-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cf9tUVEdPQDSp4kq2sX2t8KLvxya2z90IrRyYQgPZRDShiFyLyIRsvF5FgvdvIDX qkzxhQOeJoHwvs+yE6yiGQ== 0001360474-08-000008.txt : 20081114 0001360474-08-000008.hdr.sgml : 20081114 20081114170342 ACCESSION NUMBER: 0001360474-08-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081114 DATE AS OF CHANGE: 20081114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRC Health CORP CENTRAL INDEX KEY: 0001360474 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 731650429 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-135172 FILM NUMBER: 081192710 BUSINESS ADDRESS: STREET 1: 20400 STEVENS CREEK BOULEVARD, SUITE 600 CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 877-272-8668 MAIL ADDRESS: STREET 1: 20400 STEVENS CREEK BOULEVARD, SUITE 600 CITY: CUPERTINO STATE: CA ZIP: 95014 10-Q 1 form10-q.htm CRC HEALTH CORP. Q308 FORM 10Q form10-q.htm
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: September 30, 2008
 
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 Company is privately held. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
 
The total number of shares of the registrant’s common stock, par value of $0.001 per share, outstanding as of November 14, 2008 was 1,000.
 
CRC HEALTH CORPORATION
 
INDEX
 
       
Page No.
  
Part I.
Financial Information
      
 
Item 1.
Financial Statements (Unaudited)
      
        3  
        4  
        5  
         6  
 
Item 2.
     29  
 
Item 3.
     34  
 
Item 4T.
     34  
           
Part II.
Other Information
        
 
Item 1A.
     35  
 
Item 6.
     35  
    36  
    37  
 
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, 2007 filed on April 7, 2008, 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.
 
2
CRC HEALTH CORPORATION
 
(In thousands, except share amounts)
 
   
September 30,
2008
    
December 31,
2007
  
ASSETS
            
CURRENT ASSETS:
            
Cash and cash equivalents
   $ 3,014     $ 5,118  
Accounts receivable, net of allowance for doubtful accounts of $5,935 in 2008 and $6,901 in 2007
     31,689       31,910  
Prepaid expenses
     6,404       7,544  
Other current assets
     1,531       2,120  
Income taxes receivable
     ––     193  
Deferred income taxes
     6,599       6,599  
Total current assets
     49,237       53,484  
PROPERTY AND EQUIPMENT—Net
     129,369       122,937  
GOODWILL
     602,854       730,684  
INTANGIBLE ASSETS—Net
     361,750       390,388  
OTHER ASSETS
     21,831       24,798  
TOTAL ASSETS
   $ 1,165,041     $ 1,322,291  
LIABILITIES AND STOCKHOLDER’S EQUITY
                
CURRENT LIABILITIES:
                
Accounts payable
   $ 7,909     $ 7,014  
Accrued liabilities
     29,186       37,582  
Current portion of long-term debt
     9,014       35,603  
       Other current liabilities
     24,582       29,824  
Income taxes payable
     6,908       ––  
Total current liabilities
     77,599       110,023  
LONG-TERM DEBT—Less current portion
     648,910       612,764  
OTHER LIABILITIES
     6,039       7,514  
DEFERRED INCOME TAXES
     121,585       145,867  
Total liabilities
     854,133       876,168  
COMMITMENTS AND CONTINGENCIES (Note 12)
                
MINORITY INTEREST
     317       374  
STOCKHOLDER’S EQUITY:
                
Common stock, $0.001 par value—1,000 shares authorized; 1,000 shares issued and outstanding at September 30, 2008 and December 31, 2007
     —       —  
Additional paid-in capital
     442,150       438,608  
(Accumulated deficit) retained earnings
    (130,559 )     7,141  
Accumulated other comprehensive  (loss) income
     (1,000 )     —  
Total stockholder’s equity
     310,591       445,749  
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
   $ 1,165,041     $ 1,322,291  
 
See notes to unaudited condensed consolidated financial statements.
 
 
3
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(In thousands)
 
   
Three Months
Ended
September 30,
2008
    
Three Months
Ended
September 30,
2007
    
Nine Months
Ended
September 30,
2008
    
Nine Months
Ended
September 30,
2007
  
NET REVENUE:
                        
Net client service revenue
   $ 124,278     $ 120,623     $
358,646
     $ 341,489  
Other revenue
     2,146       1,746       6,126       4,603  
Total net revenue
     126,424       122,369       364,772       346,092  
OPERATING EXPENSES:
                                
Salaries and benefits
     61,429       55,443       183,959       167,131  
Supplies, facilities and other operating costs
     36,926       36,557       107,582       100,677  
Provision for doubtful accounts
     1,715       2,036       5,010       5,064  
Depreciation and amortization
     5,929       5,397       17,343       16,310  
       Asset impairments     23,880       ––       23,880      
––
  
       Goodwill impairment     142,238       ––       142,238       ––  
Total operating expenses
     272,117       99,433       480,012       289,182  
(LOSS) INCOME FROM OPERATIONS
     (145,693 )      22,936       (115,240 )     56,910  
INTEREST EXPENSE, NET
     (13,125 )     (15,169 )     (40,148 )     (44,971 )
OTHER (EXPENSE)
     (37 )    
(1,217
 )      (69 )     (800 )
(LOSS) INCOME BEFORE INCOME TAXES
     (158,855 )    
6,550
       (155,457 )      11,139  
INCOME TAX (BENEFIT) EXPENSE
    (19,222 )     1,502       (17,699 )     3,375  
MINORITY INTEREST IN INCOME (LOSS) OF SUBSIDIARIES
     301       427       (57 )     275  
NET (LOSS) INCOME
   $ (139,934 )    $ 4,621     $ (137,701 )   $ 7,489  
 
See notes to unaudited condensed consolidated financial statements.
 
4
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(In thousands)
 
   
Nine Months
Ended
September 30,
2008
    
Nine Months
Ended
September 30,
2007
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net (loss) income
   $ (137,701 )    $ 7,489  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                
Depreciation and amortization
     17,343       16,310  
Amortization of debt discount and capitalized financing costs
     3,357       3,356  
Loss on interest rate swap agreement
     165       744  
Goodwill impairment
     142,238       ––  
                   Asset impairments     23,880       ––  
Gain (loss) on disposition of property
     21       (10 )
Provision for doubtful accounts
     5,010       5,064  
Stock-based compensation
     3,847       3,203  
Deferred income taxes
     (26,674 )     3,747  
Minority interest
     (57 )     275  
Changes in assets and liabilities:
                
Accounts receivable
     (4,789 )    
(5,745
 )
Income taxes receivable
     193       (2,605 )
Prepaid expenses
     1,140       1,929  
Other current assets
     589            (296)  
Accounts payable
     1,740       (926)  
Accrued liabilities
     (9,257 )      (10,037 )
                              Income taxes payable     6,908       ––  
Other current liabilities
    (6,992 )     (5,211 )
Other assets
     (39 )     357  
Other liabilities
    
168
       475  
Net cash provided by operating activities
     21,090       18,119  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Additions of property and equipment
     (18,587 )      (24,239 )
Proceeds from sale of property and equipment
     101       67  
Acquisition of business, net of cash acquired
     (11,567 )     (33,602 )
Acquisition adjustments
     (10 )      979  
Payments made under earnout arrangements
     (2,947 )     —  
Net cash used in investing activities
     (33,010 )     (56,795 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Capital  (distributed to )/contributed  from Parent
     (305 )     500  
Capitalized financing costs
     (187 )     (611 )
Repayment of capital lease obligations
     (17 )     (194 )
Net borrowings under revolving line of credit
     13,500       41,900  
Repayments of long-term debt
     (3,175 )      (4,013 )
Net cash provided by financing activities
    
9,816
       37,582  
NET  DECREASE  IN CASH AND CASH EQUIVALENTS
     (2,104 )      (1,094 )
CASH AND CASH EQUIVALENTS—Beginning of period
     5,118       4,206  
CASH AND CASH EQUIVALENTS—End of period
   $ 3,014     $ 3,112  
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
                
Payable for contingent consideration
   $ 641     $ 4,625  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Cash paid for interest
   $ 43,081     $ 47,342  
Cash paid for income taxes, net of refunds
   $ 1,430     $ 2,235  
 
 
See notes to unaudited condensed consolidated financial statements.
 
5
CRC HEALTH CORPORATION
 
 
1.
ORGANIZATION
 
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 Company delivers its substance abuse and addiction disease treatment services through residential and outpatient treatment facilities, which are referred to as the Company’s recovery division. As of September 30, 2008, the Company operated 109 residential and outpatient treatment facilities in 22 states and treated approximately 28,000 patients per day. The Company delivers its youth treatment services through its residential schools, wilderness programs and summer camps, which are referred to as the Company’s youth division. As of September 30, 2008, the Company’s youth division operated programs at 29 facilities in 10 states. The Company’s healthy living division provides treatment services for eating disorders and obesity, each of which may be effectively treated through a combination of medical, psychological and social treatment programs. As of September 30, 2008, the Company’s healthy living division operated 16 facilities in eight states and one facility in the United Kingdom.
 
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation and Principles of Consolidation—These interim, unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable for interim financial information. 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.
 
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, 2007.
 
Use of Estimates—Preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
 
Goodwill and Other Intangible Assets—In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), the Company tests goodwill and indefinite lived intangible assets for impairment annually, at the beginning of its fourth quarter or more frequently if evidence of possible impairment arises. 
 
The provisions of SFAS 142 require that a two-step impairment test be performed on goodwill. In the first step, the Company compares the fair value of the reporting unit being tested to its carrying value. The Company's reporting units are consistent with the reportable segments identified in Note 16.  The Company determines the fair value of its reporting units using a combination of an income approach and a market approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, the Company estimates fair value based on what investors are paying for similar interests in comparable companies through the development of ratios of market prices to various earnings indications of comparable companies taking into consideration adjustments for growth prospects, debt levels and overall size. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then the Company records an impairment loss equal to the difference.  At September 30, 2008, the Company tested its youth division and its healthy living division for possible impairment based upon year to date results of operations of the youth division, economic conditions, including the lack of availability of student loans and other factors.  The Company believes that there will be a decrease in expected future cash flows, and it has recognized a non-cash charge of $142.2 million for impairment of goodwill allocated to its youth division as well as a non-cash charge of $6.0 million related to intangible assets not subject to amortization for its youth division. Impairment charges related to goodwill and  intangible assets not subject to amortization are included in the condensed consolidated statement of operations under goodwill impairment and asset impairment, respectively.
 
6
 
The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions at many points during the analysis.  The Company's estimated future cash flows are based on assumptions that are consistent with its annual planning process and include estimates for revenue and operating margins and future economic and market conditions. Actual future results may differ from those estimates. The Company bases its fair value estimates on assumptions it believes to be reasonable at the time, but that are unpredictable and inherently uncertain. In addition, the Company makes certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of its reporting units tested.  See Note 6.
 
Long-Lived Assets—The Company tests for impairment of its long-lived assets including property and equipment and intangible assets subject to amortization in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the impairment or Disposal of Long Lived Assets ("SFAS 144").  Under the provisions of SFAS 144, the Company tests its long lived assets for impairment whenever events and changes in circumstances indicate that the carrying value of certain of its assets may not be recoverable.  According to SFAS 144, if  the undiscounted future cash flows from the asset tested are less than the carrying value, a loss equal to the difference between the carrying value and the fair market value of the asset is recorded. 
 
The Company's analysis of its undiscounted cash flows requires judgment with respect to many factors, including future cash flows, success at executing its business strategy, and future revenue and expense growth rates. It is possible that the Company's estimates of undiscounted cash flows may change in the future resulting in the need to reassess the carrying value of its long-lived assets for impairment.
 
For the three and nine months ended September 30, 2008, the Company recognized  a non-cash charge of  $1.5 million related to impairment of long-lived assets and a $16.4 million non-cash charge related to impairment of intangible assets subject to amortization.  These charges are related to the Company's youth division and are included in the Company's condensed consolidated statement of operations under asset impairment.  See Note 5 and see Note 6.
 
Facility Closures and Restructuring Costs—The Company periodically reviews its facilities to ensure proper alignment of its operations with its business strategy.  The Company accounts for facility closures and restructuring costs in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS 146").  The Company records as an obligation, the present value of estimated costs that will not be recovered. These costs include employment termination benefits, lease contract termination costs, the book value of abandoned property, and other associated costs.  At September 30, 2008, the Company had not incurred any liabilities related to costs associated with exit or disposal activities.  See Note 17.
 
Recent Accounting Pronouncements— In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines and establishes a framework for measuring fair value and expands related disclosures, but it does not require any new fair value measurements.
 
SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, effective February 6, 2008, the FASB deferred the effective date of SFAS 157 for one year for non financial assets and non financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
 
The Company adopted the financial asset and liability provisions of SFAS 157 on January 1, 2008. The Company has not adopted the non-financial asset and non-financial liability provisions of SFAS 157. See Note 10 for additional information.
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment to FASB Statement No. 115 (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that would otherwise not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and may generally be made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure at fair value. The Company adopted SFAS 159 on January 1, 2008. Upon adoption and for the nine months ended September 30, 2008, the Company did not elect any fair value options under the provisions of SFAS 159.
 
7
 
 
In December 2007, the 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) is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of 2009. The Company is currently evaluating the potential impact of the adoption of SFAS 141(R) on its financial statements.
 
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 minority interests. All other requirements shall be applied prospectively. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of the adoption of SFAS 160 on its financial statements.
 
In March 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 of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 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, with earlier adoption allowed. The Company is currently evaluating the potential impact of the adoption of SFAS 161 on its financial statements.
 
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). This guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142’s entity-specific factors. FSP 142-3 is effective for the Company beginning January 1, 2009.  At September 30, 2008, the Company does not believe that there will be a material impact to its financial statements as a result of adopting SFAS 142-3.
 
On October 10, 2008, FASB, issued FASB Staff Position, referred to as FSP, No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP FAS 157-3 clarifies the application of SFAS No. 157, “Fair Value Measurements,” in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective immediately, including prior periods for which financial statements have not been issued. The Company has adopted FSP FAS 157-3 effective with the financial statements ended September 30, 2008. The adoption of FSP FAS 157-3 had no impact on the Company’s condensed, consolidated results of operations, financial position, or cash flows for the three months and nine months ended September 30, 2008.
 
8
3.
ACQUISITIONS

    2008 Acquisitions
 
In the nine months ended September 30, 2008, the Company completed two acquisitions, and paid total cash consideration of approximately $11.6 million, including acquisition related expenses with an additional  $1.0 million in earn-out provisions contingent on one of the acquisitions meeting certain performance benchmarks over two years post acquisition. The acquisitions are intended to provide expansion of the Company’s services within the respective corresponding markets of the acquired facilities in the United States. The Company recorded $11.3 million of goodwill for its recovery division of which $11.1 million is expected to be deductible for tax purposes.
 
The acquisitions were accounted for as purchases in accordance with SFAS No. 141, Business Combinations ("SFAS141"). Under purchase accounting, the purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values. The purchase price was allocated using the information currently available. As a result, the Company may adjust the allocation of the purchase consideration as it obtains more information regarding the asset valuations, liabilities assumed and purchase price adjustments.
 
The Company has included the acquired entities’ results of operations in the unaudited condensed consolidated statements of operations from the date of the acquisition. Pro forma results of operations have not been presented because the effects of the acquisitions are not material.
 
Prior Period Acquisitions
 
2007 Acquisitions
 
In the nine months ended September 30, 2007, the Company completed four acquisitions and paid total cash consideration of approximately $32.9 million, including acquisition related expenses. The acquisitions expanded its recovery, youth, and corporate/other services into new geographic regions within the United States. The Company recorded $29.7 million of goodwill, of which $29.7 million is expected to be deductible for tax purposes. Goodwill assigned to the recovery, youth, and corporate/other divisions was $22.9 million, $2.2 million, and $4.6 million, respectively.
 
The acquisitions were accounted for as a purchase in accordance with SFAS 141. Under purchase accounting, the purchase price for each acquisition was allocated to the assets acquired and liabilities assumed based on their respective fair values. The purchase price was allocated using the information currently available. As a result, the Company adjusted the allocation of the purchase consideration as it obtained more information regarding the asset valuations, liabilities assumed and purchase price adjustments post acquisition.
 
The Company has included the acquired entities’ results of operations in the unaudited condensed consolidated statements of operations from the date of the acquisition. Pro forma results of operations have not been presented because the effect of the acquisitions was not material.
 
4.
BALANCE SHEET COMPONENTS
 
Balance sheet components at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):
 
   
September 30,
2008
    
December 31,
2007
  
Accounts receivable—gross
   $ 37,624     $ 38,811  
Less allowance for doubtful accounts
     (5,935 )     (6,901 )
Accounts receivable—net
   $ 31,689     $ 31,910  
Other assets:
                
Capitalized financing costs—net
   $ 20,416     $ 23,361  
Deposits
     935       874  
Note receivable
     480       563  
Total other assets
   $ 21,831     $ 24,798  
Accrued liabilities:
                
Accrued payroll and related expenses
   $ 12,096     $ 14,923  
Accrued vacation
     6,227       5,421  
Accrued interest
     3,926       9,647  
Other accrued expenses
     6,937       7,591  
Total accrued liabilities
   $ 29,186     $ 37,582  
Other current liabilities:
                
Deferred revenue
   $ 12,570     $ 13,190  
Client deposits
     6,338       8,628  
Insurance premium financing
     268       2,653  
Interest rate swap liability
     2,827       1,662  
Other
     2,579       3,691  
Total other current liabilities
   $ 24,582     $ 29,824  
                 
Income taxes payable   $ 6,908     $ ––  
9
 
5.
PROPERTY AND EQUIPMENT
 
For the three months and nine months ended September 30, 2008, the Company recognized a non-cash impairment charge of $1.5 million related to certain long-lived assets of its youth division. These impairment charges are based on the Company's  decision to close one of its therapeutic boarding schools within its youth division and reduce the carrying  value of the fixed assets of the facility to be closed to their estimated fair value.
 
Property and equipment at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):
 
   
September 30,
2008
    
December 31,
2007
  
Land
   $ 21,673     $ 19,230  
Building and improvements
     64,960       63,316  
Leasehold improvements
     22,179       19,424  
Furniture and fixtures
     11,463       9,571  
Computer equipment
    
9,425
       8,146  
Computer software
     7,121       4,291  
Motor vehicles
     5,436       4,516  
Field equipment
     2,806       2,382  
Construction in progress
     11,531       8,792  
      156,594       139,668  
Less accumulated depreciation
     (27,225 )     (16,731 )
Property and equipment—net
   $ 129,369     $ 122,937  
 
Depreciation expense was $3.8 million and $2.7 million for the three months ended September 30, 2008 and 2007, respectively, and $11.1 million and $8.3 million for the nine months ended September 30, 2008 and 2007, respectively.
 
6.
GOODWILL AND INTANGIBLE ASSETS
 
Changes to goodwill by reportable segment for the nine months ended September 30, 2008 are as follows (in thousands):
 
   
Recovery (restated)
    
Youth
(restated)
    
Corporate/
Other
    
Total
  
Goodwill December 31, 2007
   $ 488,318     $ 218,821     $ 23,545     $ 730,684  
Goodwill additions
     11,304       —       —       11,304  
Goodwill impairment
     —       (142,238 )     —       (142,238 )
Goodwill related to earnouts
     —       641       —       641  
Goodwill adjustments
     685       1,731       47       2,463  
Goodwill September 30, 2008
   $ 500,307     $ 78,955     $ 23,592     $ 602,854  
        
    
10
 
 
 
Goodwill related to impairment
 
 At September 30, 2008, under the provisions of SFAS 142, the Company concluded that a portion of the youth division goodwill was impaired.  The Company believes that there will be a significant decrease in expected future cash flows for the youth division based upon current economic conditions including the lack of availability of student loans, credit for our clients, and other factors.  As a result, for the three and nine months ended September 30, 2008, the Company recognized  non-cash impairment charges of $142.2 million for youth division goodwill.  Consistent with the provisions of SFAS 142, impairment charges for goodwill recognized by the Company are estimated amounts which are subject to revision as more information becomes available. 
 
Goodwill related to earnouts
 
Certain acquisition agreements related to the purchase of Aspen Education Group contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the results of the acquired entity's operations exceed negotiated benchmarks. During the nine months ended September 30, 2008, the youth segment recorded $0.6 million in additional goodwill as a result of one of the entities meeting the benchmarks.
 
Goodwill adjustments
 
Subsequent to the issuance of the 2007 financial statements, the Company determined that errors were made in the allocation of goodwill attributable to the Company's segments.  Goodwill as of December 31, 2007 has been reduced by $3.9 million for the Company's recovery division and has been increased by $3.9 million for the youth division from amounts previously reported.  Goodwill adjustments also include  $2.5 million  related to the correction of an error in determining the estimated deferred tax benefit from deferred revenues related to an acquisition in 2006. There is no material effect on the Company's consolidated financial statements related to the above disclosures.
 
Intangible assets subject to amortization
 
At September 30, 2008, the Company tested its indefinite lived intangible assets  for possible impairment due to events and changes in circumstances which indicated that the carrying value of certain of its assets may not be recoverable.  According to  SFAS 144, if  the undiscounted future cash flows from the asset tested are less than the carrying value, a loss equal to the difference between the carrying value and the fair market value of the asset is recorded.  For the three and nine months ended September 30, 2008, the Company determined that certain intangible assets subject to amortization within its youth division  were impaired. Under the provisions of SFAS 144, the Company recognized a non-cash charge of $16.4 million which is included in the condensed consolidated statement of operations under asset impairment.  These impairment charges are based on the Company's  decision to close one of its therapeutic boarding schools and reduce the carrying  value of certain of its intangible assets subject to amortization to their estimated fair value.
 
11
Intangible assets not subject to amortization
 
The Company tests intangible assets not subject to amortization for possible impairment in accordance with SFAS 142.  Accordingly, due to third quarter changes in cash flow expectations, market conditions, and other factors, 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 therapeutic boarding schools.  Subsequently, the Company recognized a non-cash impairment charge of $6.0 million for the three and nine months ended September 30, 2008. Charges related to impairment of the intangible assets are included in the Company's condensed consolidated statement of operations under asset impairment.
 
 Total intangible assets at September 30, 2008 and December 31, 2007 consist of the following (in thousands):
 
 
September 30, 2008
  
December 31, 2007
  
 
Useful
Life
  
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Net
Carrying
Amount
  
Useful
Life
  
Gross
Carrying
Amount
    
Accumulated
Amortization
    
Net
Carrying
Amount
  
Intangible assets subject to amortization:
                                        
Referral network
20 years
   $ 35,892     $ (3,375 )   $ 32,517  
              20 years
   $ 45,400     $ (2,554 )   $ 42,846  
Accreditations
20 years
     16,118       (1,521 )     14,597  
              20 years
     24,400       (1,373 )     23,027  
Curriculum
20 years
     8,743       (820 )     7,923  
              20 years
     9,000       (506 )     8,494  
Government including
                                                    
Medicaid contracts
15 years
     35,600       (6,329 )     29,271  
              15 years
     35,600       (4,548 )     31,052  
Managed care contracts
10 years
     14,400       (3,840 )     10,560  
              10 years
     14,400       (2,759 )     11,641  
Managed care contracts
         5 years
     100       (20 )     80  
              5 years
     100       (5 )     95  
Core developed technology
         5 years
     2,704       (1,446 )     1,258  
              5 years
     2,704       (1,041 )     1,663  
Covenants not to compete
         3 years
     152       (152 )     —  
              3 years
     152       (128 )     24  
Registration rights
         2 years
     200       (200 )     —  
              2 years
     200       (200 )     —  
Student contracts
          1 year
     1,772       (1,751 )     21  
              1 year
     2,241       (2,241 )     —  
Total intangible assets subject to amortization:
     $ 115,681     $ (19,454 )     96,227       $ 134,197     $ (15,355 )     118,842  
Intangible assets not subject to amortization:
                                                    
Trademarks and trade names
                       181,463                         183,725  
Certificates of need
                       44,600                         44,600  
Regulatory licenses
                       39,460                         43,221  
Total intangible assets not subject to amortization
                       265,523                         271,546  
Total intangible assets
                     $ 361,750                       $ 390,388  
 
Amortization expense of intangible assets subject to amortization was $2.1 million and $2.7 million for the three months ended September 30, 2008 and 2007, respectively, and $6.3 million and $8.1 million for the nine months ended September 30, 2008 and 2007, respectively.
 
Estimated future amortization expense related to the amortizable intangible assets at September 30, 2008 is as follows (in thousands):
 
Fiscal Year
      
2008 (remaining 3 months)
   $ 1,853  
2009
    
7,412
  
2010
     7,412  
2011
     6,912  
2012
     6,866  
Thereafter
     65,772  
Total
   $ 96,227  
 
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7.
INCOME TAXES
 
The Company determines its income tax expense for interim periods by applying the use of the full years estimated effective tax rate in financial statements for interim periods. For the three and nine months ended September 30, 2008, the Company recognized an income tax benefit of $19.2 million, and income tax benefit of $17.7 million respectively, reflecting an effective tax rate of 12.1% and 11.4%, respectively, including discrete items. The Company's effective tax rate was 78.21% and 51.37% for the three and nine months ended September 30, 2008, respectively, without consideration of discrete items. Impairment charges for goodwill and intangible assets represent the discrete items.  Of the total impairment charges related to the discrete items, $62.7 million are deductible for tax purposes.The income tax expense for the three and nine months ended September 30, 2007 was $1.5 million and $3.4 million, respectively, reflecting an effective tax rate of 22.9% and 30.3% (there were no discrete items in 2007). The Company's effective tax rate for the  nine months ended September 30, 2008 differs from the US federal statutory rate of 35% primarily because of state taxes and the aforementioned impairments of goodwill and intangible assets in the third quarter.
 
The Company files its income tax returns in various jurisdictions, including United States 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.
 
 
8.
LONG-TERM DEBT
 
Long-term debt at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):
 
   
September 30,
2008
    
December 31,
2007
  
Term loan
   $ 410,890     $ 414,034  
Revolving line of credit
    
40,000
       26,500  
Senior subordinated notes, net of discount of $2,184 in 2008 and $2,407 in 2007
     197,816       197,593  
Seller notes
     8,869       10,206  
Lessor financing, leasehold improvements     331       ––  
Capital lease obligations
     18       34  
Total debt
     657,924       648,367  
Less current portion
     (9,014 )     (35,603 )
Long-term debt—less current portion
   $ 648,910     $ 612,764  
 
Based on a periodic review of its debt structure, the Company determined that it is appropriate to classify $40.0 million related to the revolving line of credit as long-term debt at September 30, 2008.
 
Interest expense on total debt was $13.1 million and $15.2 million for the three months ended September 30, 2008 and 2007, respectively, and $40.1 million and $45.5 million for the nine months ended September 30, 2008 and 2007, respectively.
 
9.
FINANCIAL INSTRUMENTS
 
 
Derivatives -Interest Rate Swaps
 
At September 30, 2008, the Company had an  interest rate swap agreement which converted $70.0 million of its floating-rate debt to fixed-rate debt at 4.99%.  At June 30, 2008, the interest rate swap had not been designated as a qualifying hedge under the provisions of SFAS 133. On July 1, 2008 (the “off-market” date) the Company designated the interest rate swap as a qualifying SFAS 133 cash flow hedge.  In accordance with the Company’s risk management policy, future changes in the fair value of the interest rate swap due to hedge effectiveness will be recognized in other comprehensive income (“OCI”) for the remaining contractual life of the interest rate swap.  Accumulated ineffectiveness as of the off-market date will be amortized over the contractual life of the interest rate swap. Any ineffectiveness in hedging activity related to the interest swap is reclassified to earnings in the period during which the ineffectiveness is measured.
 
On June 30, 2008, as provided for in the Credit Agreement and retained in the Amended and Restated Credit Agreement and Amendment No. 2, the Company entered into an interest rate swap agreement to provide for interest rate protection for an aggregate notional amount of $200.0 million. The effective date of the agreement is June 30, 2008 and has a maturity date of July 1, 2011.  The interest rate swap agreement is designated as a cash flow hedge under SFAS 133.  Under the interest rate swap, the Company receives an interest rate equal to 3-month LIBOR and in exchange pays a fixed rate of 3.875% on the $200.0 million.
 
The fair value of the Company’s interest rate swaps and their effects, if any, on the Company's earnings are discussed in Note 10.
 
13
 
10.
FAIR VALUE MEASUREMENTS
 
The Company adopted 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.
 
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 the 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. As of  September 30, 2008, the aggregate fair value of the Company’s interest rate swap agreements was a liability of $2.8 million compared to a liability of $1.7 million at December 31, 2007.  For its interest rate swap agreement executed February 28, 2006 (the "2006 Swap"), the Company recognized a gain of approximately $0.2 million for the three and nine months ended September 30, 2008, which is recorded in OCI. For the six months ended June 30, 2008,  and prior to the off-market date,  the Company recognized an immaterial loss for the 2006 Swap which is recorded in other (expense) income.  For the three and nine months ended September 30, 2007, the Company recorded a loss of $1.2 million and $0.7 million respectively for the 2006 Swap, which were recognized in other (expense) income on the condensed consolidated statements of operations.   The Company recognized losses of approximately $0.8 million and $1.2 million for the three and nine months ended September 30, 2008, respectively, on its interest rate swap agreement executed on June 30, 2008 (the "2008 Swap") and they are recorded in OCI net of tax.
 
11.
OTHER COMPREHENSIVE INCOME
    
    Other comprehensive income includes other gains and losses affecting equity that are excluded from net income.  The components of  other comprehensive income consist of
    changes in the fair value of derivative financial instruments.
 
Comprehensive income for the three and nine months ended September 30, 2008 and 2007 are comprised of the following (in thousands):

   
Three Months
Ended
September 30,
2008
    
Three Months
Ended
September 30,
2007
    
Nine Months
Ended
September 30,
2008
    
Nine Months
Ended
September 30,
2007
  
    Net income
   $ (139,934 )    $ 4,621      $ (137,701 )    $ 7,489   
     Other comprehensive income
                                
      Net change in unrealized losses on cash flow hedges (net of tax)
     (647 )  
—
       (1,000 )  
—
  
    Total Comprehensive Income
   $ (140,581 )    $ 4,621      $ (138,701 )   $ 7,489  
 
14
 
12.
COMMITMENTS AND CONTINGENCIES
 
Indemnifications—The Company provides for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, bylaws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance which should enable the Company to recover a portion of any future amounts paid.
 
In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with business dispositions and acquisitions and also provide indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to such sales or acquisitions.
 
While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved.
 
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.
 
Earnouts— Certain acquisition agreements acquired in the purchase of Aspen Education Group contain contingent earnout provisions that provide for additional consideration to be paid to the sellers if the results of the acquired entity’s operations exceed negotiated benchmarks. Additionally, future acquisitions may contain earnout provisions which would require the Company to pay amounts beyond the original purchase consideration upon satisfaction of defined performance benchmarks. The Company’s policy is to accrue the earnouts as they are earned and issue periodic payments on the earnouts through a combination of notes and cash payments.
 
13.
STOCK-BASED COMPENSATION
 
Description of Share-Based Plans

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

On February 6, 2006, the Group adopted the 2006 Executive Incentive Plan (the “Executive Plan”) and the 2006 Management Incentive Plan (the “Management Plan”) and on September 7, 2007, the Group adopted the 2007 Incentive Plan (the “Incentive Plan”). The Company refers to the Executive Plan, Management Plan and Incentive Plan collectively as the “Plans”. The Plans provide for options to purchase Group stock by the Company’s key employees, directors, consultants and advisors. Options granted under the Plans may be either incentive or non-incentive stock options.
 
 As of September 30, 2008, only non-incentive options (non-qualified under Internal Revenue Code Section 422) have been awarded under the Plans. Options granted under the Plans represent the right to purchase units of Group shares. One unit consists of nine shares of class A and one share of class L common stock of the Group.

Options under the Plans may be granted with a term of up to ten years at an exercise price generally not less than fair market value of the shares subject to the award, determined as of the award date. In the case that the incentive stock options are granted to a 10% shareholder, an exercise price shall not be less than 110% of the fair market value of the shares subject to the award at the grant date. All options granted under the Plans generally expire ten years from the date of grant.
 
Options granted under the Executive Plan and Incentive Plan vest in three tranches as follows: tranche 1 options vest and become exercisable at the rate of 20% in one year from the date of grant and 10% on each six-month period thereafter or, if earlier, 100% on a change of control as defined in the Executive and Incentive plans; tranche 2 options vest and become exercisable upon achievement of  market conditions, as defined in the Executive and Incentive plans; tranche 3 options vest and become exercisable over a five-year period upon achievement of performance conditions or alternatively upon achievement of certain performance conditions and a market condition, as defined in the Executive and Incentive plans. Tranche 1 options represent 50% of an option grant under the Executive and Incentive plans and tranches 2 and 3 options each represent 25% of the options granted under the Executive and Incentive plans.

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

In September 2007, the Group amended the Executive Plan to provide that any unvested tranche 3 options—options that vest over a five year period upon the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) reaching certain levels—would vest upon the first anniversary of an initial public offering, each six month anniversary thereafter or the date of a sale transaction if the value per unit (nine shares of Class A and one share of Class L) equals or exceeds $360 on such date. In conjunction with this modification the Company evaluated the impact on modified awards and determined that the incremental compensation cost was immaterial.

15
During the nine months ended September 30, 2008, the Group’s board of directors increased the number of share units available under the Plans by 20,000 units. Consequently, at September 30, 2008, a maximum of 5,734,054 shares of Class A common stock of the Group and 637,117 shares of Class L common stock of the Group may be granted under the Plans. Additional fully vested options under the Executive Plan of 1,184,809 shares of Class A common stock of the Group and 131,647 shares of Class L common stock of the Group were issued in connection with rolled over options at the time of the acquisition of the Company by investment funds managed by Bain Capital Partners, LLC in February 2006 and the acquisition of Aspen Education Group by the Company in November 2006.
 
Valuation of Stock-Based Awards

The Company estimates the fair value of stock options granted using the Black Scholes option valuation model for Management Plan grants, tranche 1 and 3 Executive Plan grants, and tranche 1 Incentive Plan grants. The Company uses the Monte Carlo simulation approach to a binomial model to determine the fair value of tranche 2 and 3 Incentive Plan grants and tranche 2 Executive Plan grants. The estimated fair value of awards granted is based upon certain assumptions, including probability of achievement of market conditions for certain Executive Plan and Incentive Plan awards, stock price, expected term, expected volatility, dividend yield, and a risk-free interest rate. The weighted average grant date fair value of units granted during the three months ended September 30, 2008 and 2007 were $53.53 and $54.52 per unit, respectively. For the  nine months ended September 30, 2008 and 2007 the average grant date fair value of units granted was $53.72 and $54.91 per unit respectively.
 
The following assumptions were used to calculate the weighted average grant date fair values of employee stock options for the periods presented below:

   
Three Months
Ended
September 30,
2008
    
Three Months
Ended
September 30,
2007
  
Black Scholes
            
Expected term (in years)
     6.27       6.22  
Expected volatility
     39.90 %     45.30 %
Dividend yield
     0 %     0 %
Risk-free interest rate
     3.40 %     4.18 %
Binomial (Monte Carlo simulation)
                
Expected volatility
     51.32 %     54.34 %
Dividend yield
     0 %     0 %
Risk-free interest rate
     3.94 %     4.42 %

   
Nine Months
Ended
September 30,
2008
    
Nine Months
Ended
September 30,
2007
  
Black Scholes
            
Expected term (in years)
     6.30       6.26  
Expected volatility
     39.37 %     47.10 %
Dividend yield
     0 %     0 %
Risk-free interest rate
     3.22 %     4.62 %
Binomial (Monte Carlo simulation)
                
Expected volatility
     51.30 %     54.72 %
Dividend yield
     0 %     0 %
Risk-free interest rate
     3.80 %     4.78 %


 
 
•
  
Expected term used in the Black Scholes valuation model represents the period that the Company’s stock options are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock options, vesting schedules and expectation of future employee behavior as influenced by changes to the terms of its stock option grants.
 
 
•
  
Expected volatility utilized for the units granted during the period is based on the historical volatility of comparable public companies for periods corresponding to expected term of the awards.
 
 
•
  
No dividends are expected to be paid over the option term.
 
 
•
  
The risk-free rate used for options granted is based on the implied yield on U.S. Treasury constant maturities issued with a term equal to the expected term of the options.
 

16
Stock-Based Compensation Expense

Options granted under the Plans are for the purchase of Group stock by the Company’s key employees, directors, consultants and advisors. Stock based compensation expense related to the stock options granted by the Group is being recorded on the Company’s condensed consolidated financial statements, as substantially all grants have been made to employees of the Company. Under the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),  Share-Based Payment  (“SFAS 123(R)”), the Company recognizes stock based compensation costs net of an estimated forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award. Stock option compensation expense related to employee stock options granted under the Plans was $1.5 million and $1.1 million for the three months ended September 30, 2008 and 2007, respectively, and $3.8 million and $3.2 million for the nine months ended September 30, 2008 and 2007, 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 and $0.4 million for the three months ended September 30, 2008 and 2007, respectively, and $1.5 million and $1.3 million for the nine months ended September 30, 2008 and 2007, respectively.

As of September 30, 2008, $13.1 million of total unrecognized compensation, net of estimated forfeitures of $0.7 million, is expected to be recognized over a weighted-average period of 2.84 years if all performance conditions are met under the provisions of the plans. During the three and nine months ended September 30, 2008, 281,925 and 591,576 shares vested with an aggregate grant date fair value of $1.5 million and $3.2 million, respectively.

Stock Option Activity under the Plans

During the nine months ended September 30, 2008, the Group granted units, which represent option shares to purchase Class A common stock of the Group and option shares to purchase Class L common stock of the Group. Activity under the Plans for the nine months ended September 30, 2008 is summarized below:
 
   
Option Shares
    
Weighted-
Average
Exercise
Price
Per Share
    
Weighted-
Average
Remaining
Contractual Term
(In Years)
  
Balance at December 31, 2007
     7,251,136     $ 7.76       8.33  
Granted
     481,616       11.23       9.68  
Exercised
     (38,793 )     2.98          
Forfeited/cancelled/expired
     (275,302 )     9.62          
Outstanding—September 30, 2008
     7,418,657     $ 7.94       7.70  
Exercisable—September 30, 2008
     2,799,371     $ 5.42       7.47  
Exercisable and expected to be exercisable
     7,047,724     $ 7.94          

As of September 30, 2008, the aggregate intrinsic value of share options outstanding, exercisable, and outstanding and expected to be exercisable was $24.4 million, $16.3 million and $23.2 million, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the Group’s shares as of September 30, 2008.

The Group recorded an immaterial amount of cash received for options exercised by certain non-director employees who terminated their employment with the Company. All cash received and paid related to the option exercise and Class A and L Common Stock retirement is reflected within the Company’s financial statements as Capital Contribution from Parent. The aggregate intrinsic value of share options exercised under equity compensation plans for the three months ended September 30, 2008 was immaterial. For the nine months ended September 30, 2008, the aggregate intrinsic value of share options exercised under equity compensation plans was $0.3 million.

The following table presents the composition of options outstanding and exercisable as of September 30, 2008:
 
     
Options Outstanding
    
Options Exercisable
  
Range of Exercise Prices
    
Number of
Shares
    
Weighted Average
Remaining Contractual
Term (Years)
    
Weighted Average
Exercise Price
    
Number of
Shares
    
Weighted Average
Exercise Price
  
$0.03 - $ 0.32       1,129,132       7.44     $ 0.10       1,129,132     $ 0.10  
$1.00 - $ 3.30       5,558,498       7.75       1.15       1,401,233       1.08  
$7.89 - $17.62       114,616       7.37       8.07       114,616       8.07  
$81.00 - $98.16       616,411       7.75       83.50       154,390       81.76  
Total
       7,418,657       7.70     $ 7.94       2,799,371     $ 5.42  

17
14.
RELATED PARTY TRANSACTIONS
 
In connection with the 2006 acquisition of the Company by investment funds managed by Bain Capital Partners, LLC (“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 directors are employees of Bain Capital Partners, LLC, the Parent’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 provide management services. Pursuant to such agreement, an affiliate of Bain Capital Partners, LLC receives an aggregate annual management fee of $2.0 million and reimbursement for out-of-pocket expenses incurred in connection with the Bain Merger prior to the closing of the Bain Merger and in connection with the provision of services pursuant to the agreement. The Company under this agreement paid management fees approximating $0.5 million during each of the three months ended September 30, 2008 and 2007 and approximately $1.6 million and $1.5 million  for the nine months ended September 30, 2008 and 2007, respectively, which is included in supplies, facilities and other operating costs.
 
The Company leases buildings from certain employees. Such related party leases are due and payable on a monthly basis on similar terms and conditions as the Company’s other leasing arrangements.
 
Two directors receive compensation for their services to the Company as consultants. During 2007, one director was granted options to purchase 13,435 shares of Class A common stock of the Group and options to purchase 1,492 shares of Class L common stock of the Group 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 $5,000 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.
 
15.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 
As of September 30, 2008, the Company had $200.0 million aggregate principal amount of the 10.75% Senior Subordinated Notes due 2016 (“the Notes”) outstanding. The Notes are fully and unconditionally guaranteed, jointly and severally on an unsecured senior subordinated basis, by the Company’s wholly owned subsidiaries.
 
The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors as of September 30, 2008 and December 31, 2007, the condensed consolidating statements of operations for the three and nine months ended September 30, 2008 and 2007, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2008 and 2007.
 
For the year 2007, management determined that allocations including income tax accounts and intercompany management fee revenue should be allocated to the parent and the investment in the Company’s subsidiaries should be presented using the equity method in the parent column of the consolidating financial statements. As a result, the consolidating balance sheet for the year ended December 31, 2007 and the consolidating statement of operations and consolidating statement of cash flows for the three and nine months ended September 30, 2007 have been restated from previously reported amounts to reflect the allocations and the investment in subsidiaries using the equity method instead of the cost basis method. There is no impact on the Company’s condensed consolidated financial statements as the allocations and investment in subsidiaries are eliminated in consolidation.
 
18
Condensed Consolidating Balance Sheet as of September 30, 2008
(In thousands) (Unaudited)
 
   
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
ASSETS
                              
CURRENT ASSETS:
                              
Cash and cash equivalents
   $ —     $ 2,678     $ 336     $ —     $ 3,014  
Accounts receivable—net of allowance
     ––       30,998       691               31,689  
Prepaid expenses
     2,843       3,398       163               6,404  
Other current assets
     20       1,463       48               1,531  
Deferred income taxes
     6,599       —       —               6,599  
Total current assets
     9,462       38,537       1,238       —       49,237  
PROPERTY AND EQUIPMENT—Net
     8,095       118,624       2,650               129,369  
GOODWILL
     —       591,056       11,798               602,854  
INTANGIBLE ASSETS—Net
     —       361,750       —               361,750  
OTHER ASSETS
     20,506       1,304       21               21,831  
INVESTMENT IN SUBSIDIARIES
     1,068,889       —       —       (1,068,889 )     —  
TOTAL ASSETS
   $ 1,106,952     $ 1,111,271     $ 15,707     $ (1,068,889 )   $ 1,165,041  
LIABILITIES AND STOCKHOLDER’S EQUITY
                                        
CURRENT LIABILITIES:
                                        
Accounts payable
   $ 5,400     $ 2,387     $ 122     $ —     $ 7,909  
Accrued liabilities
     10,421       17,364       1,401               29,186  
Current portion of long-term debt
     4,193       4,821       —               9,014  
Other current liabilities
     3,180       20,054       1,348               24,582  
        Income taxes payable     6,908       ––       ––       ––       6,908  
Total current liabilities
     30,102       44,626       2,871       —       77,599  
LONG-TERM DEBT—Less current portion
     644,513       4,397       —               648,910  
OTHER LIABILITIES
     161       5,858       20               6,039  
DEFERRED INCOME TAXES
     121,585       —       —               121,585  
Total liabilities
     796,361       54,881       2,891       —       854,133  
MINORITY INTEREST
     —       —       317       —       317  
STOCKHOLDER’S EQUITY
     310,591       1,056,390       12,499       (1,068,889 )     310,591  
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
   $ 1,106,952     $ 1,111,271     $ 15,707     $ (1,068,889 )   $ 1,165,041  
 
19
Condensed Consolidating Balance Sheet as of December 31, 2007
(In thousands) (Unaudited) (Restated)
 
   
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
ASSETS
                              
CURRENT ASSETS:
                              
Cash and cash equivalents
   $ —     $ 4,929     $ 189     $ —     $ 5,118  
Accounts receivable—net of allowance
     —       31,203       707       —       31,910  
Prepaid expenses
     4,315       3,162       67               7,544  
Other current assets
     19       2,099       2               2,120  
Income taxes receivable
     193       —       —               193  
Deferred income taxes
     6,599       —       —               6,599  
Total current assets
     11,126       41,393       965       —       53,484  
PROPERTY AND EQUIPMENT—Net
     5,629       115,392       1,916               122,937  
GOODWILL
     —       718,886       11,798               730,684  
INTANGIBLE ASSETS—Net
     —       390,388       —               390,388  
OTHER ASSETS
     23,436       1,347       15               24,798  
INVESTMENT IN SUBSIDIARIES
     1,215,413       —       —       (1,215,413 )     —  
TOTAL ASSETS
   $ 1,255,604     $ 1,267,406     $ 14,694     $ (1,215,413 )   $ 1,322,291  
LIABILITIES AND STOCKHOLDER’S EQUITY
                                        
CURRENT LIABILITIES:
                                        
Accounts payable
   $ 4,240     $ 2,741     $ 33     $ —     $ 7,014  
Accrued liabilities
     17,075       19,495       1,012               37,582  
Current portion of long-term debt
     30,693       4,910       —               35,603  
Other current liabilities
     4,381       24,843       600               29,824  
Total current liabilities
     56,389       51,989       1,645       —       110,023  
LONG-TERM DEBT—Less current portion
     607,434       5,330       —               612,764  
OTHER LIABILITIES
     165       7,349       —               7,514  
DEFERRED INCOME TAXES
     145,867       —       —               145,867  
Total liabilities
     809,855       64,668       1,645       —       876,168  
MINORITY INTEREST
     —       —       374       —       374  
STOCKHOLDER’S EQUITY
     445,749       1,202,738       12,675       (1,215,413 )     445,749  
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
   $ 1,255,604     $ 1,267,406     $ 14,694     $ (1,215,413 )   $ 1,322,291  
 
20
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2008
(In thousands) (Unaudited)
 
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
NET REVENUE:
                              
Net client service revenue
   $ 8     $ 115,169     $ 9,101     $ —     $ 124,278  
Other revenue
     2       2,143       1               2,146  
Management fee revenue
     20,096       —       —       (20,096 )     —  
Total net revenue
     20,106       117,312       9,102       (20,096 )     126,424  
OPERATING EXPENSES:
                                        
Salaries and benefits
     4,661       53,859       2,909               61,429  
Supplies, facilities and other operating costs
     1,926       29,621       5,379               36,926  
Provision for doubtful accounts
     1       1,694       20               1,715  
Depreciation and amortization
     630       5,127       172               5,929  
        Asset impairments     ––       23,880       ––               23,880  
        Goodwill impairment     ––       142,238       ––               142,238  
Management fee expense
     —       19,462       634       (20,096 )     —  
Total operating expenses
     7,218       275,881       9,114       (20,096 )     272,117  
INCOME (LOSS) FROM OPERATIONS
     12,888       (158,569 )     (12 )     —       (145,693 )
INTEREST EXPENSE, NET
     (12,930 )     (193 )     (2 )             (13,125 )
OTHER EXPENSE
     (2 )     —       (35 )              (37 )
(LOSS) INCOME BEFORE INCOME TAXES
     (44 )     (158,762 )     (49 )     —       (158,855 )
INCOME TAX EXPENSE (BENEFIT)
    420       (20,640 )      998               (19,222 )
MINORITY INTEREST IN INCOME (LOSS) OF  SUBSIDIARIES
     —       —       301              
301
  
EQUITY IN LOSS OF SUBSIDIARIES, NET OF TAX
     (139,470 )      —       —       139,470       —  
NET LOSS
   $ (139,934 )    $ (138,122 )   $ (1,348 )   $ 139,470     $ (139,934 )
 
 
21
Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2007
(In thousands) (Unaudited) (Restated)
 
   
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
NET REVENUE:
                              
Net client service revenue
   $ 6     $ 113,874     $ 6,743     $ —     $ 120,623  
Other revenue
     3       1,528       215               1,746  
Management fee revenue
     19,427       —       —       (19,427 )     —  
Total net revenue
     19,436       115,402       6,958       (19,427 )     122,369  
OPERATING EXPENSES:
                                        
Salaries and benefits
     3,079       50,453       1,911               55,443  
Supplies, facilities and other operating costs
     2,221       31,092       3,244               36,557  
Provision for doubtful accounts
     —       2,017       19               2,036  
Depreciation and amortization
     130       5,179       88               5,397  
        Asset impairments     ––       ––       ––               ––  
        Goodwill impairment     ––       ––       ––               ––  
Management fee expense
     —       17,880       1,547       (19,427 )     —  
Total operating expenses
     5,430       106,621       6,809       (19,427 )     99,433  
INCOME (LOSS) FROM OPERATIONS
     14,006       8,781       149               22,936  
INTEREST EXPENSE, NET
     (14,947 )     (222 )     —               (15,169 )
OTHER  (EXPENSE) INCOME
     (1,220 )     ––       3               (1,217 )
(LOSS) INCOME BEFORE INCOME TAXES
     (2,161 )     8,559       152               6,550  
INCOME TAX (BENEFIT) EXPENSE
     (496 )     1,963       35               1,502  
MINORITY INTEREST IN INCOME OF  SUBSIDIARIES
     ––       —       427               427  
EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX
     6,286       —       —       (6,286 )     —  
NET INCOME (LOSS)
   $ 4,621     $ 6,596     $ (310 )   $ (6,286 )   $ 4,621  
 
22
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2008
(In thousands) (Unaudited)
 
   
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
NET REVENUE:
                              
Net client service revenue
   $ 20     $ 340,971     $ 17,655     $ —     $ 358,646  
Other revenue
     8       6,117       1               6,126  
Management fee revenue
     58,777       —       —       (58,777 )     —  
Total net revenue
     58,805       347,088       17,656       (58,777 )     364,772  
OPERATING EXPENSES:
                                        
Salaries and benefits
     12,837       163,719       7,403               183,959  
Supplies, facilities and other operating costs
     5,910       91,016       10,656               107,582  
Provision for doubtful accounts
     9       4,899       102               5,010  
Depreciation and amortization
     1,754       15,089       500               17,343  
        Asset impairments     ––       23,880       ––               23,880  
        Goodwill impairment     ––       142,238       ––               142,238  
Management fee expense
     —       56,769       2,008       (58,777 )     —  
Total operating expenses
     20,510       497,610       20,669       (58,777 )     480,012  
INCOME (LOSS) FROM OPERATIONS
     38,295       (150,522 )     (3,013 )     —       (115,240 )
INTEREST EXPENSE, NET
     (39,578 )     (568 )     (2 )             (40,148 )
OTHER EXPENSE
     (34 )     —       (35 )              (69 )
(LOSS) INCOME BEFORE INCOME TAXES
     (1,317 )     (151,090 )     (3,050 )     —       (155,457 ) 
INCOME TAX BENEFIT
     (150 )     (17,202 )     (347 )             (17,699 )
MINORITY INTEREST IN (LOSS) OF SUBSIDIARIES
     —       —       (57 )             (57 )
EQUITY IN (LOSS) OF SUBSIDIARIES, NET OF TAX
     (136,534 )      —       —       136,534       —  
NET LOSS
   $ (137,701 )    $ (133,888
)
   $ (2,646 )   $ 136,534     $ (137,701 ) 
 
23
Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2007
(In thousands) (Unaudited) (Restated)
 
   
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
NET REVENUE:
                              
Net client service revenue
   $ 21     $ 328,756     $ 12,712     $ —     $ 341,489  
Other revenue
     8       4,363       232               4,603  
Management fee revenue
     58,565       —       —       (58,565 )     —  
Total net revenue
     58,594       333,119       12,944       (58,565 )     346,092  
OPERATING EXPENSES:
                                        
Salaries and benefits
     9,901       152,637       4,593               167,131  
Supplies, facilities and other operating costs
     6,466       87,159       7,052               100,677  
Provision for doubtful accounts
     ––       5,034       30               5,064  
Depreciation and amortization
     1,217       14,891       202               16,310  
        Asset impairments     ––       ––       ––               ––  
        Goodwill impairment     ––       ––       ––               ––  
Management fee expense
     ––       55,622       2,943       (58,565 )     —  
Total operating expenses
     17,584       315,343       14,820       (58,565 )     289,182  
INCOME (LOSS) FROM OPERATIONS
     41,010       17,776       (1,876 )     —       56,910  
INTEREST EXPENSE, NET
     (44,345 )     (625 )     (1 )             (44,971 )
OTHER (EXPENSE) INCOME
     (789 )     (13 )     2               (800 ) 
(LOSS) INCOME BEFORE INCOME TAXES
     (4,124 )     17,138       (1,875 )     —       11,139  
INCOME TAX (BENEFIT) EXPENSE
     (1,250 )     5,193       (568 )             3,375  
MINORITY INTEREST IN INCOME OF SUBSIDIARIES
     —       —       275               275  
EQUITY IN INCOME OF SUBSIDIARIES, NET OF TAX
     10,363       —       —       (10,363 )      —  
NET INCOME (LOSS)
   $ 7,489     $ 11,945     $ (1,582 )   $ (10,363 )    $ 7,489  
 
 
24
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2008
(In thousands) (Unaudited)
 
   
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                              
Net cash (used in) provided by operating activities
   $ (17,485 )   $ 39,659     $ (1,084 )   $       $ 21,090  
CASH FLOWS FROM INVESTING ACTIVITIES:
                                        
Additions of property and equipment
     (4,257 )     (13,893 )     (437 )             (18,587 )
Proceeds from sale of property and equipment
     ––       101       ––               101  
    Acquisition of business, net of cash acquired     (11,567  )     ––       ––               (11,567 )
Acquisition adjustments
     ––       (10 )     ––               (10 )
Payments made under earnout arrangements
     (2,947 )     ––       ––               (2,947 )
Net cash used in investing activities
     (18,771 )     (13,802 )     (437 )     —       (33,010 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                                        
Intercompany transfers
     26,423       (28,091 )     1,668             —  
Capital distributed to Parent
     (305 )     ––       ––               (305 )
Capitalized financing costs
     (187 )     ––       ––               (187 )
Repayments of capital lease obligations
     ––       (17 )     ––               (17 )
Net borrowings under revolving line of credit
     13,500       ––       ––               13,500  
Repayments of long-term debt
     (3,175 )     ––       ––               (3,175 )
Net cash provided by (used in) financing activities
     36,256       (28,108 )     1,668               9,816  
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
     —       (2,251 )      147       —       (2,104 ) 
CASH AND CASH EQUIVALENTS Beginning of period
     —       4,929       189       —       5,118  
CASH AND CASH EQUIVALENTS End of period
   $ —     $ 2,678     $ 336     $ —     $ 3,014  
 
25

 
Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2007
(In thousands) (Unaudited) (Restated)
 
   
CRC Health
Corporation
    
Subsidiary
Guarantors
    
Subsidiary
Non-Guarantors
    
Eliminations
    
Consolidated
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                              
Net cash provided by operating activities
   $ 4,021     $ 14,062     $ 36     $ —     $ 18,119  
CASH FLOWS FROM INVESTING ACTIVITIES:
                                        
Additions of property and equipment
     (2,247 )     (20,776 )     (1,216 )             (24,239 )
Proceeds from sale of property and equipment
     ––        67       ––               67  
Acquisition of businesses, net of cash acquired
     (33,602 )     ––       ––               (33,602 )
Acquisition adjustments
     ––       979       ––               979  
Net cash (used in) investing activities
     (35,849 )     (19,730 )     (1,216 )     —       (56,795 )
CASH FLOWS FROM FINANCING ACTIVITIES:
                                        
Intercompany transfers
     (5,948 )     4,419       1,529               —  
Capitalized contributed by parent
     500       ––       ––               500  
        Repayments of capital lease obligations     ––       (194 )     ––               (194 )
Capitalized financing costs
     (611 )      ––       ––               (611 )
Net borrowings under revolver line of credit
     41,900       ––       ––               41,900  
Repayments of long-term debt
     (4,013 )     ––       ––               (4,013 )
Net cash provided by financing activities
     31,828       4,225       1,529       ––       37,582  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
     —       (1,443 )     349       —       (1,094 )
CASH AND CASH EQUIVALENTS Beginning of period
     —       4,167       39       —       4,206  
CASH AND CASH EQUIVALENTS End of period
   $ —     $ 2,724     $ 388     $ —     $ 3,112  
 
26
 
16.
SEGMENT INFORMATION
 
Effective October 1, 2007, the Company realigned its operations and internal organizational structure. In accordance with the criteria of SFAS 131, the Company has three identified operating segments under the new organizational structure: recovery division, youth division and healthy living division. For segment reporting purposes, the Company has identified two reportable segments: recovery and youth. The Company evaluated the healthy living division for segment reporting under the provisions of SFAS 131 and determined that this segment does not meet the quantitative thresholds for separate disclosure and therefore is not a reportable segment. The healthy living division is combined with corporate/other for the purposes of segment reporting. 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 segment specializes in the treatment of chemical dependency and other behavioral health disorders both on an inpatient residential basis and on an outpatient basis. Services offered in this segment include: inpatient/residential care, partial/day treatment, intensive outpatient groups, therapeutic living/half-way house environments, aftercare centers and detoxification. As of September 30, 2008, the recovery segment provided substance abuse and behavioral health services to patients at 109 facilities located in 22 states.
 
Youth—The youth segment provides a wide variety of therapeutic programs through settings and solutions that match individual needs with the appropriate learning and therapeutic environment. As of September 30, 2008, the youth segment operated 29 educational facilities in 10 states and its offerings include boarding schools, experiential outdoor education programs and summer camps.
 
Corporate/Other—In addition to the two reportable segments as described above, the Company has activities classified as corporate/other which represent revenue and expenses associated with eGetgoing, an online internet treatment option, certain corporate-level operating general and administrative costs (i.e., expenses associated with the corporate offices in Cupertino, California, which provides management, financial, human resources and information system support), stock option-based compensation expenses that are not allocated to the segments, and the healthy living division.
 
The healthy living division provides treatment services for eating disorders and obesity, each a related behavioral disorder that may be effectively treated through a combination of medical, psychological and social treatment programs. As of September 30, 2008, the healthy living division operated 16 facilities in eight states and one facility in the United Kingdom.
 
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.
 
As discussed in Note 6, there were goodwill adjustments for prior acquisitions that relate primarily to revisions of the original estimates, which affected goodwill allocation between the recovery division and youth division segments. These adjustments affect the segments’ total assets as of December 31, 2007. There is no effect on the Company’s consolidated balance sheet, statement of operations, or statement of cash flows for 2007 or for 2008.
 
27

 
Selected segment financial information for the Company’s reportable segments was as follows (in thousands):
 
   
Three
Months Ended
September 30,
2008
    
Three
Months Ended
September 30,
2007
    
Nine
Months Ended
September 30,
2008
    
Nine
Months Ended
September 30,
2007
  
Net revenue:
                        
Recovery division
   $ 79,979     $ 73,713     $ 235,994     $ 216,176  
Youth division
     36,713       40,224       105,795       112,693  
Corporate/other
     9,732       8,432       22,983       17,223  
Total consolidated net revenue
   $ 126,424     $ 122,369     $ 364,772     $ 346,092  
Operating expenses:
                                
Recovery division
   $ 56,246     $ 52,728     $ 169,035     $ 154,589  
Youth division (1)
     200,219       35,163       267,559       102,686  
Corporate/other
     15,652       11,542       43,418       31,907  
Total consolidated operating expenses
   $ 272,117     $ 99,433     $ 480,012     $ 289,182  
Income (loss) from operations:
                                
Recovery division
   $ 23,733     $ 20,985     $ 66,959     $ 61,587  
Youth division
     (163,506 )     5,061       (161,764 )     10,007  
Corporate/other
     (5,920
)
     (3,110 )     (20,435 )     (14,684 )
Total consolidated (loss) income from operations
   $ (145,693 )   $ 22,936     $ (115,240 )   $ 56,910  
Income (loss) from operations before income taxes:
                                
Total consolidated (loss) income from operations
   $ (145,693 )   $ 22,936     $ (115,240 )   $ 56,910  
Interest expense, net
     (13,125 )     (15,169 )     (40,148 )     (44,971 )
Other (expense)
     (37 )     (1,217 )     (69 )     (800 )
Total consolidated (loss) income before income taxes
   $ (158,855 )    $ 6,550     $ (155,457 )   $ 11,139  
Capital expenditures:
                                
Recovery division
   $ 3,175     $ 5,542     $ 8.890     $ 14,814  
Youth division
     1,228       1,669       3,973       4,588  
Corporate/other
     1,699       2,060       5,724       4,837  
Total consolidated capital expenditures
   $ 6,102     $ 9,271     $ 18,587     $ 24,239  
                                 
                   
September 30,
2008
    
December 31,
2007
  
                           
(Restated)
  
Total assets:
                                
Recovery division
                   $ 904,738     $ 891,556  
Youth division
                     179,313       348,224  
Corporate/other
                     80,990       82,511  
Total consolidated assets
                   $ 1,165,041     $ 1,322,291  
(1) Includes $23.9 million of asset impairments and $142.2 million of goodwill impairment
 
17.
SUBSEQUENT EVENTS
 
Subsequent September 30, 2008, and prior to issuance of the interim financial statements, the Company's executive management team conducted a review of  facility operations across its divisions. As a result, the Company's executive management team decided to discontinue operations at certain of the Company's facilities.  As of November 14, 2008, the Company had not incurred any liabilities associated with such closures subsequent to September 30, 2008.  The Company's executive management team expects to more fully develop a plan for closure of such facilities before December 31, 2008.
28
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 
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. We deliver our services through our three divisions, the recovery division, the youth 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 youth division provides educational programs for underachieving young people through residential schools and wilderness programs. Our healthy living division provides treatment services through its adolescent and adult weight management programs and its eating disorder facilities.
 
We have three operating segments: recovery division, youth division and healthy living division. However, for the purposes of segment reporting and discussion, we combine healthy living division with our corporate/other reporting segment because the healthy living division does not currently meet the quantitative thresholds for separate disclosure (see Note 16 to the condensed consolidated financial statements). As of September 30, 2008, our recovery division, which operates the 30 inpatient and 79 outpatient facilities in 22 states, provides treatment services to patients suffering from chronic addiction related diseases and related behavioral disorders. As of September 30, 2008, our recovery division treated approximately 28,000 patients per day. As of September 30, 2008, our youth division, which operates 29 programs in 10 states, provides a wide variety of therapeutic and educational programs for underachieving young people. Our healthy living division, which operates 16 facilities in eight states and one facility in the United Kingdom, provides eating disorder and weight management services. Other activities classified as “corporate/other” 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
 
The accompanying financial data has been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and is in conformity with U.S. generally accepted accounting principles (“GAAP”). Our fiscal year ends on December 31 and our third fiscal quarter ends on September 30. Unless otherwise stated, all year and quarterly dates refer to our fiscal year or our third fiscal quarter, respectively.
 
Management is responsible for the fair presentation of the accompanying unaudited condensed consolidated financial statements, prepared in accordance with GAAP, and has full responsibility for their integrity and accuracy. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly our unaudited condensed consolidated balance sheet, condensed consolidated statement of operations, and condensed consolidated statement of cash flows for all periods presented.
 
Principles of consolidation. The condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
 
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, which is twelve months. During the three months ended September 30, 2008 and 2007,we generated 84.1% and 85.7% of our net revenue from non-governmental sources, including 69.5% and 71.2% from self payors, respectively, and 14.6% and 14.5% from commercial payors, respectively. During the nine months ended September 30, 2008 and 2007, we generated 84.0% and 86.1%
 
29
of our net revenue from non-governmental sources, including 68.7% and 71.2% from self payors, respectively, and 15.2% and 14.9% from commercial payors, respectively. Substantially all of our government program net revenue was received from multiple counties and states under Medicaid and similar programs.
 
During the three months ended September 30, 2008, our consolidated same-facility net revenue decreased by $0.1 million or 0.1% when compared to the comparable period in 2007.  For the nine months ended September 30, 2008, our consolidated, same-facility revenue increased $2.3 million or 0.7% when compared to the comparable period in 2007.  “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 youth 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 nine months ended September 30, 2008 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, 2007 in our Annual Report on Form 10-K.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
See Note 2 to our condensed consolidated financial statements in Part I, Item 1 for a description of recent accounting pronouncements, including our expected adoption dates and estimated effects, if any, on our results of operations, financial condition and cash flows.
 
30
RESULTS OF OPERATIONS
 
The following table presents our results of operations by segment for the three and nine months ended September 30, 2008 and 2007 (dollars in thousands, except for percentages; percentages are calculated as percentage of total net revenue).
 
   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
Statement of Income Data:
  
2008
    
%
    
2007
    
%
    
2008
    
%
    
2007
    
%
  
Net revenue:
                                                
Recovery division
   $ 79,979       63.3 %   $ 73,713       60.2 %   $
235,994
       64.7 %   $ 216,176       62.5 %
Youth division
     36,713       29.0 %     40,224       32.9 %     105,795       29.0 %     112,693       32.5 %
Corporate / other(1)
     9,732       7.7 %     8,432       6.9 %     22,983       6.3 %     17,223       5.0 %
Total net revenue
     126,424       100.0 %     122,369       100.0 %     364,772       100.0 %     346,092       100.0 %
Operating expenses:
                                                                
Recovery division
     56,246       44.5 %     52,728       43.1 %     169,035       46.3 %     154,589       44.7 %
Youth division (2)
     200,219       158.3 %     35,163       28.7 %     267,559       73.3 %     102,686       29.7 %
Corporate / other(1)
     15,652       12.4 %     11,542       9.5 %     43,418       11.9 %     31,907       9.2 %
Total operating expenses
     272,117       215.2 %     99,433       81.3 %     480,012       131.5 %     289,182       83.6 %
Income (loss) from operations:
                                                                
Recovery division
     23,733       18.8 %     20,985       17.1 %     66,959       18.4 %     61,587       17.8 %
Youth division
     (163,506 )     (129.3 )%     5,061       4.1 %     (161,764 )     (44.3 )%     10,007       2.9 %
Corporate / other(1)
     (5,920 )     (4.7 )%     (3,110 )     (2.5 )%     (20,435 )     (5.6 )%     (14,684 )     (4.3 )%
(Loss) income from operations
     (145,693 )     (115.2 )%     22,936       18.7 %     (115,240 )     (31.5 )%     56,910       16.4 %
Interest expense, net
     (13,125 )             (15,169 )             (40,148 )             (44,971 )        
Other (expense)
     (37 )              (1,217 )             (69 )             (800 )        
Income before income taxes
     (158,855 )             6,550               (155,457 )             11,139          
Income tax (benefit) expense
     (19,222 )             1,502               (17,699 )             3,375          
Minority interest in income (loss)of a subsidiary
     301               427               (57 )             275          
Net (loss) income
   $ (139,934 )           $ 4,621             $ (137,701 )           $ 7,489          
 
 
(1)
(2)
Includes our healthy living division.
Youth division operating expenses include $23.9 million of asset impairments and $142.2 million of goodwill impairment.
 
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 
Consolidated net revenue increased $4.1 million, or 3.3%, to $126.4 million in 2008 from $122.4 million in 2007. Of the total net revenue increase, the recovery division contributed $6.3 million, representing 8.5% growth for the division, with the remaining net revenue growth driven by an increase of $1.3 million, or 15.4% in corporate/other.  Total net revenue growth was partially offset by a net revenue decrease in the youth division of $3.5 million, or 8.7%. Of the $3.5 million decrease in youth division revenue, $1.1 million is attributed to a single therapeutic boarding school that experienced a significant increase in student graduation rates without a commensurate increase in enrollments beginning the quarter ended September 30, 2007. We believe, in addition to the impact of this boarding school, that there has been a slight lessening in demand as a result of the soft economy and the inability of families to access the credit markets and student loan markets to fund the tuition. Additionally, our youth division same–facility net revenue decreased $4.4 million, or 11.5%, due in part from the impact of the aforementioned boarding school. The remaining decrease was due to lower census in both our residential and outdoor programs. Revenue growth in the recovery division was due to same-facility growth of $4.7 million, or 6.5%. Of the remaining $1.6 million net revenue increase in recovery division, $1.1 million increase was due to an acquisition completed in the quarter ended September 30, 2007 and the rest was from startups.  The $1.3 million net revenue increase in corporate/other was contributed by start-ups and  acquisitions completed in the three months ended September 30, 2007.
 
Consolidated operating expenses increased $172.7 million, or 173.7%, to $272.1 million for the three months ended September 30, 2008 from $99.4 million in the same period of 2007. Of the $172.7 million increase in operating expenses, the recovery division incurred an increase of $3.5 million, or 6.7%, corporate/other incurred an increase of $4.1 million, or 35.6%, and our youth division incurred a net increase of $165.1 million, or 469.4%. The increase in operations expenses within the youth division was primarily due to a $142.2 million non-cash  impairment charge for goodwill as well as for a  $23.9 million non-cash impairment charge related to asset impairments partially offset by reductions in general and administrative expenses.  Excluding the combined $166.1 million in youth division impairment charges, youth division operating expenses decreased $1.0 million compared to the same period in the prior year. For our recovery division, same-facility increase in operating expenses was $1.8 million, or 3.8%, acquisition-related increase was $1.1 million, and startup related increase was $0.7 million. Corporate/other same-facility growth in operating expenses was flat year over year for the three months ended September 30, 2008.
 
          
31
            Our consolidated operating margin was -115.2% in the quarter ended September 30, 2008 compared to 18.7% in the quarter ended September 30, 2007.  Excluding youth division non-cash impairment charges of $166.1 million, consolidated operating margin was 16.2% for the three months ended September 30, 2008.   On a same-facility basis, our consolidated operating margin decreased to -109.4% in the quarter ended September 30, 2008 compared to 32.7% in the quarter ended September 30, 2007. Recovery division same-facility operating margin increased to 37.7% in the quarter ended September 30, 2008 compared to 36.2% in the quarter ended September 30, 2007. Youth division same-facility operating margin decreased to -475.3% in the quarter ended September 30, 2008 compared to 26.0% in the quarter ended September 30, 2007. The significant decrease in our youth division operating margin is in primarily due to the non-cash goodwill and asset impairment charges as well as to a decrease of $1.1 million in revenue from one single therapeutic boarding school, and the remaining decline is generally attributable to lower student census in the remaining youth division programs. Corporate/other same-facility operating margin decreased to 29.9% in the quarter ended September 30, 2008 compared to 33.1% in the quarter ended September 30, 2007.
 
For the three months ended September 30, 2008, consolidated net income decreased by $144.6 million compared to the same period in 2007. The decrease in net income in 2008 is primarily attributable to goodwill and asset impairments within the youth division in the amounts of $142.2 million and $23.9 million respectively offset by reductions in general and administrative expenses.
 
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 
Consolidated net revenue increased $18.7 million, or 5.4%, to $364.8 million in 2008 from $346.1 million in 2007. Of the $18.7 million increase, the recovery division contributed $19.8 million, representing 9.2% growth for the division, and the remaining net revenue growth was driven by a net revenue increase of $5.8 million, or 33.4% in corporate/other. Our youth division had a net revenue decrease of $6.9 million, or 6.1%.  Of the $6.9 million decrease in youth division revenue, $5.1 million is attributed to a single therapeutic boarding school that experienced a significant increase in student graduations beginning in the quarter ended September 30, 2007 without a commensurate increase in new enrollments. Additionally, our youth division same-facility net revenue decreased $12.6  million, or 11.2% due in part from the impact from the aforementioned boarding school. The remaining decrease was due to lower census in both our residential and outdoor programs. Revenue growth in the recovery division was due to same-facility growth of $14.2 million, or 6.7%. Of the remaining 5.6 million net revenue increase in recovery division, $3.9 million increase resulted from an acquisition, completed in the quarter ended September 30, 2007 and the rest was from startups.  Of the $5.8 million net revenue increase in corporate/other, $0.7 million or 4.6% was due to same facility growth and $5.1 million was contributed by start-ups and by an acquisition completed in the three months ended September 30, 2007.

Consolidated operating expenses increased $190.8 million, or 66.0%, to $480.0 million in 2008 from $289.2 million in 2007. Of the $190.8 million increase in operating expenses, the recovery division incurred an increase of $14.5 million, or 9.3%, corporate/other incurred an increase of $11.5 million, or 36.1%, and our youth division incurred an increase of $164.8 million, or 160.6% due to impairment charges of $142.2 million for goodwill and $23.9 million for long-lived assets.  Excluding the non-cash impairment charges of $166.1 million, youth division operating expenses decreased $1.2 million or approximately 1.2% due to lower general and administrative expenses.   For our recovery division, same-facility increase in operating expenses was $9.9 million, or 7.4%, and acquisition and startup-related increase was $4.5 million. For corporate/other, same-facility increase in operating expenses was $1.2 million, or 9.9%. Of the remaining increase, $10.3 million was related to an acquisition completed in the quarter ended September 30, 2007 and start-ups.
 
Our consolidated operating margin was -31.6% for the nine months ended September 30, 2008 compared to 16.4% for the nine months ended September 30, 2007. Excluding youth division non-cash, combined impairment charges $166.1 million, consolidated operating margins were $13.9% for the nine months ended September 30, 2008.   On a same-facility basis, our consolidated operating margin decreased to -18.9% for the nine months ended September 30, 2008 as compared to 32.5% for the nine months ended September 30, 2007. Excluding youth division impairments of $166.1 million, same facility margins were 29.3% for the nine months ended September 30, 2008.   Recovery division same-facility operating margin decreased to 36.4% for the nine months ended September 30, 2008 as compared to 36.8% for the nine months ended September 30, 2007. Youth division same-facility operating margin decreased to -151.4% for the nine months ended September 30, 2008 as compared to 25.7% for the nine months ended September 30, 2007. The significant decrease in our youth division operating margin is due to the $166.1 million in non-cash impairment charges recognized during the third quarter. The remainder is due to a decrease of $5.1 million in revenue from one single therapeutic boarding school as well as to lower census in the remaining youth division programs.  Excluding the $166.1 million non-cash impairment charges, same-facility youth division margins for the  nine months ended September 30, 2008 were 14.9%.  Corporate/other same-facility operating margin decreased to 19.5% for the nine months ended September 30, 2008 as compared to 23.4% for the nine months ended September 30, 2007.
 
For the nine months ended September 30, 2008, consolidated net income decreased by $145.2 million compared to the same period in 2007. The decrease in net income in 2008 is primarily attributable to goodwill and asset impairments within the youth division in the amounts of $142.2 million and $23.9 million respectively.
 
32
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 $28.4 million at September 30, 2008, compared to negative working capital of $56.5 million at December 31, 2007. The increase in working capital from September 30, 2008 compared to  December 31, 2007 was primarily attributable to a reclassification of $40.0 million, related to the revolver loan from short-term to long term debt. 
 
 
Sources and Uses of Cash
 
   
Nine Months Ended
September 30,
  
   
2008
    
2007
  
   
(In thousands)
  
Net cash provided by operating activities
   $ 21,090     $ 18,119  
Net cash used in investing activities
     (33,010 )     (56,795 )
Net cash provided by financing activities
     9,816       37,582  
Net increase (decrease) in cash
   $ (2,104 )   $ (1,094)  
 
 
Cash used provided by operating activities was $21.1 million for the nine months ended September 30, 2008 compared to cash provided in operating activities of $18.1 million during the same period in 2007.
 
Cash used in investing activities was $33.0 million in for the nine months ended September 30, 2008 compared to $56.8 million in the same period of 2007.  The decrease in cash used in investing activity primarily relates to a decrease in the additions of plant, property and equipment and in acquisitions.
 
Cash provided by financing activities was $9.8 million for the nine months ended September 30, 2008 compared to $37.6 million for the same period in 2007. 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 September 30, 2008, our senior secured credit facility was comprised of a $410.9 million senior secured term loan facility and a $100.0 million revolving credit facility. At September 30, 2008, the revolving credit facility had $52.8 million available for borrowing, $40.0 million outstanding and classified on our balance sheet as long term debt, and $7.2 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 $200.0 million, less original issue discount, remained outstanding at September 30, 2008. 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. We expect to spend approximately $8.2 million for maintenance related expenditures and an additional $21.2 million over the next 12 months for expansion projects, systems upgrades and other related initiatives.
 
Under the terms of our borrowing arrangements, we are required to comply with various covenants, including the maintenance of certain financial ratios. As of September 30, 2008, we were in compliance with all such covenants.
 
33
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 $70 million of the term loan at 4.990% and $200 million of the term loan at 3.875%.
 
We and our subsidiaries, affiliates, and significant shareholders may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchange offers in open market purchases, privately negotiated transactions, by tender offers or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.  The amounts involved may be material.
 
Funding Commitments
 
Certain agreements acquired in our acquisition of Aspen Education Group (the "Acquisition") contain contingent earnout provisions that provide for additional payments if the acquisitions meet performance milestones as specified in the agreements. For the nine months ended September 30, 2008, we incurred liabilities of $0.6 million associated with earnout obligations and made payments of $2.9 million. We have no future obligations for additional liabilities associated with such earnouts related to the Acquisition.
 

 
 
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, 2007, which is incorporated herein by reference. As of September 30, 2008, our exposure to market risk has not changed materially since December 31, 2007.
 
 
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.
 
34
PART II. OTHER INFORMATION
 
Item 1A.
 
As of September 30, 2008, except as set forth below, 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, 2007.
 
Unfavorable student loan markets could negatively impact our revenues in our youth division.
 
Some students attending therapeutic boarding school in our youth division obtain private loans from lenders to finance a portion of their education. In response to recent tightening in the credit markets, certain lenders have announced that they will apply more stringent lending standards for private student loans. Continued tightening of the credit markets may result in financing difficulties for those students who rely on private student loans and could adversely impact our revenues.
 
Changes to federal, state and local regulations could prevent us from operating our existing facilities or acquiring additional facilities or could result in additional regulation of our operations which may cause our growth to be restrained, an increase in our operating expenses and our operating results to be adversely affected.
 
Federal, state and local regulations determine the capacity at which our therapeutic education programs for adolescents may be operated. Some of our programs in our youth division rely on federal land-use permits to conduct the hiking, camping and ranching aspects of these programs. State licensing standards require many of our programs to have minimum staffing levels, minimum amounts of residential space per student and adhere to other minimum standards. Local regulations require us to follow land use guidelines at many of our programs, including those pertaining to fire safety, sewer capacity and other physical plant matters.
 
In addition, federal, state and local regulations may be enacted that impose additional requirements on our facilities. For example, in 2007, legislators in the states of California and Indiana introduced bills that would impose new regulations affecting our operations. In addition, U.S. Representative Miller introduced federal legislation in April 2008, which, if adopted, would impose an additional layer of federal regulation on all private residential and outdoor treatment programs for youth under the age of 18. Adoption of legislation or the creation of new regulations affecting our facilities could increase our operating costs, restrain our growth and harm our operating results.
 
Item 6.                      Exhibits
 
The Exhibit Index beginning on page 37 of this report sets forth a list of exhibits.
 
35
 
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: November 14, 2008
     
   
CRC HEALTH CORPORATION
   
(Registrant)
       
   
By
/s/    KEVIN HOGGE        
     
Kevin Hogge,
     
Chief Financial Officer
     
(Principal Financial Officer and Principal
Accounting Officer and duly authorized signatory)
 
36
CRC HEALTH CORPORATION
 
 
   
3.1
Certificate of Incorporation of CRC Health Corporation, with amendments (incorporated by reference to Exhibit 3.1 of Form S-4 (File No. 333-1351712) filed June 21, 2006)
   
3.2
By-Laws of CRC Health Corporation (incorporated by reference to Exhibit 3.3 of Form S-4 (File No. 333-1351712) filed June 21, 2006)
   
4.1h 
Release of Guarantee dated as of July 25, 2008 by and among US Bank National Association, as Trustee, CRC Health Corporation, Adirondack Leadership Expeditions, LLC and Lone Star Expeditions, Inc. ‡     
   
                    10.3i
    Release of Guarantee and Collateral dated as of July 25, 2008 by and among Citibank, NA, as Administrative Agent and Collateral Agent, CRC Health    
    Corporation, Adirondack Leadership Expeditions, LLC and Lone Star Expeditions, Inc.  ‡
   
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.
 
 
37
 EX-4.1H 2 ex4_1h.htm RELEASE OF GUARANTEE ex4_1h.htm
                                                  < /font>              Exhibit 4.1h
RELEASE OF GUARANTEE
 
This Release of Guarantee, dated as of July 25, 2008 (“Release”), is by and among U.S. BANK NATIONAL ASSOCIATION, as Trustee (as defined below), CRC HEALTH CORPORATION, a Delaware corporation (f/k/a CRC HEALTH GROUP, INC.) (the “Issuer”), ADIRONDACK LEADERSHIP EXPEDITIONS, LLC, a Delaware limited liability company (“Adirondack”) and LONE STAR EXPEDITIONS, INC., a Delaware corporation (“Lone Star” and, together with Adirondack, the “Company Guarantors”).
 
1. Reference to the Indenture and the Credit Agreement  Reference is made to (i) that Indenture dated as of February 6, 2006 (as amended, supplemented or otherwise modified from time to time, the “Indenture”), among CRCA Merger Corporation, a Delaware corporation, and U.S. Bank National Association, as trustee (the “Trustee”), and after the Mergers (as defined in the Indenture), the Issuer, and, as Guarantors, the Guarantors listed on the signature pages thereto and (ii) that Credit Agreement dated as of February 6, 2006 (as amended and restated as of November 17, 2006 and as subsequently amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among CRC Health Group, Inc., a Delaware corporation (“Holdings”), the Issuer, Citibank, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer, each Lender from time to time party thereto, JPMorgan Chase Bank, N.A., as Syndication Agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Documentation Agent.  Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Indenture.
 
2. Certification.  The undersigned, in the capacity as the duly appointed officer of each Company Guarantor and the Issuer, hereby certifies on behalf of each Company Guarantor and the Issuer that (i) each Company Guarantor has been released or shall be released simultaneously with this Release of its guarantee of Indebtedness of the Issuer under the Credit Agreement which resulted in the obligation to guarantee the Notes (the “Senior Release”) and (ii) the Trustee is authorized to release the Guarantee of each Company Guarantor pursuant to Section 10.05(a)(i)(c) of the Indenture.
 
3. Release.  In connection with the Senior Release, each Company Guarantor and the Issuer has requested that the Trustee release the Guarantee of each Company Guarantor created pursuant to Section 4.13 of the Indenture in accordance with Section 10.05(a)(i)(c) of the Indenture.  The Trustee hereby releases each such Guarantee as well as each Company Guarantor from the associated notation of Guarantee.  For the avoidance of doubt, this Release does not release any Guarantee in respect of Issuer or any other Guarantor other than the Company Guarantors pursuant to the Indenture.
 
4. General.  This Release shall be governed by and construed in accordance with the laws of the State of New York, as applied to contracts made and performed within the State of New York.  The parties may sign multiple counterparts of this Release.  Each signed counterpart shall be deemed an original, but all of them together represent one and the same agreement.
 
                                                                Exhibit 4.1h

Each of the undersigned has caused this Release to be executed and delivered by its duly authorized officer as of the date first above written.
 

CRC HEALTH CORPORATION


By:           
Name:    Kevin Hogge
Title:     Chief Financial Officer


ADIRONDACK LEADERSHIP EXPEDITIONS, LLC


By:        
Name:    Kevin Hogge
Title:     Chief Financial Officer


LONE STAR EXPEDITIONS, INC.


By:     
      Name:    Kevin Hogge
  Title:     Chief Financial Officer


The foregoing is hereby agreed to and accepted:

U.S. Bank National Association,
   as Trustee

By:           
Name:
Title:
 

 
 
 
                                                     
 EX-10.3I 3 ex10_3i.htm RELEASE OF GUARANTEE AND COLLATERAL ex10_3i.htm
                                                                            
                                                              Exhibit 10.3i
 
This Release of Guarantee and Collateral, dated as of July 25, 2008, (“Release”) is by and among CITIBANK, N.A., as Administrative Agent and Collateral Agent (as defined below), CRC HEALTH CORPORATION, a Delaware corporation (f/k/a CRC HEALTH GROUP, INC.) (the “Borrower”), ADIRONDACK LEADERSHIP EXPEDITIONS, LLC, a Delaware limited liability company (“Adirondack”) and LONE STAR EXPEDITIONS, INC., a Delaware corporation (“Lone Star” and, together with Adirondack, the “Companies”).
 
1. Reference to Credit Agreement and Security Agreement  Reference is made to (i) that Credit Agreement dated as of February 6, 2006 (as amended and restated as of November 17, 2006 and as subsequently amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among CRC Health Group, Inc., a Delaware corporation (“Holdings”), Borrower, Citibank, N.A., as administrative agent (in such capacity, the “Administrative Agent”), collateral agent (in such capacity, the “Collateral Agent”), Swing Line Lender and L/C Issuer, each Lender from time to time party thereto, JPMorgan Chase Bank, N.A., as Syndication Agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Documentation Agent and (ii) that certain Security Agreement dated as of February 6, 2006 (the “Security Agreement”), among Borrower, Holdings, the Subsidiaries of the Borrower identified therein and Citibank, N.A., as Collateral Agent for the Secured Parties.  Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement and the Security Agreement referred to therein.
 
2. Company’s Certification.  The undersigned, in the capacity as the duly appointed officer of each Company and the Borrower, hereby certifies on behalf of each Company and the Borrower that (i) each Company is a Crowell Subsidiary, (ii) the Equity Interests of each Company have vested pursuant to the terms of the applicable Crowell Equity Document attached as Annex A hereto in accordance with the first proviso to Section 7.14 of the Credit Agreement (the “Vested Interests”), (iii) each Company has been released or shall be released simultaneously with this Release from its guarantee of the Senior Subordinated Notes and (iv) the Administrative Agent and Collateral Agent are authorized to release the Guarantee of each Company pursuant to Section 9.11(c) of the Credit Agreement and by the Security Agreement and to release its security interest in each Company pursuant to Section 9.11(a)(iv) of the Credit Agreement and by the Security Agreement.
 
3. Release.  In connection with the Vested Interests, each Company and the Borrower has requested that the Collateral Agent release the Guarantee of each Company created pursuant to the Credit Agreement in accordance with Section 9.11(c) of the Credit Agreement and release each lien, security interest and other encumbrance of any kind in respect of each Company created pursuant the Security Agreement in accordance with Section 9.11(a)(iv) of the Credit Agreement.  The Administrative Agent and Collateral Agent hereby release such Guarantee and security interest.  For the avoidance of doubt, this Release does not release any guarantee or lien in respect of Borrower or any other Loan Party other than the Companies in favor of the Secured Parties pursuant to the Credit Agreement, Security Agreement or any other Loan Document.
 
4. Authorization to File UCC-3.  The Collateral Agent hereby authorizes each Company to file UCC-3 termination financing statements in the form attached hereto as Annex B.
 
5. General.  Each of the Credit Agreement and the Security Agreement is confirmed as being in full force and effect.  This Release may be executed in any number of counterparts, which together shall constitute one instrument, and shall bind and inure to the benefit of the parties and their respective permitted successors and assigns.  This Release shall be governed by and construed in accordance with the laws of the State of New York without regard to conflict of laws principles thereof.
                                                   &# 160;           Exhibit 10.3i

Each of the undersigned has caused this Release to be executed and delivered by its duly authorized officer as of the date first above written.
 

CRC HEALTH CORPORATION


By:           
Name:    Kevin Hogge
Title:     Chief Financial Officer
 



ADIRONDACK LEADERSHIP EXPEDITIONS, LLC


By:           
Name:    Kevin Hogge
Title:     Chief Financial Officer
 


LONE STAR EXPEDITIONS, INC.


By:           
Name:    Kevin Hogge
Title:     Chief Financial Officer
 

The foregoing is hereby agreed to and accepted:

CITIBANK, N.A.,
   as Administrative Agent and Collateral Agent


By:           
 
Name:
Title:
 

 
Annex A
                                                                Exhibit 10.3i
                                                 
ADIRONDACK LEADERSHIP EXPEDITIONS, LLC
SUBSCRIPTION AGREEMENT

THIS SUBSCRIPTION AGREEMENT (the “Agreement”), dated as of April 1, 2004, is entered into by and between ADIRONDACK LEADERSHIP EXPEDITIONS, LLC, a Delaware limited liability company (the “Company”), and the undersigned, SUE CROWELL (the “Employee”).

RECITALS
 
WHEREAS, the Company is an indirect, wholly-owned subsidiary of Aspen Education Group, Inc., a California corporation (“AEG”), and a direct, wholly-owned subsidiary of Aspen Youth, Inc., a California corporation (“Aspen”).

WHEREAS, Employee is employed by AEG as the head of the wilderness division of AEG.

WHEREAS, in order to give Employee an opportunity to acquire an interest in the Company as an incentive for Employee to continue participating in the affairs of the Company, the Company desires to issue certain membership interests to Employee pursuant to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions, covenants and other consideration, the sufficiency and adequacy of which is hereby acknowledged, the Company and Employee agree as follows:

1.                      Issuance of Membership Interest. On April 1, 2008 (the “Vesting Date”), the Company shall issue to Employee ten (10) units of the Company (the “Units”), which represent ten percent (10%) of the issued and outstanding membership interests of the Company. On such date of issuance, the Company shall deliver to Employee a membership certificate registered in Employee’s name representing the Units and Employee shall sign a receipt acknowledging receipt of the Units.

2.                      Amended and Restated Operating Agreement. Notwithstanding the foregoing, the Company shall not issue the Units to Employee unless and until Employee signs an Amended and Restated Operating Agreement, effective as of the date of issuance of the Units, that includes the transfer restrictions and other rights and obligations of the Company and Employee as set forth herein. Notwithstanding anything to the contrary herein, the Amended and Restated Operating Agreement shall provide that all Distributions (as defined therein) shall be made to Aspen and that no Distribution shall be made to Employee. The Company shall provide such Amended and Restated Operating Agreement to Employee for review no later than 30 days prior to the Vesting Date.

3.                      Sale of the Company. In  the event Aspen elects to sell the membership interests of the Company, whether through a direct purchase or through a merger or other type of transaction, or all or substantially all of the assets of the Company, to a third party (a “Call  Event”) on or after the Vesting Date, the Company shall notify Employee of such sale at least ten
days prior to the closing of such sale and Employee shall sell or transfer the Units to the Company on or before the closing date.

(a)           In consideration for such sale or transfer of the Units to the Company, Employee shall receive an amount of consideration (the “Transfer Price”) equal to: the product of (i) the sum of (X) twelve month trailing EBITDA for the twelve month period ending on the last day of the month immediately preceding the month in which such Call Event occurs, minus (Y) an amount equal to maintenance capital expenditures for such twelve month period; multiplied by (ii) 4.5; multiplied by (iii) 10%.

As an example only, if the twelve month trailing EBIDTA for the relevant period is $1,000,000 and maintenance capital expenditures for that period is $100,000, the Transfer Price would be equal to:

($1,000,000 - $100,000) x 4.5 x 0.10 = $405,000

                                                     Exhibit 10.3i
    (b)           The consideration that Employee shall receive shall be in the same form or type of consideration as Aspen receives for the sale of such membership interests or assets. For example, if Aspen receives shares of capital stock of the third party purchaser, Employee shall be entitled to that number of such shares of capital stock of the third party purchaser equal to the product of the Transfer Price divided by the per Unit price Aspen receives for the sale of such membership interests or assets. Employee shall deliver the membership certificate representing the Units to the Company on the date and at the location designated by the Company and shall sign such agreements or other documents in connection with the sale of the Units to the Company as the Company reasonably requests.

4.                      Conversion Upon an IPO. In the event AEG completes an initial public offering (an “IPO”) of its common stock prior to the Vesting Date, the Employee’s right to receive the Units shall automatically be converted into the right to receive a number of shares of common stock of AEG (which shares of common stock shall not be registered under the Securities Act of 1933, as amended (the “Act”)) on the Vesting Date equal to the product of (i) the Transfer Price that Employee would have received had a Call Event occurred on the Vesting Date, divided by (ii) the closing price per share of the AEG common stock on the Vesting Date. For purposes of this Agreement, an “initial public offering” shall mean the initial firm commitment underwritten public offering of the common stock of Aspen, immediately following which such common stock is listed for trading on the New York Stock Exchange or for quotation on the NASDAQ National Market System or other agreed, internationally recognized stock exchange.
 
5.                      Termination of Employment.

(a)           If prior to the Vesting Date (i) Employee ceases to be an employee of AEG, Aspen or the Company, or ceases to provide services to the Company, whether due to Employee’s death, disability or voluntary or involuntary termination, or (ii) the membership interests or all or substantially all of the assets of the Company are sold or transferred to a third party that is not an affiliate of AEG, this Agreement shall automatically terminate and have no further force or effect and Employee shall not be
consideration pursuant to this Agreement or in connection with the termination of this Agreement.

(b)           If after the Vesting Date Employee ceases to be an employee of AEG, Aspen or the Company, or ceases to provide services to the Company, whether due to Employee’s death, disability or voluntary or involuntary termination, the Company shall have the right, but not the obligation, to purchase the Units from the Employee for a purchase price equal to the Transfer Price; provided that for purposes of this Section 5(b), the Transfer Price shall be calculated using the twelve month period ending on the last day of the month immediately preceding the month in which Employee’s employment terminated.

6.                      Right of First Refusal. Employee agrees that in the event Employee desires to transfer any or all of her Units to another party, Employee shall give prior written notice to the Company describing in reasonable detail the terms of such bona fide offer. For a period of thirty (30) days after such notice of transfer is received by the Company (the “Exercise Period”), the Company shall have a right to repurchase all or any portion of the Units to be transferred at the lower of the price set forth in the transfer notice or the Transfer Price, and upon the terms set forth in the transfer notice (the “Company’s First Refusal Rights”). The Company shall exercise the Company First Refusal Rights by giving Employee written notice of such intention prior to the expiration of the Exercise Period.

7.                      Representations and Warranties of the Company. The Company hereby represents and warrants to Employee that, as of the date hereof:

(a)           The Company is a limited liability company validly existing in good standing under the laws of the state of Delaware and has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted and to enter into and perform this Agreement and to carry out the transactions contemplated hereby. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties.

(b)           The outstanding membership interests of the Company consists of 100 Units.

8.                      Representations and Warranties of Employee. Employee acknowledges, represents and warrants to the Company as follows:

(a)           Employee understands that the Units have not been registered under the Act, or under any other federal or state law, and that the Company does not currently contemplate such a registration.

                                                      Exhibit 10.3i
(b)           Employee has such knowledge, skill and experience in business, financial and investment matters so that Employee is capable of evaluating the merits and risks of an investment in the Units. To the extent that Employee has deemed it appropriate to do so, Employee has retained, and relied upon, appropriate professional advice regarding the tax, legal and financial merits and consequences of the investment in the Units.

(c)           Employee has made, either alone or together with advisors (if any), such independent investigation of the Company, its management, and related matters as Employee deems to be, or such advisors (if any) have advised to be, necessary or advisable in connection with an investment in the Units; and Employee and Employee’s advisors (if any) have received all information and data which Employee and such advisors (if any) believe to be necessary in order to reach an informed decision as to the advisability of an investment in the Units. Employee is satisfied that there are no material facts regarding the Company or the Units as to which Employee has not been fully informed.

(d)           Employee represents that Employee has reviewed Employee’s financial condition and commitments, alone and together with Employee’s advisors, and that, based on such review, Employee is satisfied that (i) Employee has adequate means of providing for Employee’s financial needs and possible contingencies and has assets or sources of income which, taken together, are more than sufficient so that Employee could bear the risk of loss of Employee’s entire investment in the Units, (ii) Employee has no present or contemplated future need or intention to dispose of or sell all or any portion of the Units to satisfy any existing or contemplated undertaking, need or indebtedness, and (iii) Employee is capable of bearing the economic risk of an investment in the Units for the indefinite future. Employee agrees to furnish any additional information requested by the Company to assure compliance of this transaction with applicable federal and state securities laws in connection with the purchase and sale of the Units.

(e)           Employee understands that the Units are “restricted securities” under applicable federal securities laws and that the Act and the rules of the Securities and Exchange Commission provide in substance that Employee may dispose of the Units only pursuant to an effective registration statement under the Act or an exemption from such registration if available. Employee further understands that the Company has no obligation or intention to register any of the Units under or to take action so as to permit sales pursuant to the Act. Employee further understands that applicable blue sky laws may permit sales of the Units only if the Units are registered or the transaction is subject to an applicable exemption. As a consequence, Employee understands that Employee must bear the economic risks of the investment in the Units for an indefinite period of time.

(f)           Employee hereby confirms that Employee is acquiring the Units for investment only and not with a view to or in connection with any resale or distribution of the Units. Employee hereby affirms that Employee has no present intention of making any sale, assignment, pledge, gift, transfer or other disposition of the Units or any interest therein.

(g)           Employee is an “accredited investor” within the meaning of Rule 501 under the Act and the representations made on the Preliminary Purchaser Questionnaire delivered previously to the Company are true and correct in all respects as of the date hereof.

(h)           Employee acknowledges and agrees that for purposes of this Agreement, the term “Units” as used in this Section 8 shall mean the Units as defined in Section 1 and the shares of common stock of AEG which Employee may receive pursuant to Section 4.

                                                                 Exhibit 10.3i
9.                      Legend. Employee acknowledges and agrees that the membership certificate evidencing the Units will bear a restrictive legend substantially in the following form:

“THE MEMBERSHIP INTERESTS REPRESENTED BY THIS CERTIFICATE (THE “UNITS”) HAVE BEEN GRANTED BY ADIRONDACK LEADERSHIP EXPEDITIONS, LLC (THE “COMPANY”) UNDER THE AMENDED AND RESTATED OPERATING AGREEMENT OF THE COMPANY (THE “AGREEMENT”), DATED AS OF APRIL 1, 2008 BETWEEN THE REGISTERED OWNER NAMED HEREON (“EMPLOYEE”) AND THE COMPANY. UNDER THE AGREEMENT, THE UNITS ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND TO THE OTHER TERMS AND CONDITIONS AS SET FORTH THEREIN.

THE UNITS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR REGISTERED OR QUALIFIED ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR QUALIFICATION OR AN EXEMPTION THEREFROM UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.”

10.                      General Solicitation. Employee acknowledges that neither the Company nor any person acting on its behalf has offered or sold the Units to Employee by any form of general solicitation, general or public media advertising or mass mailing.

11.                      Governing Law. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of California, without regard for the conflicts of laws provisions thereof.

12.                      Modifications or Waivers. Neither this Agreement nor any provisions hereof shall be modified, changed, discharged or terminated except by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought.
13.                      Assignments. This Agreement is not transferable or assignable by Employee or the Company.

14.                      Counterparts. This Agreement may be executed in any number of counterparts and by facsimile, and all of such counterparts together will be deemed one instrument.

* * * * *
                                                                Exhibit 10.3i

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.


ADIRONDACK LEADERSHIP EXPEDITIONS, LLC

By:           AYS Management, Inc.,
as Manager
   
By: 
       Name: Elliot Sainer
   Its:    Chief Executive Officer and President

Employee intends to be legally bound hereby.

EMPLOYEE:


By:     
                                                 
Name:  SUE CROWELL

[Signature Page to Subscription Agreement]
 
 
 
                                                                  Exhibit 10.3i


LONE STAR EXPEDITIONS, INC.
SUBSCRIPTION AGREEMENT

THIS SUBSCRIPTION AGREEMENT (the “Agreement”), dated as of April 1, 2004, is entered into by and between LONE STAR EXPEDITIONS, INC., a Delaware corporation (the “Company”), and the undersigned, SUE CROWELL (the “Employee”).

RECITALS
 
WHEREAS, the Company is an indirect, wholly-owned subsidiary of Aspen Education Group, Inc., a California corporation (“AEG”), and a direct, wholly-owned subsidiary of Aspen Youth, Inc., a California corporation (“Aspen”).

WHEREAS, Employee is employed by AEG as the head of the wilderness division of AEG.

WHEREAS, in order to give Employee an opportunity to acquire an interest in the Company as an incentive for Employee to continue participating in the affairs of the Company, the Company desires to issue shares of its common stock to Employee pursuant to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions, covenants and other consideration, the sufficiency and adequacy of which is hereby acknowledged, the Company and Employee agree as follows:

1.                      Issuance of Common Stock. On April 1, 2008 (the “Vesting Date”), the Company shall issue to Employee ten (10) shares of common stock of the Company (the “Shares”), which represents ten percent (10%) of the issued and outstanding capital stock of the Company. On such date of issuance, the Company shall deliver to Employee a stock certificate registered in Employee's name representing the Shares and Employee shall sign a receipt acknowledging receipt of the Shares.

2.                      Restricted Stock Award Agreement. Notwithstanding the foregoing, the Company shall not issue the Shares to Employee unless and until Employee signs a Restricted Stock Award Agreement, effective as of the date of issuance of the Shares, that includes the transfer restrictions and other rights and obligations of the Company and Employee as set forth herein. The Company shall provide such Restricted Stock Award Agreement to Employee for review no later than 30 days prior to the Vesting Date.
 
3.                      Sale of the Company. In  the event Aspen elects to sell the capital stock of the Company, whether through a direct purchase or through a merger or other type of transaction, or all or substantially all of the assets of the Company, to a third party (a “Call Event”) on or after the Vesting Date, the Company shall notify Employee of such sale at least ten days prior to the closing of such sale and Employee shall sell or transfer the Shares to the Company on or before the closing date.

(a)           In consideration for such sale or transfer of the Shares to the Company,
Employee shall receive an amount of consideration (the “Transfer Price”) equal to: the product product of (i) the sum of (X) twelve month trailing EBITDA for the twelve month period ending on the last day of the month immediately preceding the month in which such Call Event occurs, minus (Y) an amount equal to maintenance capital expenditures for such twelve month period; multiplied by (ii) 4.5; multiplied by (iii) 10%.

As an example only, if the twelve month trailing EBIDTA for the relevant period is $1,000,000 and maintenance capital expenditures for that period is $100,000, the Transfer Price would be equal to:

($1,000,000 - $100,000) x 4.5 x 0.10 = $405,000

                                                      Exhibit 10.3i
(b)           The consideration that Employee shall receive shall be in the same form or type of consideration as Aspen receives for the sale of such capital stock or assets. For example, if Aspen receives shares of capital stock of the third party purchaser, Employee shall be entitled to that number of such shares of capital stock of the third party purchaser equal to the product of the Transfer Price divided by the per share price Aspen receives for the sale of such capital stock or assets. Employee shall deliver the stock certificate representing the Shares to the Company on the date and at the location designated by the Company and shall sign such agreements or other documents in connection with the sale of the Shares to the Company as the Company reasonably requests.

4.                      Conversion Upon an IPO. In the event AEG completes an initial public offering (an “IPO”) of its common stock prior to the Vesting Date, the Employee's right to receive the Shares shall automatically be converted into the right to receive a number of shares of common stock of AEG (which shares of common stock shall not be registered under the Securities Act of 1933, as amended (the “Act”)) on the Vesting Date equal to the product of (i) the Transfer Price that Employee would have received had a Call Event occurred on the Vesting Date, divided by (ii) the closing price per share of the AEG common stock on the Vesting Date. For purposes of this Agreement, an “initial public offering” shall mean the initial firm commitment underwritten public offering of the common stock of Aspen, immediately following which such common stock is listed for trading on the New York Stock Exchange or for quotation on the NASDAQ National Market System or other agreed, internationally recognized stock exchange.

5.           Termination of Employment.

(a)           If prior to the Vesting Date (i) Employee ceases to be an employee of AEG, Aspen or the Company, or ceases to provide services to the Company, whether due to Employee's death, disability or voluntary or involuntary termination, or (ii) the capital stock or all or substantially all of the assets of the Company are sold or transferred to a third party that is not an affiliate of AEG, this Agreement shall automatically terminate and have no further force or effect and Employee shall not be entitled to receive any of the Shares or any other consideration pursuant to this Agreement or in connection with the termination of this Agreement.

(b)           If after the Vesting Date Employee ceases to be an employee of AEG, Aspen or the Company, or ceases to provide services to the Company, whether due to Employee's death, disability or voluntary or involuntary termination, the Company shall right, but not the obligation, to purchase the Shares from the Employee for a purchase price equal to the Transfer Price; provided that for purposes of this Section 5(b), the Transfer Price shall be calculated using the twelve month period ending on the last day of the month immediately preceding the month in which Employee’s employment terminated.

6.                      Right of First Refusal. Employee agrees that in the event Employee desires to
transfer any or all of her Shares to another party, Employee shall give prior written notice to the
Company describing in reasonable detail the terms of such bona fide offer. For a period of thirty (30) days after such notice of transfer is received by the Company (the “Exercise Period”), the
Company shall have a right to repurchase all or any portion of the Shares to be transferred at the
lower of the price set forth in the transfer notice or the Transfer Price, and upon the terms set forth in the transfer notice (the “Company's First Refusal Rights”). The Company shall exercise the Company First Refusal Rights by giving Employee written notice of such intention prior to the expiration of the Exercise Period.

7.                      Representations and Warranties of the Company. The Company hereby represents and warrants to Employee that, as of the date hereof:

(a)           The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted and to enter into and perform this Agreement and to carry out the transactions contemplated hereby. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties.

(b)           The authorized capital of the Company consists of 3,000 shares of common stock, no par value. There are 100 shares of common stock issued and outstanding.

(c)           The outstanding common shares are duly authorized and validly authorized and issued, fully paid and nonassessable.
 
                                                < font id="TAB2" style="LETTER-SPACING: 9pt">                Exhibit 10.3i
8.                      Representations and Warranties of Employee. Employee acknowledges, represents and warrants to the Company as follows:

(a)           Employee understands that the Shares have not been registered under the Act, or under any other federal or state law, and that the Company does not currently contemplate such a registration.

(b)           Employee has such knowledge, skill and experience in business, financial and investment matters so that Employee is capable of evaluating the merits and risks of an investment in the Shares. To the extent that Employee has deemed it appropriate to do so, Employee has retained, and relied upon, appropriate professional advice regarding the tax, legal and financial merits and consequences of the investment in the Shares.
                                                                  
(c)           Employee has made, either alone or together with advisors (if any), such independent investigation of the Company, its management, and related matters as Employee deems to be, or such advisors (if any) have advised to be, necessary or advisable in connection with an investment in the Shares; and Employee and Employee's advisors (if any) have received all information and data which Employee and such advisors (if any) believe to be necessary in order to reach an informed decision as to the advisability of an investment in the Shares. Employee is satisfied that there are no material facts regarding the Company or the Shares as to which Employee has not been fully informed.

(d)           Employee represents that Employee has reviewed Employee's financial condition and commitments, alone and together with Employee's advisors, and that, based on such review, Employee is satisfied that (i) Employee has adequate means of providing for Employee's financial needs and possible contingencies and has assets or sources of income which, taken together, are more than sufficient so that Employee could bear the risk of loss of Employee's entire investment in the Shares, (ii) Employee has no present or contemplated future need or intention to dispose of or sell all or any portion of the Shares to satisfy any existing or contemplated undertaking, need or indebtedness, and (iii) Employee is capable of bearing the economic risk of an investment in the Shares for the indefinite future. Employee agrees to furnish any additional information requested by the Company to assure compliance of this transaction with applicable federal and state securities laws in connection with the purchase and sale of the Shares.

(e)           Employee understands that the Shares are “restricted securities” under applicable federal securities laws and that the Act and the rules of the Securities and Exchange Commission provide in substance that Employee may dispose of the Shares only pursuant to an effective registration statement under the Act or an exemption from such registration if available. Employee further understands that the Company has no obligation or intention to register any of the Shares under or to take action so as to permit sales pursuant to the Act. Employee further understands that applicable blue sky laws may permit sales of the Shares only if the Shares are registered or the transaction is subject to an applicable exemption. As a consequence, Employee understands that Employee must bear the economic risks of the investment in the Shares for an indefinite period of time.

(f)           Employee hereby confirms that Employee is acquiring the Shares for investment only and not with a view to or in connection with any resale or distribution of the Shares. Employee hereby affirms that Employee has no present intention of making any sale, assignment, pledge, gift, transfer or other disposition of the Shares or any interest therein.

(g)           Employee is an “accredited investor” within the meaning of Rule 501 under the Act and the representations made on the Preliminary Purchaser Questionnaire delivered previously to the Company are true and correct in all respects as of the date hereof.

                                    Exhibit 10.3i
(h)           Employee acknowledges and agrees that for purposes of this Agreement, the term “Shares” as used in this Section 8 shall mean the Shares as defined in Section 1 and the shares of common stock of AEG which Employee may receive pursuant to Section 4.

9.                      Legend. Employee acknowledges and agrees that the stock certificate evidencing the Shares will bear a restrictive legend substantially in the following form:

“THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE (THE “SHARES”) HAVE BEEN GRANTED BY LONE STAR EXPEDITIONS, INC.
(THE “COMPANY”) AS RESTRICTED STOCK UNDER THE RESTRICTED STOCK AWARD AGREEMENT (THE “AGREEMENT”), DATED AS OF APRIL 1, 2008 BETWEEN THE REGISTERED OWNER NAMED HEREON (“EMPLOYEE”) AND THE COMPANY. UNDER THE AGREEMENT, THE SHARES ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND TO THE OTHER TERMS AND CONDITIONS AS SET FORTH THEREIN.

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR REGISTERED OR QUALIFIED ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR QUALIFICATION OR AN EXEMPTION THEREFROM UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS.”
                                                                            
10.                      General Solicitation. Employee acknowledges that neither the Company nor any person acting on its behalf has offered or sold the Shares to Employee by any form of general solicitation, general or public media advertising or mass mailing.

11.                      Governing Law. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of California, without regard for the conflicts of laws provisions thereof.

12.                      Modifications or Waivers. Neither this Agreement nor any provisions hereof shall be modified, changed, discharged or terminated except by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought.

13.                      Assignments. This Agreement is not transferable or assignable by Employee or the Company.

14.                      Counterparts.  This Agreement may be executed in any number of counterparts and by facsimile, and all of such counterparts together will be deemed one instrument.

* * * * *

                                      & #160;                    Exhibit 10.3i
 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.


LONE STAR EXPEDITIONS, INC.


By:  
         
Name: Elliot Sainer
Its:           Chief Executive Officer and President

Employee intends to be legally bound hereby.

EMPLOYEE:


By:    
       
Name:                      SUE CROWELL



























[Signature page to Subscription Agreement]


                                                                 Exhibit 10.3i

Annex B
 

 
UCC-3 Financing Statements
 
 
 
 
EX-31.1 4 ex31_1.htm PRINCIPAL EXECUTIVE OFFICER CERTIFICATION ex31_1.htm

Exhibit 31.1
 
CERTIFICATION
 
I, Dr. Barry W. Karlin, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of CRC Health Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
     
     
Date: November 14, 2008
  
/s/    DR. BARRY W. KARLIN        
   
Dr. Barry W. Karlin
   
Chairman and Chief Executive Officer
   
(Principal Executive Officer)

 
 EX-31.2 5 ex31_2.htm CFO AND PRINCIPAL ACCOUNTING OFFICER CERTIFICATION ex31_2.htm

Exhibit 31.2
 
CERTIFICATION
 
I, Kevin Hogge, certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of CRC Health Corporation;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
     
     
Date: November 14, 2008
  
/s/    KEVIN HOGGE        
   
Kevin Hogge
   
Chief Financial Officer
   
(Principal Financial Officer and Principal Accounting Officer)

 
 EX-32.1 6 ex32_1.htm CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER ex32_1.htm

Exhibit 32.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Dr. Barry W. Karlin, Chairman and Chief Executive Officer of CRC Health Corporation (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
 
•
the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2008, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
•
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
     
Date: November 14, 2008
    
     
/s/    DR. BARRY W. KARLIN        
    
Dr. Barry W. Karlin
    
Chairman and Chief Executive Officer
    
(Principal Executive Officer)
    
 
A signed original of this written statement required by Section 906 has been provided to CRC Health Corporation and will be retained by CRC Health Corporation and furnished to the Securities and Exchange Commission or its staff upon request.


 EX-32.2 7 ex32_2.htm CERTIFICATION OF CFO AND PRINCIPAL ACCOUNTING OFFICER ex32_2.htm

Exhibit 32.2
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Kevin Hogge, Chief Financial Officer of CRC Health Corporation (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
 
•
the Quarterly Report on Form 10-Q of the Company for the quarter ended Setpember 30, 2008, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
•
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 

     
Date: November 14, 2008
    
     
/s/    KEVIN HOGGE        
    
Kevin Hogge
    
Chief Financial Officer
    
(Principal Financial Officer and Principal Accounting Officer)
    
 
A signed original of this written statement required by Section 906 has been provided to CRC Health Corporation and will be retained by CRC Health Corporation and furnished to the Securities and Exchange Commission or its staff upon request.


 
 
 

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