approximately $0.7 million and $0.6 million in its healthy living
and recovery divisions, respectively.
  16.
              DISCONTINUED
      OPERATIONS As part
of the FY08 Plan,the
Company announced its intention to sell, dispose, or cease operations at certain
of its facilities across each of its business divisions. At December 31,
2008, these facilities included one therapeutic boarding school and one eating
disorder start-up in its healthy living division, and eight outpatient treatment
clinics in its recovery division. At March 31, 2009, the Company had
classified a total of eleven facilities as discontinued operations
inclusive of one outdoor program within its healthy living
division.
  Activities
related to discontinued operations are recognized in the Company’s condensed
consolidated statement of operations under discontinued operations for
all periodspresented.
  The
results of operations for those facilities classified as discontinued operations
are summarized below (in thousands):
  For
      the Three Months Ended March 31,2009
                    
                    
                    2008Net
      revenue
                    
                    $
                    1,050
                    
                    
                    $
                    2,105Operating
      expenses
                    
                    
                    1,369
                    
                    
                    
                    3,152Asset
      impairment
                    
                    
                    1,417
                    
                    
                    
                    —Gain on
      disposals
                    
                    
                    (1
                    )
                    
                    
                    —Loss
      before income taxes
                    
                    
                    (1,735
                    )
                    
                    
                    (1,047
                    )Tax
      benefit
                    
                    
                    (649
                    )
                    
                    
                    (363
                    )Loss
      from discontinued operations
                    
                    $
                    (1,086
                    )
                    
                    $
                    (684
                    )


19


17.
            SEGMENT
      INFORMATION




Effective January 1,
2009, the Company realigned its operations and internal organizational structure
by combining its "youth division" with its "healthy living division." The
healthy living division was previously included as a component of
"corporate/other."  There were no organizational changes to the
Company's recovery division.




In accordance with the
criteria of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS
131"),  the Company has two identified operating segments under
the new organizational structure: recovery division and healthy living division.
For segment reporting purposes, the Company has identified two reportable
segments in accordance with its new organizational structure: recovery and
healthy living.   All periods presented have been restated to
give effect to the change in reportable segments.




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




The Company’s reportable
segments are as follows:




Recovery—The
recovery reportable 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: comprehensive treatment centers ("CTC"), inpatient/residential care,
partial/day treatment, intensive outpatient groups, therapeutic living/half-way
house environments, aftercare centers and detoxification. As of March  31,
2009, the recovery segment provided substance abuse and behavioral health
services to patients at 103 facilities located in twenty-two states.




Healthy Living—The healthy
living segment includes programs and treatment services for adolescent youth as
well as treatment services for eating disorders and weight management
serving all age groups. Adolescent and youth treatment services include
therapeutic and educational programs for children and adolescents struggling
with academic, emotional, and behavioral issues.




As of March 31, 2009,
the healthy living segment operated twenty-seven youth educational
facilities in ten states and its offerings include adolescent
therapeutic boarding schools and youth experiential outdoor education
programs and summer camps. As of March 31, 2009, the healthy living segment also
operated eighteen facilities in eight states and one facility in the
United Kingdom which provided eating disorder treatment services, obesity
treatment services, and weight loss programs.




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.







20







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




Three
              Months Ended
              March
      31,
              2009
            
            
            Three
              Months Ended
              March
      31,
              2008Net
      revenue:Recovery
      division
            
            $
            75,112
            
            
            $
            76,093Healthy
      living division
            
            
            30,721
            
            
            
            37,759Corporate
            
            
            64
            
            
            
            98Total
      consolidated net revenue
            
            $
            105,897
            
            
            $
            113,950Operating
      expenses:Recovery
      division
            
            $
            54,459
            
            
            $
            55,045Healthy
      living division
            
            
            33,799
            
            
            
            38,096Corporate
            
            
            8,027
            
            
            
            6,773Total
      consolidated operating expenses
            
            $
            96,285
            
            
            $
            99,914Operating
      income (loss):Recovery
      division
            
            $
            20,653
            
            
            $
            21,048Healthy
      living division
            
            
            (3,078
            )
            
            
            (337
            )Corporate
            
            
            (7,963
            )
            
            
            (6,675
            )Total
      consolidated operating income
            
            $
            9,612
            
            
            $
            14,036Operating
      (loss) income:Total
      consolidated operating income
            
            $
            9,612
            
            
            $
            14,036Interest
      expense, net
            
            
            (11,952
            )
            
            
            (14,517
            )Other
      expense
            
            
            (82
            )
            
            
            (1,618
            )Total
      consolidated loss from continuing operations before income
      taxes
            
            $
            (2,422
            )
            
            $
            (2,099
            )Capital
      expenditures:Recovery
      division
            
            $
            1,256
            
            
            $
            2,441Healthy
      living division
            
            
            346
            
            
            
            1,961Corporate
            
            
            712
            
            
            
            1,381Total
      consolidated capital expenditures
            
            $
            2,314
            
            
            $
            5,783March
      31,
              2009
            
            
            
            December 31,
              2008Total
      assets:Recovery
      division
            
            $
            898,927
            
            
            $
            899,360Healthy living division
            
            
            218,169
            
            
            
            222,525Corporate
            
            
            46,347
            
            
            
            47,290Total
      consolidated assets
            
            $
            1,163,443
            
            
            $
            1,169,175


21


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.




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. Effective January 1,
2009, the Company realigned its operations and internal organizational structure
by combining its "youth division" with its "healthy living division",
 formerly included as a component of "corporate/other."  There
were no organizational changes to the Company's recovery division.




We
deliver our services through our two divisions, the recovery division and
the healthy living division. Our recovery division provides our substance abuse
and behavioral disorder treatment services through our residential treatment
facilities and outpatient treatment clinics. Our healthy living division
provides education 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.




We
have two operating segments: recovery division and healthy living division.
As of March 31, 2009, our recovery division, which operates 29 inpatient
and 74 outpatient facilities in 22 states, provides treatment services
to patients suffering from chronic addiction related diseases and related
behavioral disorders. As of March 31, 2009, our recovery division treated
approximately 28,000 patients per day. As of March 31, 2009, our healthy
living division, which operates 27 youth programs in 10 states,
provides a wide variety of therapeutic and educational programs for
underachieving young people. Our healthy living division
also operates eighteen facilities in eight states and one
facility in the United Kingdom with a focus on providing treatment services
for eating disorders and weight management. Other activities classified as
corporate represent revenue and expenses associated with eGetgoing, an online
internet treatment option, and general and administrative expenses (i.e.,
expenses associated with our corporate offices in Cupertino, California, which
provides management, financial, human resource and information system support)
and stock option-based compensation expense that are not allocated to the
segments.




Basis
of Presentation




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 balance sheets of CRC Health Corporation, as
of March 31, 2009,  and December 31, 2008, the condensed consolidated
statements of operations for the three months ended March 31, 2009 and
2008, and the condensed consolidated statements of cash flows for the three
months ended March 31, 2009 and March 31, 2008 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. However, the unaudited balance sheets as of December 31, 2008
have been derived from audited balance sheets for the respective
period.




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,
2008. The
unaudited condensed consolidated income statements and unaudited condensed
consolidated balance sheets have been presented to include the effects of
discontinued operations for all periods presented.




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 .






EXECUTIVE
SUMMARY




We
generate revenue by providing substance abuse treatment services and youth
treatment services in the United States. 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 patient. Client service revenue is reported at the estimated net
realizable amounts from clients, third-party payors and others for services
rendered. Revenue under third-party payor agreements is subject to audit and
retroactive adjustment. Provisions for estimated third-party payor settlements
are provided for in the period the related services are rendered and adjusted in
future periods as final settlements are determined. Revenue for educational
services provided 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 ten months.
Alumni fees revenue represents non-refundable upfront fees for post graduation
services and these fees are deferred and recognized systematically over the
contracted life. During the three months ended March 31, 2009 and 2008, we
generated 81.3% and 84.4% of our net revenue from non-governmental sources,
including 65.1% and 69.1% from self payors, respectively, and 16.3% and 15.3%
from commercial payors, respectively. Substantially all of our government
program net revenue was received from multiple counties and states under
Medicaid and similar programs.




22




During
the three months ended March 31, 2009, our consolidated same-facility net
revenue decreased by $9.1 million or 8.0% when compared to the
comparable period in 2008.  “Same facility” means a comparison over the
comparable period of the financial performance of a facility we have operated
for at least one year.




Our
operating expenses include salaries and benefits, supplies, facilities and other
operating costs, provision for doubtful accounts, depreciation and amortization
and acquisition related costs. Operating expenses for our recovery and healthy
living divisions exclude corporate level general and administrative costs (i.e.,
expenses associated with our corporate offices in Cupertino, California, which
provide management, financial, human resources and information systems support),
stock-based compensation expense and expenses associated with
eGetgoing.




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 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, 2009 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, 2008 in
our Annual Report on Form 10-K.




RECENT
ACCOUNTING PRONOUNCEMENTS




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, 2008. See Note 1 and Note 2.




23


RESULTS
OF OPERATIONS




The
following table presents our results of operations by segment for the three
months ended March 31, 2009 and 2008 (dollars in thousands, except for
percentages; percentages are calculated as percentage of total net revenue
unless otherwise indicated).




Three
      Months Ended March 31,Statement
      of Income Data:
            
            2009
            
            
            %
            
            
            2008
            
            
            %Net
      revenue:Recovery
      division
            
            $
            75,112
            
            
            
            70.9
            %
            
            $
            76,093
            
            
            
            66.8
            %Healthy
      living division
            
            
            30,721
            
            
            
            29.0
            %
            
            
            37,759
            
            
            
            33.1
            %Corporate
            
            
            64
            
            
            
            0.1
            %
            
            
            98
            
            
            
            0.1
            %Total
      net revenue
            
            
            105,897
            
            
            
            100.0
            %
            
            
            113,950
            
            
            
            100.0
            %Operating
      expenses:Recovery
      division
            
            
            54,459
            
            
            
            51.4
            %
            
            
            55,045
            
            
            
            48.3
            %Healthy
      living division
            
            
            33,799
            
            
            
            31.9
            %
            
            
            38,096
            
            
            
            33.4
            %Corporate
            
            
            8,027
            
            
            
            7.6
            %
            
            
            6,773
            
            
            
            6.0
            %Total
      operating expenses
            
            
            96,285
            
            
            
            90.9
            %
            
            
            99,914
            
            
            
            87.7
            %Operating
      income (loss):Recovery
      division
            
            
            20,653
            
            
            
            19.5
            %
            
            
            21,048
            
            
            
            18.5
            %Healthy
      living division
            
            
            (3,078
            )
            
            
            (2.9
            )%
            
            
            (337
            )
            
            
            (0.3
            )%Corporate
            
            
            (7,963
            )
            
            
            (7.5
            )%
            
            
            (6,675
            )
            
            
            (5.9
            )%Total
      operating (loss) income
            
            
            9,612
            
            
            
            9.1
            %
            
            
            14,036
            
            
            
            12.3
            %Interest
      expense, net
            
            
            (11,952
            )
            
            
            
            
            
            
            (14,517
            )Other
      expense
            
            
            (82
            )
            
            
            
            
            
            
            (1,618
            )Loss
      from continuing operations before income taxes
            
            
            (2,422
            )
            
            
            
            
            
            
            (2,099
            )Income
      tax benefit
            
            
            (2,195
            )
            
            
            
            
            
            
            (956
            )Loss
      from continuing operations, net of tax
            
            
            (227
            )
            
            
            
            
            
            
            (1,143
            )Loss
      from discontinued operations, (net of tax benefit of ($649) and ($363) in
      the three months ended March 31, 2009 and 2008,
    respectively)
            
            
            (1,086
            )
            
            
            
            
            
            
            (684
            )Net
      loss
            
            
            (1,313
            )
            
            
            
            
            
            
            (1,827
            )Less:
      Net loss attributable to the noncontrolling interest
            
            
            (128
            )
            
            
            
            
            
            
            (303
            )Net
      loss attributable to CRC Health Corporation
            
            $
            (1,185
            )
            
            
            
            
            
            $
            (1,524
            )






Quarter
Ended March 31, 2009 Compared to Quarter Ended March 31, 2008






Consolidated
net revenue decreased $8.1 million, or 7.1%, to $105.9 million in 2009 from
$114.0 million in 2008. Of the total net revenue decrease, the recovery division
contributed a decrease of $1.0 million, representing 1.3% negative growth for
the division, with the remaining net revenue decrease driven by a decrease
of $7.0 million, or 18.6% in the healthy living division. The $7.0 million
decrease was driven by revenue decreases of $3.0 million each in adolescent
outdoor programs and adolescent therapeutic boarding schools. The remaining $1.0
million decrease  resulted from revenue decreases of $0.4 million in weight
management and $0.6 million in eating disorders. Of the $1.0 million net
decrease in recovery division revenue, $2.9 million or 5.7% is attributed
to decreases within our private pay facilities at  residential
treatment centers offset by $1.9 million or 7.7%, in revenue growth from
comprehensive treatment centers ("CTC"). Revenue decreases in the healthy
living division are primarily attributable to lower revenue performance across
the division due to a lessening of demand as a result of the weak economy and
the inability of families and individuals to access the credit markets and
student loan markets to fund the tuition. Recovery division same facility
revenue decreased $2.0 million or 2.7% primarily due to a $3.9 million revenue
decrease in residential treatment centers partially offset by a $1.9 million
revenue increase in CTCs. Our healthy living division same facility net
revenue decreased $7.1 million, or 18.8%, due primarily from the impact of the
aforementioned economic conditions. Of the $7.1 million decrease of same
facility net revenue within our healthy living division, $1.1 million or
2.9% was attributable to $0.7 million and $0.4 million decreases
in eating disorder and weight management revenues, respectively. The
remaining $6.0 million or 15.9% decrease in healthy living division
revenue were due to revenue decreases of $3.0 million e ach in
our adolescent residential boarding schools and adolescent outdoor
programs. Corporate division revenue was insignificant for the three months
ended March 31, 2009 and 2008.
  Consolidated
operating expenses decreased $3.6 million, or 3.6%, to $96.3 million for
the three months ended March 31, 2009 from $99.9 million in the same period of
2008. Recovery division operating expenses decreased $0.6 million year over
year. Of the $3.6 million decrease in operating expenses, the healthy
living division incurred a decrease of $4.3 million, or 11.3% primarily due to a
$1.3 million decrease in supplies, facilities, and other operating costs as well
as by a decrease of $2.9 million in salaries and benefits. Corporate
division operating expenses increased $1.3 million or $18.5% year over year
reflecting a $0.4 million increase in depreciation expense as well as an
increase of $0.9 million in salaries primarily due to facility
consolidations resulting from restructuring activities. For our recovery
division, same facility operating expenses decreased $2.2 million
or 4.3% primarily driven by decreases of $1.2 million in salaries and
benefits with CTC and residential treatment centers each contributing
decreases of $0.6 million. The remaining $1.0 million decrease was
primarily due to a reduction of $0.9 million in supplies, facilities, and other
costs within residential treatment centers. Healthy living division same
facility operating expenses decreased $4.1 million or 12.4%. Of the $4.1
million decrease, $2.6 million was due to decreases in salaries and
benefits with decreases of $1.0 million in adolescent residential
boarding schools, $1.3 million in adolescent outdoor programs, and weight
management contributing to the remaining $0.3 million decrease in same facility
division salaries and benefits. The remaining $1.5 million decrease in
healthy living division, same facility operating expenses was due to decreased
expenditures within supplies, facilities and other costs of $0.6 million in
adolescent outdoor programs, $0.7 million in adolescent
residential boarding schools, and $0.4 million in eating disorder and weight
management offset by a $0.2 million increase in depreciation and
amortization expenses.
 
 Our
consolidated operating margin was 9.1% in the quarter ended March 31, 2009
compared to 12.3% in the comparable period of 2008. On a same facility
basis, our consolidated operating margin decreased to 27.0% in the quarter ended
March 31, 2009 compared to 27.3% in the same quarter of 2008. Recovery
division same facility operating margin increased to 36.0% in the quarter ended
March 31, 2009 compared to 34.8% in the quarter ended March 31, 2008. Healthy
living division same facility operating margin decreased to 5.3% in the
quarter ended March 31, 2009 compared to 12.1% in the quarter ended March 31,
2008.The
significant decrease in our healthy living division operating margin is primarily
due to lower client census resulting
from the current weak economic environment.
 
 For the
three months ended March 31, 2009, consolidated net loss from continuing
operations decreased by approximately $0.9 million year over year
resulting in a loss of $0.2 million compared to a loss of $1.1
million in the same period of 2008. The decrease in loss from continuing
operations in 2009 is primarily attributable to decreased expenses in salaries
and benefits as well as in supplies, facilities, and other costs resulting from
our implementation of our restructuring activities. Additionally, flat
growth in our recovery division as well decreased revenue in our healthy living
division contributed to the net loss in continuing
operations.


24





Working
Capital




Working
capital is defined as total current assets, including cash and cash equivalents,
less total current liabilities, including the current portion of long-term
debt.




We had
negative working capital of $8.5 million at March 31, 2009, compared to negative
working capital of $14.5 million at December 31, 2008. The increase in
working capital from March 31, 2009 compared to December 31, 2008 is
attributed to an increase in accounts receivables of $1.3 million, a decrease of
$2.9 million in other current liabilities, a decrease of $1.2 million in
accrued liabilities a decrease of $1.2
million in income tax payable and an increase of $0.8 income tax receivable
offset by slight net increase in other liabilities.




Sources
and Uses of Cash
  Three
      Months Ended
                March 31,2009
              
              
              2008(In
      thousands)Net
      cash provided by (used in) operating activities
              
              $
              2,691
              
              
              $
              (6,049
              )Net
      cash used in investing activities
              
              
              (2,247
              )
              
              
              (7,833
              )Net
      cash (used in) provided by financing activities
              
              
              (2,454
              )
              
              
              11,388Net
      decrease in cash
              
              $
              (2,010
              )
              
              $
              (2,494
              )
  Cash
provided by operating activities was $2.7 million
for the three months ended March 31, 2009 compared to cash used in
operating activities of $6.0 million during the same period in
2008.
  Cash used
in investing activities was $2.2 million
for the three months ended March 31, 2009 compared to $7.8 million in the
same period of 2008.  The decrease in cash used in investing
activities primarily relates to a decrease in the additions of property and
equipment and in acquisitions.
  Cash used
in financing activities was $2.5 million for the three months ended March
31, 2009 compared to cash provided by financing activities of $11.4 million for
the same period in 2008. The decrease in cash provided by financing activities
is primarily due to a net decrease in borrowing under the revolving line of
credit.




Financing
and Liquidity




We intend
to fund our ongoing operations through cash generated by operations, funds
available under the revolving portion of our senior secured credit facility and
existing cash and cash equivalents. As of March 31, 2009, our senior secured
credit facility was comprised of a $408.8 million senior secured term loan
facility and a $100.0 million revolving credit facility. At March 31, 2009, the
revolving credit facility had $30.4 million available for borrowing, $61.5
million outstanding and classified on our balance sheet as long term debt,
and $8.1 million of letters of credit issued and outstanding. As part of
the acquisition of the Company by investment funds managed by Bain Capital
Partners, LLC, we issued $200.0 million in aggregate principal amount of 10.75%
senior subordinated notes due 2016 of which $177.3 million remained outstanding
at March 31, 2009. 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.




In
addition, we may expand existing recovery and youth treatment facilities and
build or acquire new facilities. Management continually assesses our capital
needs and may seek additional financing, including debt or equity, to fund
potential acquisitions or for other corporate purposes. We had 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, 2009, 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.




25


Effective
April 16, 2007, we entered into an amendment to our senior secured credit
agreement dated November 17, 2006. Per the agreement, the term loan
interest is payable quarterly at 90 day LIBOR plus 2.25% per annum;
provided that on and after such time our corporate rating from Moody’s is at
least B1 then the interest is payable quarterly at 90 day LIBOR plus 2% per
annum.  Our interest rate swaps have effectively fixed the interest
rate on a substantial portion of the term loan.  Our existing swaps
have fixed $50.0 million of the term loan at 4.990% and $200.0 million of the
term loan at 3.875%.




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 for the year ended
December 31, 2008. As of March 31, 2009, our exposure to market risk
has not changed materially since December 31, 2008.




Item 4T.
            Controls
      and Procedures




Evaluation of Disclosure Controls and Procedures




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




No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the period covered by this
Quarterly Report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




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.




26


PART II.
OTHER INFORMATION




Item 1A.
            Risk
      Factors




As of March 31, 2009  there have been no material
changes to the factors disclosed in Item 1A Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2008.








Item 6.                      Exhibits




The
Exhibit Index beginning on page 28 of this report sets forth a list of
exhibits.




27


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: May 15,
2009


CRC
      HEALTH CORPORATION(Registrant)By
            /s/    KEVIN HOGGEKevin
      Hogge,Chief
      Financial Officer(Principal
      Financial Officer and Principal
              Accounting Officer and duly authorized signatory)




28


CRC
HEALTH CORPORATION




EXHIBIT INDEX




4.li
                  Form
      of Ninth Supplemental Indenture dated as of April 27, 2009, by and among
      CRC Health Corporation, the Guarantors named therein, the New Guarantor
      named therein and U.S. Bank National Association, as Trustee, with respect
      to the 10 3 / 4 % Senior Subordinated Notes due 2016.
    ‡10.2j
                  Form
      of SUPPLEMENT NO. 10 dated as of April 27, 2009, to the Security Agreement
      dated as of February 6, 2006 among CRC Health Corporation (f/k/a CRCHealth
      Group, Inc.), CRC Health Group, Inc. (f/k/a/ CRCA Holdings, Inc.), and the
      Subsidiary of the Borrower identified therein and Citibank, N.A., ascollateral
      Agent for the Secured Parties, as defined therein.
  ‡10.3j
                  Form
      of SUPPLEMENT NO. 10 dated as of April 27, 2009, to the Guarantee
      Agreement dated as of February 6, 2006, among CRC Health Group, Inc.,CRC
      HealthCorporation,
      the Subsidiary of the Borrower identified therein and Citibank, N.A., as
      Administrative Agent. ‡31.1
                  Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive Officer
      ‡31.2
                  Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial Officer and
      Principal Accounting Officer ‡32.1
                  Section 1350
      Certification of Principal Executive Officer †32.2
                  Section 1350
      Certification of Principal Financial Officer and Principal Accounting
      Officer †





‡
            Filed
      herewith.




†
            Furnished
      herewith.









29