1360474--4/2/2007--CRC_Health

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{condition, economic, financial}

{system, service, information}

{loan, real, estate}

{investment, property, distribution}

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Impact of Inflation and Economic Trends Our level of indebtedness could adversely affect our ability to meet our obligations under our indebtedness, raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry. If federal or state healthcare programs, managed care organizations and other third-party payors reduce their reimbursement rates for services provided, our revenue and profitability may decline. We derive a significant portion of our revenue from key treatment programs that are located in Pennsylvania, California, Arizona, Indiana and West Virginia, which makes us particularly sensitive to regulatory and economic conditions in those states. If Pennsylvania government funds for the services we provide are reduced or unavailable, our revenue and profitability may be negatively impacted. A sustained downturn in the U.S. economy could negatively affect revenue and profitability of our operations dependent on private-pay funding. We may have difficulty operating and integrating treatment facilities and youth treatment programs that we acquire. This may disrupt our business and increase our costs and harm our operating results. We may have difficulty opening new treatment facilities and operating them profitably. We have limited experience in opening new residential treatment facilities. If we are unable to execute our strategy, our growth may be restrained and our operating results could be adversely affected. State and local regulation of the construction, acquisition or expansion of treatment facilities could prevent us from opening or acquiring additional residential and outpatient treatment facilities or expanding or renovating our existing treatment facilities, which may cause our growth to be restrained and our operating results to be adversely affected. Changes to federal, state and local regulations affecting the operation of our treatment facilities could prevent us from operating our existing facilities or acquiring additional facilities, which may cause our growth to be restrained and our operating results to be adversely affected. A shortage of qualified workers could adversely affect our ability to identify, hire and retain qualified personnel. This could increase our operating costs, restrain our growth and reduce our revenue. If we fail to cultivate new or maintain established relationships with referral sources, our revenue may decline. Our treatment facilities are sometimes subject to attempts by local or regional governmental authorities and local area residents to force their closure or relocation. There are only two significant suppliers of methadone distributed by our outpatient treatment facilities. If one or both of these vendors does not supply the methadone we require, we may face increased costs in our outpatient treatment division, which may adversely affect our operating results and profitability. A decline in the revenues or profitability of our Sierra Tucson facility would likely have a material adverse effect on our revenues and operating results. Accidents or other incidents involving the students at our youth treatment facilities, or those of our competitors, may adversely affect our revenues and operating results directly or through negative public perception of the industry. Natural disasters such as hurricanes, earthquakes and floods may adversely affect our revenues and operating results. We face significant competition from established treatment providers as well as new entrants. As a provider of treatment services, we are subject to claims and legal actions by patients, students, employees and others, which may increase our costs and harm our business. Companies within the healthcare industry continue to be the subject of federal and state investigations. The integration of our information systems may be more costly than we anticipate, may not be completed on time or the integrated systems may not function properly. We have a limited history of profitability, have incurred net losses in the past and may incur substantial net losses in the future. We are subject to restrictions that limit our flexibility in operating our business as a result of our debt financing agreements. Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligation to increase significantly. We depend on our key management personnel. Funds associated with Bain Capital Partners, LLC control us and may have conflicts of interest with us. If we fail to comply with extensive laws and government regulations, we could suffer penalties, become ineligible to participate in reimbursement programs or be required to make significant changes to our operations, which may reduce our revenues, increase our costs and harm our business. Referrals of patients and relationships with physicians Changes in state and federal regulation and in the regulatory environment, as well as different or new interpretations of existing regulations, could adversely affect our operations and profitability.

Full 10-K form ▸

1360474--4/2/2007--CRC_Health_CORP