UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission file number: 333-129179

NATIONAL MENTOR HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		31-1757086
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
313 Congress Street, 6th Floor
Boston, Massachusetts 02210		(617) 790-4800
(Address of principal executive offices,		(Registrant’s telephone number,
including zip code)		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 o No þ

The Company is a voluntary filer of reports required of companies with public securities under Sections 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports which would have been required of the Company during the past 12 months had it been subject to such provisions.

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

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if smaller reporting company)

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

As of May 16, 2011, there were 100 shares outstanding of the registrant’s common stock, $.01 par value.

 

 

Index
National Mentor Holdings, Inc.

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets as of March 31, 2011 and September 30, 2010		3
Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2011 and 2010		4
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2011 and 2010		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Item 4. Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		29
Item 1A. Risk Factors		29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3. Defaults Upon Senior Securities		40
Item 4. (Removed and Reserved)		40
Item 5. Other Information		40
Item 6. Exhibits		41
Signatures		42
Exhibit 10.5
Exhibit 10.6
Exhibit 10.7
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 32

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements.

National Mentor Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

		(Unaudited)
		March 31,				September 30,
		2011				2010
Assets
Current assets
Cash and cash equivalents		$	12,544			$	26,448
Restricted cash			821				1,046
Accounts receivable, net			125,130				125,979
Deferred tax assets, net			13,961				13,571
Prepaid expenses and other current assets			9,398				14,701
Total current assets			161,854				181,745
Property and equipment, net			144,804				142,112
Intangible assets, net			421,222				437,757
Goodwill			230,818				229,757
Restricted cash			50,000				—
Other assets			20,981				13,915
Investment in related party debt securities			—				10,599
Total assets		$	1,029,679			$	1,015,885
Liabilities and shareholder’s equity
Current liabilities
Accounts payable		$	19,781			$	26,503
Accrued payroll and related costs			72,760				68,272
Other accrued liabilities			39,744				48,307
Obligations under capital lease, current			305				92
Current portion of long-term debt			5,300				3,667
Total current liabilities			137,890				146,841
Other long-term liabilities			16,108				15,166
Deferred tax liabilities, net			120,038				126,322
Obligations under capital lease, less current portion			6,621				1,624
Long-term debt, less current portion			755,910				500,799
Total liabilities			1,036,567				790,752
Shareholder’s equity
Common stock			—				—
Additional paid-in-capital			30,466				250,620
Accumulated other comprehensive income			—				575
Accumulated deficit			(37,354	)			(26,062	)
Total shareholder’s equity			(6,888	)			225,133
Total liabilities and shareholder’s equity		$	1,029,679			$	1,015,885

See accompanying notes.

National Mentor Holdings, Inc.

Condensed Consolidated Statements of Operations

(In thousands)

		(Unaudited)
		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Net revenue		$	266,946			$	251,002			$	533,473			$	501,008
Cost of revenue (exclusive of depreciation expense shown below)			206,650				193,055				412,712				384,389
Operating expenses:
General and administrative			34,940				32,966				69,526				66,224
Depreciation and amortization			15,013				14,231				30,020				28,398
Total operating expenses			49,953				47,197				99,546				94,622
Income from operations			10,343				10,750				21,215				21,997
Other income (expense):
Management fee of related party			(310	)			(287	)			(655	)			(563	)
Other income (expense), net			248				(185	)			477				(129	)
Extinguishment of debt			(19,278	)			—				(19,278	)			—
Gain from available for sale investment security			3,018				—				3,018				—
Interest income			6				18				11				31
Interest income from related party			190				469				684				945
Interest expense			(14,145	)			(11,520	)			(22,290	)			(23,401	)
Loss from continuing operations before income taxes			(19,928	)			(755	)			(16,818	)			(1,120	)
Benefit for income taxes			(6,921	)			(465	)			(5,576	)			(967	)
Loss from continuing operations			(13,007	)			(290	)			(11,242	)			(153	)
Loss from discontinued operations, net of tax			(51	)			(4,366	)			(50	)			(4,545	)
Net loss		$	(13,058	)		$	(4,656	)		$	(11,292	)		$	(4,698	)

See accompanying notes.

National Mentor Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

		(Unaudited)
		Six Months Ended
		March 31,
		2011				2010
Operating activities
Net loss		$	(11,292	)		$	(4,698	)
Adjustments to reconcile net loss to cash provided by operating activities:
Accounts receivable allowances			5,577				5,537
Depreciation and amortization of property and equipment			11,656				11,651
Amortization of other intangible assets			18,370				17,214
Amortization of original issue discount and initial purchasers discount			442				—
Amortization and write-off of deferred financing costs			9,899				1,598
Accretion of investment in related party debt securities			(325	)			(481	)
Stock-based compensation			174				248
Deferred income taxes			(6,674	)			(6,560	)
Gain from available for sale investment security			(3,018	)			—
(Gain) loss on disposal of assets			(96	)			346
Change in fair value of contingent consideration			321				—
Non-cash impairment charge			—				6,604
Non-cash interest income from related party			(359	)			(464	)
Changes in operating assets and liabilities:
Accounts receivable			(4,303	)			(5,314	)
Other assets			4,485				1,244
Accounts payable			(7,095	)			761
Accrued payroll and related costs			4,372				411
Other accrued liabilities			(5,341	)			2,912
Other long-term liabilities			942				768
Net cash provided by operating activities			17,735				31,777
Investing activities
Cash paid for acquisitions, net of cash received			(3,353	)			(29,199	)
Purchases of property and equipment			(9,194	)			(9,061	)
Changes in restricted cash			(49,775	)			(1,800	)
Proceeds from sale of assets			296				289
Net cash used in investing activities			(62,026	)			(39,771	)
Financing activities
Repayments of long-term debt			(505,364	)			(1,867	)
Issuance of long term debt, net of original issue discount			761,667				—
Repayments of capital lease obligations			(92	)			(67	)
Cash paid for earn-out obligations			(3,313	)			—
Dividend to Parent			(206,987	)			—
Payments of deferred financing costs			(15,524	)			—
Net cash provided by (used in) financing activities			30,387				(1,934	)
Net decrease in cash and cash equivalents			(13,904	)			(9,928	)
Cash and cash equivalents at beginning of period			26,448				23,650
Cash and cash equivalents at end of period		$	12,544			$	13,722

See accompanying notes.

National Mentor Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

1. Basis of Presentation

National Mentor Holdings, Inc., through its wholly owned subsidiaries (collectively, the “Company”), is a leading provider of home and community-based health and human services to adults and children with intellectual and/or developmental disabilities, acquired brain injury and other catastrophic injuries and illnesses; and to youth with emotional, behavioral and/or medically complex challenges. Since the Company’s founding in 1980, the Company has grown to provide services to approximately 23,500 clients in 36 states.

The Company designs customized service plans to meet the unique needs of its clients, which it delivers in home- and community-based settings. Most of the Company’s service plans involve residential support, typically in small group homes, host home settings, or specialized community facilities, designed to improve the clients’ quality of life and to promote their independence and participation in community life. Other services offered include supported living, day and transitional programs, vocational services, case management, family-based services, post-acute treatment and neurorehabilitation, neurobehavioral rehabilitation and physical, occupational and speech therapies, among others. The Company’s customized service plans offer its clients as well as the payors of these services, an attractive, cost-effective alternative to health and human services provided in large, institutional settings.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements herein should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, which is on file with the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal and recurring accruals, necessary to present fairly the financial statements in accordance with GAAP. Intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. Operating results for the three and six months ended March 31, 2011 may not necessarily be indicative of results to be expected for any other interim period or for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

2. Recent Accounting Pronouncements

Presentation of Insurance Claims and Related Insurance Recoveries — In August 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No 2010-24, Health Care Entities (Topic 954), Presentation of Insurance Claims and Related Insurance Recoveries (“ASU 2010-24”), which clarifies that companies should not net insurance recoveries against a related claim liability. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. The adoption of ASU 2010-24 is effective for the Company beginning October 1, 2011. With its adoption, the Company’s accounting for insurance recoveries and related claim liability will change on a prospective basis on the date of adoption. The Company is evaluating the impact of this guidance on its financial statements.

Disclosure of Supplementary Pro Forma Information for Business Combinations — In December 2010, the FASB issued Accounting Standards Update 2010-29, Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”). ASU 2010-29 requires a public entity to disclose pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the fiscal year had been as of the beginning of the annual reporting period or the beginning of the comparable prior annual reporting period if showing comparative financial statements. ASU 2010-29 is effective prospectively for the Company for business combinations for which the acquisition date is on or after October 1, 2011.

3. Comprehensive Loss

The components of comprehensive loss and related tax effects are as follows:

		Three Months Ended								Six Months Ended
		March 31,								March 31,
(in thousands)		2011				2010				2011				2010
Net loss		$	(13,058	)		$	(4,656	)		$	(11,292	)		$	(4,698	)
Changes in unrealized gain on derivatives net of taxes of $0 and $1,207 for the three months ended March 31, 2011 and 2010, respectively and $0 and $2,370 for the six months ended March 31, 2011 and 2010, respectively			—				1,777				—				3,490
Changes in unrealized gain on available-for-sale debt securities net of taxes of $531 and $107 for the three months ended March 31, 2011 and 2010, respectively and $390 and $142 for the six months ended March 31, 2011 and 2010, respectively			(782	)			(158	)			(575	)			210
Comprehensive loss		$	(13,840	)		$	(3,037	)		$	(11,867	)		$	(998	)

4. Long-Term Debt

The Company’s long-term debt consists of the following:

		March 31,				September 30,
(in thousands)		2011				2010
Term loan, principal and interest due in quarterly installments through February 9, 2017		$	530,000			$	—
Original issue discount on term loan			(7,757	)			—
Old senior term B loan, principal and interest were due in quarterly installments through June 29, 2013			—				320,763
Senior revolver, due February 9, 2016; quarterly cash interest payments at a variable interest rate			—				—
Old senior revolver, due June 29, 2012; quarterly cash interest payments at a variable interest rate			—				—
Senior notes, due February 15, 2018; semi-annual cash interest payments due each February 1st and August 1st (interest rate of 12.50%)			250,000				—
Original issue discount and initial purchase discount on senior notes			(11,033	)			—
Senior subordinated notes, due July 1, 2014; semi-annual cash interest payments were due each January 1st and July 1st (interest rate of 11.25%)			—				180,000
Term loan mortgage, principal and interest due in monthly installments through June 29, 2012; variable interest rate (4.75% at September 30, 2010)			—				3,703
			761,210				504,466
Less current portion			5,300				3,667
Long-term debt		$	755,910			$	500,799

At September 30, 2010, the Company had $504.5 million of indebtedness, consisting of $320.8 million of indebtedness under the old senior secured term B loan facility, $180.0 million principal amount of the 11.25% Senior Subordinated Notes due 2014 (the “senior subordinated notes”) and $3.7 million outstanding under the mortgage facility. As of September 30, 2010, the Company did not have any borrowings under the old senior revolving credit facility (the “old senior revolver”).

On February 9, 2011, the Company completed refinancing transactions, which included entering into senior secured credit facilities and issuing $250.0 million in aggregate principal amount of 12.50% senior notes due 2018 (the “senior notes”).

Also, in connection with the refinancing transactions, the old senior secured credit facilities and the mortgage facility were repaid. Approximately $171.9 million of the senior subordinated notes were purchased on February 9, 2011 pursuant to a tender offer and consent solicitation for the senior subordinated notes and the remaining senior subordinated notes were redeemed prior to March 31, 2011.

The Company incurred $19.3 million of expenses related to the refinancing transactions including (i) $10.8 million related to the tender premium and consent fees paid in connection with the repurchase of the senior subordinated notes, (ii) $7.9 million related to the acceleration of deferred financing costs related to the prior indebtedness and (iii) $0.6 million related to transaction costs. These expenses are recorded on the Company’s consolidated statements of operations as Extinguishment of debt.

Senior Secured Credit Facilities

On February 9, 2011, the Company entered into new senior secured credit facilities, consisting of a (i) six-year $530.0 million term loan facility (the “term loan”), of which $50.0 million was deposited in a cash collateral account in support of issuance of letters of credit under an institutional letter of credit facility (the “institutional letter of credit facility”) and a (ii) $75.0 million five-year senior secured revolving credit facility (the “senior revolver”). The Company refers to these facilities as the “senior secured credit facilities”.

Term loan

The $530.0 million term loan was issued at a price equal to 98.5% of its face value and amortizes one percent per year, paid quarterly, with the remaining balance payable at maturity. The senior credit agreement also includes a provision for the prepayment of a portion of the outstanding term loan amounts beginning in fiscal 2011 equal to an amount ranging from 0-50% of a calculated amount, depending on the Company’s leverage ratio, if the Company generates certain levels of cash flow. The variable interest rate on the term loan is equal to (i) a rate equal to the greater of (a) the prime rate, (b) the federal funds rate plus 1/2 of 1% and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus 4.25%; or (ii) the Eurodollar rate (provided that the rate shall not be less than 1.75% per annum), plus 5.25%, at the Company’s option. At March 31, 2011, the variable interest rate on the term loan was 7.0%.

Senior revolver

During the three months ended March 31, 2011, the Company borrowed $6.9 million under the senior revolver and repaid the borrowings in the same period. The Company had $75.0 million of availability under the senior revolver at March 31, 2011. As of March 31, 2011, the Company had $36.5 million of letters of credit issued under the institutional letter of credit facility primarily related to the Company’s workers’ compensation insurance coverage. Letters of credit can be issued under the Company’s institutional letter of credit facility up to the $50.0 million limit and letters of credit in excess of that amount reduce availability under the Company’s senior revolver. The interest rates for any borrowings under the senior revolver are the same as the term loan.

Senior Notes

On February 9, 2011, the Company issued $250.0 million of the senior notes at a price equal to 97.737% of their face value, for net proceeds of $244.3 million. The net proceeds were reduced by an initial purchasers’ discount of $5.6 million. The senior notes are the Company’s unsecured obligations and are guaranteed by certain of the Company’s existing subsidiaries.

Cash paid for interest

Total cash paid for interest on the Company’s debt amounted to $18.7 million and $15.8 million for the three months ended March 31, 2011 and 2010, respectively and $21.0 million and $21.8 million for the six months ended March 31, 2011 and 2010, respectively.

Covenants

The senior credit agreement and the indenture governing the senior notes contain negative financial and non-financial covenants, including, among other things, limitations on the Company’s ability to incur additional debt, transfer or sell assets, pay dividends, redeem stock or make other distributions or investments, and engage in certain transactions with affiliates. In addition, the senior credit agreement governing our senior secured credit facilities contains financial covenants that require the Company to maintain a specified consolidated leverage ratio and consolidated interest coverage ratio commencing with the quarter ending September 30, 2011.

The Company is restricted from paying dividends to NMH Holdings, LLC (“Parent”) in excess of $15.0 million, except for dividends used for the repurchase of equity from former officers and employees and for the payment of management fees, taxes, and certain other expenses.

Derivatives

The Company entered into an interest rate swap in a notional amount of $400.0 million effective March 31, 2011 and ending September 30, 2014. The Company entered into this interest rate swap to hedge the risk of changes in the floating rate of interest on borrowings under the term loan. Under the terms of the swap, the Company receives from the counterparty a quarterly payment based on a rate equal to the greater of 3-month LIBOR and 1.75% per annum, and the Company makes payments to the counterparty based on a fixed rate of 2.54650% per annum, in each case on the notional amount of $400.0 million, settled on a net payment basis. Based on the applicable margin of 5.25% under the Company’s term loan, this swap effectively fixes the Company’s cost of borrowing for $400.0 million of the term loan at 7.7965% per annum for the term of the swap.

The Company will account for the interest rate swap as a cash flow hedge. The effectiveness of the hedge relationship will be assessed on a quarterly basis during the term of the hedge.

5. Shareholder’s Equity

Common Stock

The holders of the Company’s common stock are entitled to receive dividends when and as declared by the Company’s Board of Directors. In addition, the holders of common stock are entitled to one vote per share. All of the outstanding shares of common stock are held by Parent.

Dividend to Parent

On February 9, 2011, as part of the refinancing transactions described in Note 4, the Company paid a dividend of $219.7 million to Parent, which in turn made a distribution of $219.7 million to its direct parent, NMH Holdings, Inc. (“NMH Holdings”). NMH Holdings used the proceeds of the distribution to (i) repurchase $210.9 million aggregate principal amount of the Senior Floating Rate Toggle Notes due 2014 (the “NMH Holdings notes”) at a premium and (ii) pay related fees and expenses.

6. Business Combinations

The operating results of the businesses acquired during the three months ended March 31, 2011 were included in the consolidated statements of operations from the date of acquisition. The Company accounted for the acquisitions under the purchase method of accounting and, as a result, the purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The excess of the purchase price over the estimated fair value of net tangible assets was allocated to specifically identified intangible assets, with the residual being allocated to goodwill.

During the three months ended March 31, 2011, the Company acquired two companies complementary to its business engaged in behavioral health and human services for total fair value consideration of $0.4 million. As a result of these acquisitions, the Company recorded $0.2 million of goodwill and $0.2 million of intangible assets in the Human Services segment.

During the six months ended March 31, 2011, the Company acquired five companies complementary to its business engaged in behavioral health and human services for total fair value consideration of $3.3 million. As a result of these acquisitions, the Company recorded $1.0 million of goodwill and $1.4 million of intangible assets in the Human Services segment and $0.2 million of goodwill and $0.4 million of intangible assets in the Post-Acute Specialty Rehabilitation Services segment. The remaining purchase price was allocated to tangible assets.

Contingent consideration

Springbrook On January 15, 2010, the Company acquired the assets of Springbrook, Inc. and an affiliate (together, “Springbrook”) for total fair value consideration of $9.3 million, subject to increase based on an earn-out. The earn-out provided that an additional $3.5 million in cash could be paid based upon the purchased entity’s achieving certain earnings targets (the “earn-out”). The fair value of the earn-out on the date of acquisition was $1.6 million. For the six months ended March 31, 2011, the fair value of the earn-out increased $0.3 million. Since the initial estimate, the fair-value of the earn-out has increased to $3.4 million based on actual financial performance of Springbook. The increase in the fair-value of the earn-out is being recognized as a charge to earnings and is included in general and administrative expenses in the consolidated statements of operations.

IFCS On June 1, 2009, the Company acquired the stock of Institute for Family Centered Services, Inc. (“IFCS”) for total cash of $11.5 million. This acquisition took place prior to the October 1, 2009 change in authoritative guidance and as a result, any adjustments to the earn-out are recorded to goodwill. During fiscal 2010, the Company accrued an additional $3.3 million of expected earn-out which was paid during the three months ended December 31, 2010.

7. Goodwill and Intangible Assets

Goodwill

The changes in goodwill for the six months ended March 31, 2011 are as follows:

						Post Acute
						Specialty
		Human				Rehabilitation
(in thousands)		Services				Services				Total
Balance as of September 30, 2010		$	169,885			$	59,872			$	229,757
Goodwill acquired through acquisitions			1,026				237				1,263
Adjustments to goodwill, net			65				(267	)			(202	)
Balance as of March 31, 2011		$	170,976			$	59,842			$	230,818

The adjustments to goodwill relate to the finalization of the purchase price for acquisitions during the measurement period.

Intangible Assets

Intangible assets consist of the following as of March 31, 2011:

		Gross
		Carrying				Accumulated				Intangible
Description		Value				Amortization				Assets, Net
(in thousands)
Agency contracts		$	467,515			$	128,495			$	339,020
Non-compete/non-solicit			1,044				508				536
Relationship with contracted caregivers			12,804				6,755				6,049
Trade names			4,039				1,674				2,365
Trade names			47,700				—				47,700
Licenses and permits			42,713				17,828				24,885
Intellectual property			904				237				667
		$	576,719			$	155,497			$	421,222

Intangible assets consist of the following as of September 30, 2010:

		Gross
		Carrying				Accumulated				Intangible
Description		Value				Amortization				Assets, Net
(in thousands)
Agency contracts		$	465,679			$	113,418			$	352,261
Non-compete/non-solicit			1,044				403				641
Relationship with contracted caregivers			12,804				5,977				6,827
Trade names			4,039				1,463				2,576
Trade names			47,700				—				47,700
Licenses and permits			42,713				15,693				27,020
Intellectual property			904				172				732
		$	574,883			$	137,126			$	437,757

Amortization expense was $9.1 million and $8.6 million for the three months ended March 31, 2011 and 2010, respectively and $18.4 million and $16.9 million for the six months ended March 31, 2011 and 2010, respectively.

8. Related Party Transactions

Management Agreements

On June 29, 2006, the Company entered into a management agreement with Vestar Capital Partners V, L.P. (“Vestar”) relating to certain advisory and consulting services for an annual management fee equal to the greater of (i) $850 thousand or (ii) an amount equal to 1.0% of the Company’s consolidated earnings before interest, taxes, depreciation, amortization and management fee for each fiscal year determined as set forth in the Company’s senior credit agreement.

As part of the management agreement, the Company agreed to indemnify Vestar and its affiliates from and against all losses, claims, damages and liabilities arising out of the performance by Vestar of its services pursuant to the management agreement. The management agreement will terminate upon such time that Vestar and its partners and their respective affiliates hold, directly or indirectly in the aggregate, less than 20% of the voting power of the outstanding voting stock of the Company.

This agreement was amended and restated effective February 9, 2011 to provide for the payment of reasonable and customary fees to Vestar for services in connection with a sale of the Company, an initial public offering by or involving NMH Investment, LLC (“NMH Investment”) or any of its subsidiaries or any extraordinary acquisition by or involving NMH Investment or any of its subsidiaries; provided, that such fees shall only be paid with the consent of the directors of the Company who are not affiliated with or employed by Vestar. The Company expensed $0.3 million of management fees and expenses for the three months ended March 31, 2011 and 2010 and $0.7 million and $0.6 million for the six months ended March 31, 2011 and 2010, respectively.

Consulting Agreements

During fiscal 2010, the Company engaged Alvarez & Marsal Healthcare Industry Group (“Alvarez & Marsal”) to provide certain transaction advisory and other services. A Company director, Guy Sansone, is a Managing Director at Alvarez & Marsal and the head of its Healthcare Industry Group. The engagement resulted in aggregate fees of $0.6 million for the six months ended March 31, 2011, and was approved by the Company’s Audit Committee. Mr. Sansone is not a member of the Company’s Audit Committee and was not personally involved in the engagement.

The Company engaged Duff & Phelps, LLC as a financial advisor in connection with the refinancing transactions described in Note 4, including the repurchase of the NMH Holdings notes, and related matters. According to public filings, Vestar owns 12.4% of the Class A common stock of Duff & Phelps Corporation, the parent company of Duff & Phelps, LLC, and one of Vestar’s principals serves on the Board of Directors of Duff & Phelps Corporation but was not personally involved in this engagement. This engagement resulted in fees of approximately $0.2 million during the six months ended March 31, 2011 and was approved by the Company’s Board of Directors, with the Vestar members abstaining from voting.

Lease Agreements

The Company leases several offices, homes and other facilities from its employees, or from relatives of employees, primarily in the states of California, Nevada and Arkansas, which have various expiration dates extending out as far as February 2020. In connection with the acquisition of NeuroRestorative in the second quarter of fiscal 2010, the Company entered into a lease of a treatment facility in Arkansas with a former shareholder and executive who is providing consulting services. The lease is an operating lease with an initial ten-year term, and the total expected minimum lease commitment is $7.0 million.

Related party lease expense was $1.2 million and $1.1 million for the three months ended March 31, 2011 and 2010, respectively and $2.4 million and $2.1 million for the six months ended March 31, 2011 and 2010, respectively

Investment in Related Party Debt Securities

During fiscal 2009, the Company purchased $11.5 million in aggregate principal amount of the NMH Holdings notes for $6.6 million. The security was classified as an available-for-sale debt security and recorded on the Company’s consolidated balance sheets as Investment in related party debt securities. Cash interest on the NMH Holdings notes accrued at a rate per annum, reset quarterly, equal to LIBOR plus 6.375%, and PIK Interest (defined below) accrued at the cash interest rate plus 0.75%. NMH Holdings paid all of the interest on the NMH Holdings notes entirely by increasing the principal amount of the NMH Holdings notes or issuing new notes (“PIK Interest”).

The carrying value of the asset increased after it was purchased as a result of the Company recording (i) PIK Interest income and (ii) accretion of the purchase discount on the security. The Company’s investment in related-party debt securities was reflected on the Company’s consolidated balance sheets at fair value with the unrealized holding gain recorded in accumulated other comprehensive income.

NMH Holdings purchased the NMH Holdings notes held by the Company on February 9, 2011 in connection with the refinancing transactions.

9. Fair Value Measurements

The Company measures and reports its financial assets and liabilities on the basis of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

A three-level hierarchy for disclosure has been established to show the extent and level of judgment used to estimate fair value measurements, as follows:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Significant other observable inputs (quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability).

Level 3: Significant unobservable inputs for the asset or liability. These values are generally determined using pricing models which utilize management estimates of market participant assumptions.

Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

A description of the valuation methodologies used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Assets and liabilities recorded at fair value at March 31, 2011 consist of:

						Quoted				Significant Other				Significant
						Market Prices				Observable Inputs				Unobservable Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
		(In thousands):
Contingent consideration		$	(3,362	)		$	—			$	—			$	(3,362	)

Assets and liabilities recorded at fair value at September 30, 2010 consist of:

						Quoted				Significant Other				Significant
						Market Prices				Observable Inputs				Unobservable Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
		(In thousands):
Cash equivalents		$	15,500			$	15,500			$	—			$	—
Investment in related party debt securities		$	10,599			$	—			$	10,599			$	—
Contingent consideration		$	(3,041	)		$	—			$	—			$	(3,041	)

Cash equivalents. Cash equivalents consist primarily of money market funds and the carrying value of cash equivalents approximates fair value.

Investment in related party debt securities. The fair value of the investment in related party debt securities was recorded in long-term assets (under Investment in related party debt securities). The fair value measurements consider observable market data that may include, among other data, credit ratings, credit spreads, future interest rates and risk free rates of return.

Contingent consideration. The fair value of the earn-out associated with the fiscal 2010 acquisitions was accrued for and classified as contingent consideration. The fair value was determined based on unobservable inputs, namely management’s estimate of expected performance based on current information.

The following table provides a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs (Level 3).

		Due to Seller
Balance at September 30, 2010		$	(3,041	)
Change in fair value of contingent consideration			(321	)
Balance at March 31, 2011		$	(3,362	)

At March 31, 2011, the carrying values of cash, accounts receivable and accounts payable approximated fair value. The carrying value and fair value of the Company’s debt instruments are set forth below:

		March 31, 2011								September 30, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(In thousands)
Senior subordinated notes (retired February 9, 2011)		$	—			$	—			$	180,000			$	184,050
Senior notes (issued February 9, 2011)		$	238,967			$	239,375				—				—

The Company estimated the fair value of the debt instruments using market quotes and calculations based on current market rates available.

10. Income Taxes

The Company’s effective income tax rate for the interim periods was based on management’s estimate of the Company’s annual effective tax rate for the applicable year. For the three months ended March 31, 2011, the Company’s effective income tax rate was 34.7% compared to an effective tax rate of 61.6% for the three months ended March 31, 2010. For the six months ended March 31, 2011, the Company’s effective income tax rate was 33.2% compared to an effective tax rate of 86.3% for the six months ended March 31, 2010. These rates differ from the federal statutory income tax rate primarily due to nondeductible permanent differences such as meals and nondeductible compensation, net operating losses not benefited and changes in the applicability of certain employment tax credits.

NMH Holdings files a federal consolidated return and files various state income tax returns. The Company files various state income tax returns and, generally, is no longer subject to income tax examinations by the taxing authorities for years prior to September 30, 2003. The Company’s reserve for uncertain income tax positions at March 31, 2011 is $4.9 million. There has been no change in unrecognized tax benefits in the six months ended March 31, 2011 and the Company does not expect any significant changes to unrecognized tax benefits within the next twelve months. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as charges to income tax expense.

11. Segment Information

The Company has two reportable segments, Human Services and Post-Acute Specialty Rehabilitation Services (“SRS”).

The Human Services segment delivers home and community-based human services to adults and children with intellectual and/or developmental disabilities and to youth with emotional, behavioral and/or medically complex challenges. Human Services is organized in a reporting structure composed of two operating segments which are aggregated into one reportable segment based on similarity of the economic characteristics and services provided.

The SRS segment delivers health care and community-based health and human services to individuals who have suffered acquired brain, spinal injuries and other catastrophic injuries and illnesses. This segment is organized in a reporting structure composed of two operating segments which are aggregated based on similarity of economic characteristics and services provided.

Activities classified as “Corporate” in the table below relate primarily to unallocated home office items.

The Company generally evaluates the performance of its operating segments based on income from operations. The following is a financial summary by reportable operating segment for the periods indicated.

						Post-Acute
						Specialty
(in thousands)		Human				Rehabilitation
For the three months ended March 31,		Services				Services				Corporate				Consolidated
2011
Net revenue		$	223,678			$	43,268			$	—			$	266,946
Income (loss) from operations			20,660				4,387				(14,704	)			10,343
Total assets			564,405				157,866				307,408				1,029,679
Depreciation and amortization			10,803				3,088				1,122				15,013
2010
Net revenue		$	219,151			$	31,851			$	—			$	251,002
Income (loss) from operations			19,417				3,415				(12,082	)			10,750
Depreciation and amortization			10,875				2,183				1,173				14,231

						Post-Acute
						Specialty
(in thousands)		Human				Rehabilitation
For the six months ended March 31,		Services				Services				Corporate				Consolidated
2011
Net revenue		$	446,906			$	86,567			$	—			$	533,473
Income (loss) from operations			40,954				9,245				(28,984	)			21,215
Total assets			564,405				157,866				307,408				1,029,679
Depreciation and amortization			21,668				6,081				2,271				30,020
2010
Net revenue		$	440,521			$	60,487			$	—			$	501,008
Income (loss) from operations			39,508				6,546				(24,057	)			21,997
Depreciation and amortization			21,925				4,135				2,338				28,398

12. Accruals for Self-Insurance and Other Commitments and Contingencies

The Company maintains insurance for professional and general liability, workers’ compensation liability, automobile liability and health insurance liabilities that include self-insured retentions. The Company intends to maintain such coverage in the future and is of the opinion that its insurance coverage is adequate to cover potential losses on asserted claims. Employment practices liability is fully self-insured.

Until September 30, 2010, the Company insured professional and general liability through its captive insurance subsidiary amounts of up to $1.0 million per claim and up to $2.0 million in the aggregate. Commencing October 1, 2010, the Company is self-insured for $2.0 million per claim and $8.0 million in the aggregate, and for $500 thousand per claim in excess of the aggregate. In connection with the Merger on June 29, 2006, subject to the $1.0 million per claim and up to $2.0 million in the aggregate retentions, the Company purchased additional insurance for certain claims relating to pre-Merger periods. For workers’ compensation, the Company has a $350 thousand per claim retention with statutory limits. Automobile liability has a $100 thousand per claim retention, with additional insurance coverage above the retention. The Company purchases specific stop loss insurance as protection against extraordinary claims liability for health insurance claims. Stop loss insurance covers claims that exceed $300 thousand on a per member basis.

During fiscal 2010, the Company’s wholly-owned subsidiary captive insurance company provided coverage for the Company’s self-insured portion of professional and general liability claims and its employment practices liability. The accounts of the captive insurance company were fully consolidated with those of the other operations of the Company in the Company’s consolidated financial statements for fiscal 2010. Effective September 30, 2010, the captive insurance subsidiary was dissolved and the Company is no longer self-insured through the captive subsidiary as of that date.

The Company is in the health and human services business and, therefore, has been and continues to be subject to substantial claims alleging that the Company, its employees or its independently contracted host-home caregivers (“Mentors”) failed to provide proper care for a client. The Company is also subject to claims by its clients, its employees, its Mentors or community members against the Company for negligence, intentional misconduct or violation of applicable laws. Included in the Company’s recent claims are claims alleging personal injury, assault, battery, abuse, wrongful death and other charges. Regulatory agencies may initiate administrative proceedings alleging that the Company’s programs, employees or agents violate statutes and regulations and seek to impose monetary penalties on the Company. The Company could be required to incur significant costs to respond to regulatory investigations or defend against civil lawsuits and, if the Company does not prevail, the Company could be required to pay substantial amounts of money in damages, settlement amounts or penalties arising from these legal proceedings.

The Company reserves for costs related to contingencies when a loss is probable and the amount is reasonably estimable. While the Company believes the provision for legal contingencies is adequate, the outcome of the legal proceedings is difficult to predict and the Company may settle legal claims or be subject to judgments for amounts that differ from the Company’s estimates.

13. Subsequent Events

On May 10, 2011, the board of directors of NMH Investment, the indirect parent company of the Company, approved an amendment (the “Amendment”) to the NMH Investment, LLC Amended and Restated 2006 Unit Plan (the “2006 Unit Plan”) to authorize the issuance of Class F Common Units (the “Class F Common Units”) of NMH Investment, a new class of non-voting equity units of NMH Investment, under the 2006 Unit Plan. Pursuant to the Amendment, up to 5,396,388 Class F Common Units may be issued under the 2006 Unit Plan to senior managers of the Company as equity-based compensation. In addition, the terms of the Class B, C and D Common Units were amended to accelerate the vesting of any unvested Class B, C and D Common Units so that they became 100% vested on May 10, 2011.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as well as our reports on Forms 10-Q and 8-K and other publicly available information. This discussion may contain forward-looking statements about our markets, the demand for our services and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons, including those discussed in the “Risk factors” and “Forward-looking statements” sections of this report.

Overview

We are a leading provider of home and community-based health and human services to adults and children with intellectual and/or developmental disabilities (“I/DD”), acquired brain injury (“ABI”) and other catastrophic injuries and illnesses, and to youth with emotional, behavioral and/or medically complex challenges, or at-risk youth (“ARY”). Since our founding in 1980, we have grown to provide services to approximately 23,500 clients in 36 states.

We design customized service plans to meet the unique needs of our clients, which we deliver in home and community-based settings. Most of our service plans involve residential support, typically in small group homes, host home settings or specialized community facilities, designed to improve our clients’ quality of life and to promote client independence and participation in community life. Other services offered include supported living, day and transitional programs, vocational services, case management, family-based services, post-acute treatment and neurorehabilitation, neurobehavioral rehabilitation and physical, occupational and speech therapies, among others. Our customized service plans offer our clients, as well as the payors for these services, an attractive, cost-effective alternative to health and human services provided in large, institutional settings.

We offer our services through a variety of models, including (i) small group homes, most of which are residences for six people or fewer, (ii) host homes, or the “Mentor” model, in which a client lives in the home of a trained Mentor, (iii) in-home settings, in which we support clients’ independence with 24-hour services in their own homes, (iv) small, specialized community facilities which provide post-acute, specialized rehabilitation and comprehensive care for individuals who have suffered ABI, spinal injuries and other catastrophic injuries and illnesses and (v) non-residential settings, consisting primarily of day programs and periodic services in various settings.

Delivery of services to adults and children with I/DD is the largest portion of our Human Services segment. Our I/DD programs include residential support, day habilitation, vocational services, case management and personal care. Our Human Services segment also includes the delivery of ARY services. Our ARY programs include therapeutic foster care, family reunification, family preservation, early intervention and adoption services. Our Post-Acute Specialty Rehabilitation Services (“SRS”) segment delivers healthcare and community-based human services to individuals who have suffered ABI, spinal injuries and other catastrophic injuries and illnesses. Our services range from sub-acute healthcare for individuals with intensive medical needs to day treatment programs, and include skilled nursing, neurorehabilitation, neurobehavioral rehabilitation, physical, occupational, and speech therapy, supported living, outpatient treatment, and pre-vocational services.

We have two reportable segments, Human Services and SRS. The Human Services segment provides home and community-based human services to adults and children with intellectual and/or developmental disabilities and to youth with emotional, behavioral and/or medically complex challenges. The SRS segment provides a mix of health care and community-based health and human services to individuals who have suffered ABI, spinal injuries and other catastrophic injuries and illnesses.

Factors Affecting our Operating Results

Demand for Home and Community-Based Health and Human Services

Our growth in revenue has historically been related to increases in the rates we receive for our services as well as increases in the number of individuals served. This growth has depended largely upon development-driven activities, including the maintenance and expansion of existing contracts and the award of new contracts, and upon acquisitions. We also attribute the continued growth in our client base to certain trends that are increasing demand in our industry, including demographic, medical and political developments.

Demographic trends have a particular impact on our I/DD business. Increases in the life expectancy of individuals with I/DD, we believe, have resulted in steady increases in the demand for I/DD services. In addition, caregivers currently caring for their relatives at home are aging and may soon be unable to continue with these responsibilities. Each of these factors affects the size of the I/DD population in need of services. Similarly, growth for our ARY services has been driven by favorable demographics. Demand for our SRS services has also grown as faster emergency response and improved medical techniques have resulted in more people surviving a catastrophic injury, as well as spinal cord and other catastrophic injuries. SRS services are increasingly sought out as a clinically-appropriate and less-expensive alternative to institutional care and “step-down” for individuals who no longer require care in acute settings.

Political and economic trends can also affect our operations. In particular, state budgetary pressures, especially within Medicaid programs, may influence the overall level of payments for our services, the number of clients and the preferred settings for many of the services we provide. Since the beginning of the recent economic downturn, our government payors in several states have responded to deteriorating revenue collections by implementing provider rate reductions, including in the states of Arizona, California, Indiana and Minnesota. In total, rate reductions implemented since October 1, 2008 have reduced revenue by approximately $16 million or about 1.6% of revenue. In addition, the volume of referrals to our programs has also been constrained in many markets as payors have taken steps to reduce spending. With the termination of the enhanced federal Medicaid funding after June 30, 2011 and the significant budgetary challenges confronting state governments for fiscal 2012, which begins July 1, 2011 in most states, we expect some of our public payors will implement additional rate reductions in the coming months.

Historically, pressure from client advocacy groups for the populations we serve has generally helped our business, as these groups generally seek to pressure governments to fund residential services that use our small group home or host home models, rather than large, institutional models. In addition, our ARY services have historically been positively affected by the trend toward privatization of these services. Furthermore, we believe that successful lobbying by these groups has preserved I/DD and ARY services and, therefore, our revenue base, from significant cutbacks as compared with certain other human services, although we have suffered rate reductions in the current recessionary environment. In addition, a number of states have developed community-based waiver programs to support long-term care services for survivors of a traumatic brain injury. The majority of our specialty rehabilitation services revenue is derived from non-public payors, such as commercial insurers, managed care and other private payors.

Expansion

We have grown our business through expansion of existing markets and programs as well as through acquisitions.

Organic Growth

We believe that our future growth will depend heavily on our ability to expand existing service contracts and to win new contracts. Our organic expansion activities consist of both new program starts in existing markets and geographical expansion in new markets. Our new programs in new and existing geographic markets (which we refer to as “new starts”) typically require us to fund operating losses for a period of approximately 18 to 24 months. If a new start does not become profitable during such period, we may terminate it. During the twelve months ended March 31, 2011, operating losses on new starts for programs started within the previous 18 months were $1.8 million.

Acquisitions

As of March 31, 2011, we have completed 31 acquisitions since 2005, including several acquisitions of rights to government contracts or fixed assets from small providers, which we integrate with our existing operations. We have pursued larger strategic acquisitions in markets with significant opportunities. Acquisitions could have a material impact on our consolidated financial statements.

During the three months ended March 31, 2011, we acquired two companies complementary to our business for total fair value consideration of $0.4 million. Both companies are included in the Human Services segment.

For additional information on the acquisitions made during three and six months ended March 31, 2011, see “Note 6. Business Combinations” to our consolidated financial statements included elsewhere in this report.

Divestitures

We regularly review and consider the divestiture of underperforming or non-strategic businesses to improve our operating results and better utilize our capital. We have made divestitures from time to time and expect that we may make additional divestitures in the future. Divestitures could have a material impact on our consolidated financial statements.

Net revenue

Revenue is reported net of allowances for unauthorized sales and estimated sales adjustments. Revenue is also reported net of any state provider taxes or gross receipts taxes levied on services we provide. For the three months ended March 31, 2011, we derived approximately 90% of our net revenue from state and local government payors and approximately 10% of our net revenue from non-public payors. Substantially all of our non-public revenue is generated by our SRS business through contracts with commercial insurers, workers’ compensation carriers and other private payors. The payment terms and rates of these contracts vary widely by jurisdiction and service type, and may be based on per person per diems, rates established by the jurisdiction, cost-based reimbursement, hourly rates and/or units of service. We bill most of our residential services on a per diem basis, and we bill most of our non-residential services on an hourly basis. Some of our revenue is billed pursuant to cost-based reimbursement contracts, under which the billed rate is tied to the underlying costs. Lower than expected cost levels may require us to return previously received payments after cost reports are filed. Reserves are provided when estimable and probable. In addition, our revenue may be affected by adjustments to our billed rates as well as adjustments to previously billed amounts. Revenue in the future may be affected by changes in rate-setting structures, methodologies or interpretations that may be proposed in states where we operate or by the federal government which provides matching funds. We cannot determine the impact of such changes or the effect of any possible governmental actions.

Occasionally, timing of payment streams may be affected by delays by the state related to bill processing systems, staffing or other factors. While these delays have historically impacted our cash position in particular periods, they have not resulted in long-term collections problems.

Expenses

Expenses directly related to providing services are classified as cost of revenue. Direct costs and expenses principally include salaries and benefits for service provider employees, per diem payments to our Mentors, residential occupancy expenses, which are primarily comprised of rent and utilities related to facilities providing direct care, certain client expenses such as food, medicine and transportation costs for clients requiring services and insurance costs. General and administrative expenses primarily include salaries and benefits for administrative employees, or employees that are not directly providing services, administrative occupancy costs as well as professional expenses such as consulting and accounting services. Depreciation and amortization includes depreciation for fixed assets utilized in both facilities providing direct care and administrative offices, and amortization related to intangible assets.

Wages and benefits to our employees and per diem payments to our Mentors constitute the most significant operating cost in each of our operations. Most of our employee caregivers are paid on an hourly basis, with hours of work generally tied to client need. Our Mentors are paid on a per diem basis, but only if the Mentor is currently caring for a client. Our labor costs are generally influenced by levels of service and these costs can vary in material respects across regions.

Occupancy costs represent a significant portion of our operating costs. As of March 31, 2011, we owned 401 facilities and one office, and we leased 945 facilities and 270 offices. We incur no facility costs for services provided in the home of a Mentor.

Expenses incurred in connection with liability insurance and third-party claims for professional and general liability totaled 0.9% and 0.4% of our net revenue for the three months ended March 31, 2011 and 2010, respectively and 1.0% and 0.4% of our net revenue for the six months ended March 31, 2011 and 2010, respectively. We have incurred professional and general liability claims and insurance expense for professional and general liability of $2.5 million and $1.0 million for the three months ended March 31, 2011 and 2010, respectively, and $5.2 million and $2.1 million for the six months ended March 31, 2011 and 2010, respectively. Claims paid by us and our insurers for professional and general liability have increased sharply in recent years. We have historically self-insured amounts of up to $1.0 million per claim and up to $2.0 million in the aggregate. Commencing October 1, 2010, we pay substantially higher premiums for our professional and general liability policies, and our self-insured retentions substantially exceed the amounts we previously had. Since October 1, 2010, we have had self-insured retentions for $2.0 million per claim and $8.0 million in the aggregate, and for $500 thousand per claim in excess of the aggregate.

During fiscal 2010, our wholly-owned subsidiary captive insurance company provided coverage for our self-insured portion of professional and general liability claims and our employment practices liability. The accounts of the captive insurance company were fully consolidated with those of our other operations in our consolidated financial statements for fiscal 2010. Effective September 30, 2010, the captive insurance subsidiary was dissolved and we are no longer self-insured through the captive subsidiary on the effective date.

Our ability to maintain our margin in the future is dependent upon obtaining increases in rates and/or controlling our expenses. In fiscal 2008, 2009 and 2010, we invested in infrastructure initiatives and business process improvements, which had a net negative impact on our margin.

Results of Operations

The following table sets forth income (loss) from operations as a percentage of net revenue for the periods indicated:

						Post Acute Specialty
For the Three Months Ended March 31,		Human Services				Rehabilitation Services				Corporate				Consolidated
(In thousands)
2011
Net revenue		$	223,678			$	43,268			$	—			$	266,946
Income (loss) from operations			20,660				4,387				(14,704	)			10,343
Operating margin			9.2	%			10.1	%			—				3.9	%
2010
Net revenue		$	219,151			$	31,851			$	—			$	251,002
Income (loss) from operations			19,417				3,415				(12,082	)			10,750
Operating margin			8.9	%			10.7	%			—				4.3	%

						Post-Acute Specialty
Six Months Ended March 31,		Human Services				Rehabilitation Services				Corporate				Consolidated
(in thousands)
2011
Net revenue		$	446,906			$	86,567			$	—			$	533,473
Income (loss) from operations			40,954				9,245				(28,984	)			21,215
Operating margin			9.2	%			10.7	%			—				4.0	%
2010
Net revenue		$	440,521			$	60,487			$	—			$	501,008
Income (loss) from operations			39,508				6,546				(24,057	)			21,997
Operating margin			9.0	%			10.8	%			—				4.4	%

Three months ended March 31, 2011 compared to three months ended March 31, 2010

Consolidated

Consolidated revenue for the three months ended March 31, 2011 increased by $15.9 million, or 6.4%, compared to revenue for the three months ended March 31, 2010. Revenue increased $11.3 million related to acquisitions that closed during and after the three months ended March 31, 2010 and $4.6 million related to organic growth, including growth related to new programs. Modest organic growth was achieved despite the negative impact of rate reductions in several states, including Indiana (5%), Oregon (multiple cuts to I/DD day and residential services) and Wisconsin (individual, client-specific adjustments).

Consolidated income from operations decreased from $10.8 million or 4.3% of revenue, for the three months ended March 31, 2010 to $10.3 million or 3.9% of revenue, for the three months ended March 31, 2011.

Our operating margin was negatively impacted by rate reductions in several states, including Indiana, Oregon and Wisconsin, as well as an increased expense relating to professional and general and employment practices liability. During the three months ended March 31, 2011, we incurred higher reserves against higher self-insured retentions and paid higher premiums for professional and general liability policies, which resulted in an additional $1.5 million of expense. We also incurred higher reserves for employment practices liability claims, which resulted in an additional $1.3 million of expense during the current quarter.

Also during the three months ended March 31, 2011, we recorded $2.4 million for the payment of one-time discretionary bonuses in recognition of individuals’ contributions to enabling the successful closing of the refinancing transactions described in Note 4 (the “transaction recognition bonuses”). The transaction recognition bonuses are included in general and administrative expense in the accompanying consolidated statement of operations. Our occupancy expense increased by $1.5 million, almost all of it related to acquisitions in our Post-Acute Specialty Rehabilitation Services segment, and we recorded $0.8 million expense related to a restructuring of corporate and certain field functions.

The decrease in income from operations was partially offset by an expense reduction from our on-going cost containment efforts.

Depreciation and amortization expense increased $0.8 million during the three months ended March 31, 2011 due to an increase in amortizable assets resulting from acquisitions in the period.

During the three months ended March 31, 2011, we recorded an additional $19.3 million of expenses related to the refinancing transactions including (i) $10.8 million related to the tender premium and consent fees paid in connection with the repurchase of the senior subordinated notes, (ii) $7.9 million related to the acceleration of deferred financing costs related to the prior indebtedness and (iii) $0.6 million related to transaction costs. These expenses are recorded on our consolidated statements of operations as Extinguishment of debt.

During the three months ended March 31, 2011, we recorded a $3.0 million gain as NMH Holdings, Inc. (“NMH Holdings”) repurchased the NMH Holdings notes (which we purchased at a discount) from us at a premium. The gain was recorded on our statements of operations as Gain from available for sale investment security.

Interest expense increased by $2.6 million primarily due to an additional $3.6 million of expense related to our new debt structure partially offset by the payment of lower variable rate interest during the three months ended March 31, 2011 compared to the three months ended March 31, 2010 due to the expiration of swap contracts at a higher fixed rate of interest during the six months ended September 30, 2010.

Human Services

Human Services revenue for the three months ended March 31, 2011 increased by $4.5 million, or 2.1%, compared to the three months ended March 31, 2010. Revenue increased $2.3 million related to organic growth, including growth related to new programs, which increased despite the negative impact of rate reductions in several states, including Indiana (5%), Oregon (multiple cuts to I/DD day and residential services) and Wisconsin (individual, client-specific adjustments). Revenue also increased $2.2 million related to acquisitions that closed during and after the three months ended March 31, 2010.

Income from operations increased from $19.4 million or 8.9% of revenue, during the three months ended March 31, 2010 to $20.7 million or 9.2% of revenue during the three months ended March 31, 2011. Income from operations was positively impacted by increased revenue and expense reduction from our ongoing cost-containment efforts. Partially offsetting this was an increase in expense related to our higher self-insured retentions and premiums for professional and general liability policies as well as an increase in our employment practices liability reserves due to development of claims. During the three months ended March 31, 2011, we recorded an additional $1.2 million related to professional and general liability expense and an additional $1.2 million related to employment practices liability. Operating margin was also negatively impacted by rate reductions in several states, including Indiana, Oregon and Wisconsin.

Post-Acute Specialty Rehabilitation Services

Post-Acute Specialty Rehabilitation Services revenue for the three months ended March 31, 2011 increased by $11.4 million, or 35.8%, compared to the three months ended March 31, 2010. This increase was due to growth of $9.1 million related to acquisitions that closed during and after the three months ended March 31, 2010 and $2.3 million related to organic growth, including growth related to new programs.

Income from operations increased from $3.4 million for the three months ended March 31, 2010 to $4.4 million for the three months ended March 31, 2011, while operating margin decreased from 10.7% to 10.1% for the same period. Our margin was negatively impacted by a $1.4 million increase in occupancy expense as a result of acquisitions.

Corporate

Total corporate expenses increased by $2.6 million from the three months ended March 31, 2010 to $14.7 million for the three months ended March 31, 2011. During the three months ended March 31, 2011, we recorded an additional $2.4 million related to the payment of transaction recognition bonuses and $0.8 million related to restructuring of corporate and certain field functions.

Six months ended March 31, 2011 compared to six months ended March 31, 2010

Consolidated

Consolidated revenue for the six months ended March 31, 2011 increased by $32.5 million, or 6.5%, compared to revenue for the six months ended March 31, 2010. Revenue increased $25.8 million related to acquisitions that closed during and after fiscal 2010 and $6.7 million related to organic growth, including growth related to new programs. Modest organic growth was achieved despite the negative impact of rate reductions in several states, including Indiana (5%), Oregon (multiple rate cuts to I/DD day and residential services) and Wisconsin (individual, client-specific adjustments).

Consolidated income from operations decreased from $22.0 million or 4.4% of revenue, for the six months ended March 31, 2010 to $21.2 million or 4.0% of revenue, for the six months ended March 31, 2011.

Our operating margin was negatively impacted by rate reductions in several states, including Indiana, Oregon and Wisconsin, as well as an increased expense relating to professional and general and employment practices liability. During the six months ended March 31, 2011, we incurred higher reserves against higher self-insured retentions and paid higher premiums for professional and general liability policies, which resulted in an additional $3.2 million of expense. We also incurred higher reserves for employment practices liability claims, which resulted in an additional $1.3 million of expense during the six months ended March 31, 2011.

Also during the six months ended March 31, 2011, we recorded $3.3 million related to an increase in occupancy expense primarily related to acquisitions in our Post-Acute Specialty Rehabilitation Services segment and $2.4 million related to the payment of transaction recognition bonuses. The transaction recognition bonuses are included in general and administrative expense in the accompanying consolidated statement of operations. In addition, we recorded $1.6 million related to restructuring of corporate and certain field functions, an additional $0.5 million in consulting and legal costs related to a transaction which was not completed and $0.3 million of expense related to a contingent earn-out adjustment from the Springbrook acquisition.

The decrease in income from operations was partially offset by an expense reduction from our on-going cost containment efforts.

Depreciation and amortization expense increased $1.6 million during the six months ended March 31, 2011 due to an increase in amortizable assets resulting from acquisitions in the period.

During the six months ended March 31, 2011, we recorded an additional $19.3 million of expenses related to the refinancing transactions including (i) $10.8 million related to the tender premium and consent fees paid in connection with the repurchase of the senior subordinated notes, (ii) $7.9 million related to the acceleration of deferred financing costs related to the prior indebtedness and (iii) $0.6 million related to transaction costs. These expenses are recorded on our consolidated statements of operations as Extinguishment of debt.

During the six months ended March 31, 2011, we recorded a $3.0 million gain as NMH Holdings repurchased the NMH Holdings notes (which we purchased at a discount) from us at a premium. The gain was recorded on our statements of operations as Gain from available for sale investment security.

Our interest expense decreased by $1.1 million during the six months ended March 31, 2011 due to the payment of lower variable rate interest during the six months ended March 31, 2011 compared to the six months ended March 31, 2010 due to the expiration of swap contracts at a higher fixed rate of interest during the six months ended September 30, 2010.

Human Services

Human Services revenue for the six months ended March 31, 2011 increased by $6.4 million, or 1.4%, compared to the six months ended March 31, 2010. Revenue increased $5.3 million related to acquisitions that closed during and after fiscal 2010 and $1.1 million related to organic growth, including growth related to new programs. Modest organic growth was achieved despite the negative impact of rate reductions in several states, including Indiana (5%), Oregon (multiple rate cuts to I/DD day and residential services) and Wisconsin (individual, client-specific adjustments).

Income from operations increased from $39.5 million or 9.0% of revenue, during the six months ended March 31, 2010 to $41.0 million or 9.2% of revenue during the six months ended March 31, 2011. Income from operations was positively impacted by increased revenue and expense reduction from our ongoing cost-containment efforts. Partially offsetting this was an increase in expense related to our higher self-insured retentions and premiums for professional and general liability policies as well as an increase in our employment practices liability reserves due to development of claims. During the six months ended March 31, 2011, we recorded an additional $2.3 million related to professional and general liability expense and an additional $1.2 million related to employment practices liability. Operating margin was also negatively impacted by rate reductions in several states, including Indiana, Oregon and Wisconsin.

Post-Acute Specialty Rehabilitation Services

Post-Acute Specialty Rehabilitation Services revenue for the six months ended March 31, 2011 increased by $26.1 million, or 43.1%, compared to the six months ended March 31, 2010. This increase was due to growth of $20.5 million related to acquisitions that closed during and after fiscal 2010 and $5.6 million related to organic growth, including growth related to new programs.

Income from operations increased from $6.5 million for the six months ended March 31, 2010 to $9.2 million for the six months ended March 31, 2011, while operating margin decreased slightly from 10.8% to 10.7% for the same period. Our margin was negatively impacted by a $3.1 million increase in occupancy expense as a result of acquisitions.

Corporate

Total corporate expenses increased by $4.9 million from the six months ended March 31, 2010 to $29.0 million for the six months ended March 31, 2011. During the six months ended March 31, 2011, we recorded an additional $2.4 million related to the payment of transaction recognition bonuses, $1.6 million related to restructuring of corporate and certain field functions, an additional $0.5 million in consulting and legal costs related to a transaction which was not completed and $0.3 million of expense related to a contingent earn-out adjustment from the Springbrook acquisition.

Liquidity and Capital Resources

Our principal uses of cash are to meet working capital requirements, fund debt obligations and finance capital expenditures and acquisitions. Cash flows from operations have historically been sufficient to meet these cash requirements. Our principal sources of funds are cash flows from operating activities and available borrowings under our senior revolver (as defined below).

Operating activities

Cash flows provided by operating activities for the six months ended March 31, 2011 were $17.7 million compared to $31.8 million for the six months ended March 31, 2010. The decrease was due to (i) a decrease in operating income primarily from the refinancing transactions including $10.8 million related to the tender premium and consent fees paid in connection with the repurchase of the senior subordinated notes and (ii) an increase in working capital due to the timing of vendor payments and tax payments. Excluding the impact to operating income from the refinancing related items, cash flow from operations would be $28.5 million for the six months ended March 31, 2011. Partially offsetting the increase in working capital was a decrease in accounts receivable as our days sales outstanding decreased two days from 47 days at September 30, 2010 to 45 days at March 31, 2011.

Investing activities

Net cash used in investing activities was $62.0 million for the six months ended March 31, 2011 compared to $39.8 million for the six months ended March 31, 2010.

Cash paid for acquisitions was $3.4 million for the six months ended March 31, 2011 and included cash paid for five acquisitions, including New Start Homes, ViaQuest, Phoenix Homes, SunnySide Homes and TheraCare. Cash paid for acquisitions for the six months ended March 31, 2010 was $29.2 million, primarily reflecting the acquisitions of NeuroRestorative for $17.0 million and Springbrook for $6.3 million. In addition to NeuroRestorative and Springbrook, we acquired Villages for total consideration of $6.0 million. Cash paid for property and equipment for the six months ended March 31, 2011 was $9.2 million, or 1.7% of revenue and cash paid for property and equipment for the six months ended March 31, 2010 was $9.1 million, or 1.8% of revenue.

In addition, during the six months ended March 31, 2011, our restricted cash balance increased to $50.8 million primarily due to the $50.0 million which was deposited in a cash collateral account in support of issuance of letters of credit under the institutional letter of credit facility.

Financing activities

Net cash provided by financing activities was $30.4 million for the six months ended March 31, 2011 compared to $1.9 million used in financing activities for the six months ended March 31, 2010.

Net cash provided by financing activities for the six months ended March 31, 2011 include the following items related to the refinancing transaction:

		(In millions)
Repayment of long-term debt		$	(504.4	)
Proceeds from the issuance of long-term debt			761.7
Dividend to Parent			(206.4	)
Payments of deferred debt financing costs			(15.5	)

See “-Debt and Refinancing Arrangements” for a description of the refinancing transactions.

In addition to the refinancing related items, net cash used in financing activities for the six months ended March 31, 2011 included an earn-out payment of $3.3 million for the IFCS acquisition, which we acquired in fiscal 2009. Also during the six months ended March 31, 2011, we paid a dividend of $0.6 million to Parent, which used the proceeds of the dividend to make a distribution to NMH Holdings, which in turn used the proceeds of the distribution to pay a dividend of $0.6 million to NMH Investment, LLC (“NMH Investment”). NMH Investment used the proceeds of the dividend to repurchase its preferred and common equity units from certain employees upon or after their departures.

Our principal sources of funds are cash flows from operating activities and available borrowings under our senior revolver. We believe that these funds will provide sufficient liquidity and capital resources to meet our financial obligations for the next twelve months, including scheduled principal and interest payments, as well as to provide funds for working capital, acquisitions, capital expenditures and other needs. No assurance can be given, however, that this will be the case.

Debt and Financing Arrangements

On February 9, 2011, we completed refinancing transactions, which included entering into a senior credit agreement (the “senior credit agreement”) for senior secured credit facilities (the “senior secured credit facilities”) and issuing $250.0 million in aggregate principal amount of 12.50% senior notes due 2018 (the “senior notes”). We used the net proceeds from the senior secured credit facilities ($520.9 million) and the senior notes ($238.7 million), together with cash on hand, to: (i) repay all amounts owing under our old senior secured credit facilities and our mortgage facility; (ii) purchase $171.9 million of our senior subordinated notes; (iii) pay $9.6 million to NMH Holdings related to a tax sharing arrangement; (iv)  declare a $219.7 million dividend to Parent, which in turn made a distribution to NMH Holdings, which used $206.4 million cash proceeds of the distribution to repurchase $210.9 million principal amount of the NMH Holdings notes at a premium, including $13.5 million principal amount of NMH Holdings notes we held as an investment; and (v) pay related fees and expenses.

Senior Secured Credit Facilities

We entered into senior secured credit facilities, consisting of a (i) six-year $530.0 million term loan facility (the “term loan”), of which $50.0 million was deposited in a cash collateral account in support of issuance of letters of credit under an institutional letter of credit facility (the “institutional letter of credit facility”) and a (ii) $75.0 million five-year senior secured revolving credit facility (the “senior revolver”). All of our obligations under the senior secured credit facilities are guaranteed by Parent and certain of our existing subsidiaries. The obligations under the senior secured credit facilities are secured by a pledge of 100% of our capital stock and the capital stock of domestic subsidiaries owned by us and any other domestic subsidiary guarantor and 65% of the capital stock of any first tier foreign subsidiaries, and a security interest in substantially all of our tangible and intangible assets and the tangible and intangible assets of Parent and each guarantor.

At our option, we may add one or more new term loan facilities or increase the commitments under the senior revolver (collectively, the “incremental borrowings”) in an aggregate amount of up to $125.0 million so long as certain conditions, including a consolidated leverage ratio (as defined in the senior credit agreement) of not more than 6.00 to 1.00 on a pro forma basis, are satisfied. The covenants in the indenture governing the senior notes effectively limit the amount of incremental borrowings that we may incur to not more than $75.0 million.

The senior credit agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase our capital stock; (vi) make capital expenditures; (vii) make investments, loans or advances; (viii) repay certain indebtedness; (ix) engage in certain transactions with affiliates; (x) enter into sale and leaseback transactions; (xi) amend material agreements governing certain of our indebtedness; (xii) change our lines of business; (xiii) make certain acquisitions; (xiv) change the status of NMH Holdings as a passive holding company; and (xv) limitations on the letter of credit cash collateral account. If we withdraw any of the $50.0 million from the cash collateral account supporting the issuance of letters of credit, we must use the cash to either prepay the term loan facility or to secure any other obligations under the senior secured credit facilities in a manner reasonably satisfactory to the administrative agent. The senior credit agreement contains customary affirmative covenants and events of default. The senior credit agreement also requires us to maintain certain financial covenants, as described under “—Covenants” below.

Term loan

The $530.0 million term loan was issued at a price equal to 98.5% of its face value and amortizes one percent per year, paid quarterly, with the remaining balance payable at maturity. The senior credit agreement also includes a provision for the prepayment of a portion of the outstanding term loan amounts beginning in fiscal 2011 equal to an amount ranging from 0 to 50% of a calculated amount, depending on our leverage ratio, if we generate certain levels of cash flow, sell certain assets or incur other indebtedness, subject to certain exceptions. We are required to repay the term loan portion of the senior credit facilities in quarterly principal installments of 0.25% of the principal amount, with the balance payable at maturity. The variable interest rate on the term loan bears interest at (i) a rate equal to the greater of (a) the prime rate (b) the federal funds rate plus 1/2 of 1% and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus 4.25%; or (ii) the Eurodollar rate (provided that the rate shall not be less than 1.75% per annum), plus 5.25%, at our option. At March 31, 2011, the variable interest rate on the term loan was 7.0%.

Senior revolver

During the three months ended March 31, 2011, we borrowed $6.9 million under the senior revolver and repaid the borrowings in the same period. We had $75.0 million of availability under the senior revolver at March 31, 2011 and had $36.5 million of letters of credit issued under the institutional letter of credit facility primarily related to our workers’ compensation insurance coverage. Letters of credit can be issued under our institutional letter of credit facility up to the $50.0 million credit collateral account. Letters of credit in excess of that amount reduce availability under our senior revolver. The interest rates for any borrowings under the senior revolver are the same as outlined for the term loan.

The senior revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swingline loans.” Any issuance of letters of credit or making of a swingline loan will reduce the amount available under the senior revolver.

Senior Notes

On February 9, 2011, we issued $250.0 million in aggregate principal amount of the senior notes at a price equal to 97.737% of their face value. The senior notes mature on February 15, 2018 and bear interest at a rate of 12.50% per annum, payable semi-annually on February 15 and August 15 of each year, beginning on August 15, 2011. The senior notes are our unsecured obligations and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our existing subsidiaries.

We may redeem the senior notes at our option, in whole or part, at any time prior to February 15, 2014, at a price equal to 100% of the principal amount of the senior notes redeemed plus accrued and unpaid interest to the redemption date and plus an applicable premium. We may redeem the senior notes, in whole or in part, on or after February 15, 2014, at the redemption prices set forth in the indenture plus accrued and unpaid interest to the redemption date. At any time on or before February 15, 2014, we may choose to redeem up to 35% of the aggregate principal amount of the senior notes at a redemption price equal to 112.5% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net proceeds of one or more equity offerings, so long as at least 65% of the original aggregate principal amount of the senior notes remain outstanding after each such redemption.

Covenants

The senior credit agreement and the indenture governing the senior notes contain negative financial and non-financial covenants, including, among other things, limitations on our ability to incur additional debt, transfer or sell assets, pay dividends, redeem stock or make other distributions or investments, and engage in certain transactions with affiliates. We were in compliance with these covenants as of March 31, 2011. In addition, in the case of the senior credit agreement, we are required to maintain at the end of each fiscal quarter, commencing with the quarter ending September 30, 2011, a consolidated leverage ratio of not more than 7.25 to 1.00. This consolidated leverage ratio will step down over time, starting with the quarter ending December 31, 2012. The consolidated leverage ratio is defined as the ratio of total debt, net of cash and cash equivalents, to consolidated adjusted EBITDA, as defined in the senior credit agreement, for the most recently completed four fiscal quarters. We are also required to maintain at the end of each fiscal quarter, commencing with the quarter ending September 30, 2011, a consolidated interest coverage ratio of at least 1.30 to 1.00. This interest coverage ratio will step up over time, starting with the quarter ending March 31, 2012. The consolidated interest coverage ratio is defined as the ratio of consolidated adjusted EBITDA to consolidated interest expense, both as defined under the senior credit agreement, for the most recently completed four fiscal quarters.

As of March 31, 2011, our consolidated leverage ratio was 6.06 to 1.00, as calculated in accordance with the senior credit agreement and our consolidated interest coverage ratio was 1.64 to 1.00, as calculated in accordance with the senior credit agreement. As of March 31, 2011, total debt, net of cash and cash equivalents, was $724.4 million. Under the senior credit agreement, consolidated adjusted EBITDA is defined as net income before interest expense and interest income, income taxes, depreciation and amortization, further adjusted to add back certain non-cash charges, fees under the management agreement with our equity sponsor, proceeds of business insurance, certain expenses incurred under indemnification or refunding provisions for acquisitions, certain start-up losses, non-cash compensation expense, transaction bonuses, unusual or non-recurring losses, charges, severance costs and relocation costs and deductions attributable to minority interests, business optimization expenses and further adjusted to subtract unusual or non-recurring income or gains, income tax credits to the extent not netted, non-cash income and interest income and gains on interest rate hedges, and further adjusted for certain other items including EBITDA and pro forma adjustments from acquired businesses and exclusion of discontinued operations.

Set forth below is a reconciliation of consolidated adjusted EBITDA, as calculated under the credit agreement, to net loss for the most recently completed four fiscal quarters ended March 31, 2011:

		(In thousands)
Net loss		$	(13,461	)
Loss from discontinued operations, net of tax			326
Benefit for income taxes			(5,197	)
Gain from available for sale investment security			(3,018	)
Interest income			(22	)
Interest income from related party			(1,660	)
Interest expense			45,582
Depreciation and amortization			59,233
Management fee of related party			1,300
Extinguishment of debt			19,278
Loss on disposal of assets			119
Stock based compensation			603
Acquisition costs			573
Change in fair value of contingent consideration			1,745
Claims made insurance liability			1,778
Predecessor company claims			766
Transaction recognition bonuses			2,362
Restructuring expense			1,797
Terminated transaction costs			1,976
Franchise taxes, transaction fees, costs, and expenses			308
Acquired EBITDA			3,267
Disposed EBITDA			95
Operating losses from new starts			1,785
Consolidated adjusted EBITDA per the senior credit agreement		$	119,535

Set forth below is an annualized calculation of consolidated interest expense as of March 31, 2011, as calculated under the credit agreement:

		(In thousands)
Interest rate swap agreements		$	3,230
Unused line of credit			458
Senior term B loan			37,468
Letters of credit			92
Senior subordinated notes			31,716
Capital leases			38
Interest income			(23	)
Consolidated interest expense per the senior credit agreement		$	72,979

Beginning September 30, 2011, the consolidated leverage ratio and the consolidated interest coverage ratios will be material components of the senior credit agreement and non-compliance with these ratios could prevent us from borrowing under the senior revolver and would result in a default under the senior credit agreement.

Contractual Commitments Summary

The following table summarizes our contractual obligations and commitments as of March 31, 2011:

						Less Than												More Than
(In thousands)		Total				1 Year				1-3 Years				3-5 Years				5 Years
Long-term debt obligations (1)		$	780,000			$	5,300			$	10,600			$	10,600			$	753,500
Operating lease obligations (2)			139,102				38,821				51,459				28,873				19,949
Capital lease obligations			6,926				305				662				748				5,211
Contingent consideration			3,362				3,362				—				—				—
Standby letters of credit			36,471				36,471				—				—				—
Total obligations and commitments (3)		$	965,861			$	84,259			$	62,721			$	40,221			$	778,660

Off-Balance Sheet Arrangements

We do not have any off-balance sheet transactions or interests.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and the impact of those events cannot be determined with certainty, the actual results may differ from our estimates. These differences could be material to the financial statements.

We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change.

As of March 31, 2011, there has been no material change in our accounting policies or the underlying assumptions or methodology used to fairly present our financial position, results of operations and cash flows for the periods covered by this report. In addition, no triggering events have come to our attention pursuant to our review of goodwill and long-lived assets that would indicate impairment of these assets as of March 31, 2011.

For further discussion of our critical accounting policies see management’s discussion and analysis of financial condition and results of operations contained in our Form 10-K for the year ended September 30, 2010.

Forward-Looking Statements

Some of the matters discussed in this report may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

These statements relate to future events or our future financial performance, and include statements about our expectations for future periods with respect to demand for our services, the political climate and budgetary environment, our expansion efforts and the impact of our recent acquisitions, our plans for divestitures and investments in our infrastructure and business process improvements, our margins and our liquidity. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

The information in this report is not a complete description of our business or the risks associated with our business. There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under “Part II. Item 1A. Risk Factors” in this report as well as the following:

	•		changes in Medicaid funding or changes in budgetary priorities by state and local governments;
	•		changes in reimbursement rates, policies or payment practices by our payors;
	•		our significant amount of debt, our ability to meet our debt service obligations and our ability to incur additional debt;
	•		current credit and financial market conditions;
	•		changes in interest rates;
	•		an increase in the number and nature of pending legal proceedings and the outcomes of those proceedings;
	•		an increase in our self-insured retentions and changes in the insurance market for professional and general liability, workers’ compensation and automobile liability and our claims history that affect our ability to obtain coverage at reasonable rates;
	•		our ability to control operating costs and collect accounts receivable;
	•		our ability to maintain, expand and renew existing services contracts and to obtain additional contracts;
	•		our ability to attract and retain experienced personnel, including members of our senior management team;
	•		our ability to acquire new licenses or to maintain our status as a licensed service provider in certain jurisdictions;
	•		government regulations and our ability to comply with such regulations;
	•		our ability to establish and maintain relationships with government agencies and advocacy groups;
	•		increased or more effective competition;
	•		successful integration of acquired businesses; and
	•		the potential for conflict between the interests of our majority equity holder and those of our debt holders.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, we do not assume responsibility for the accuracy and completeness of the forward-looking statements. All written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the “Risk Factors” and other cautionary statements included herein. We are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

Item 3.		Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to changes in interest rates as a result of our outstanding variable rate debt. To reduce the interest rate exposure related to the variable debt, we entered into an interest rate swap in a notional amount of $400.0 million effective March 31, 2011 and ending September 30, 2014. Under the terms of the swap, we receive from the counterparty a quarterly payment based on a rate equal to the greater of 3-month LIBOR and 1.75% per annum, and we make payments to the counterparty based on a fixed rate of 2.54650% per annum, in each case on the notional amount of $400.0 million, settled on a net payment basis. Based on the applicable margin of 5.25% under our term loan facility, this swap effectively fixes our cost of borrowing for $400.0 million of our term loan debt at 7.7965% per annum for the term of the swap.

As a result of the interest rate swap, the variable rate debt outstanding was effectively reduced from $530.0 million outstanding to $130.0 million outstanding as of March 31, 2011. The variable rate debt outstanding relates to the term loan and the senior revolver, which bear interest at (i) a rate equal to the greater of (a) the prime rate (b) the federal funds rate plus 1/2 of 1% and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus 4.25%; or (ii) the Eurodollar rate (provided that the rate shall not be less than 1.75% per annum), plus 5.25%, at our option. A 1% increase in the interest rate on our floating rate debt would increase cash interest expense of the floating rate debt by approximately $1.3 million per annum.

Item 4.		Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, and is accumulated and communicated to management, including the Chief Executive Officer, the President and the Chief Financial Officer, to allow for timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. As of March 31, 2011, the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our principal executive officers and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2011.

(b)

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2011, we began to transition certain field billing and accounts receivable functions into a centralized shared services center. This centralization is expected to continue in a phased approach over the next several years. As part of this centralization, as well as the continued implementation of our new billing and accounts receivable system for additional business units, we continue to refine and optimize our new billing and accounts receivable process and related system in a majority of our operations. This has affected, and will continue to affect, the processes that impact our internal control over financial reporting. We will continue to review the related controls and may take additional steps to ensure that they remain effective.

Except for the continuing centralization and optimization of our billing and accounts receivable process and related system, during the most recent fiscal quarter, there were no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings.

We are in the health and human services business and, therefore, we have been and continue to be subject to substantial claims alleging that we, our employees or our Mentors failed to provide proper care for a client. We are also subject to claims by our clients, our employees, our Mentors or community members against us for negligence, intentional misconduct or violation of applicable laws. Included in our recent claims are claims alleging personal injury, assault, battery, abuse, wrongful death and other charges. Regulatory agencies may initiate administrative proceedings alleging that our programs, employees or agents violate statutes and regulations and seek to impose monetary penalties on us. We could be required to incur significant costs to respond to regulatory investigations or defend against civil lawsuits and, if we do not prevail, we could be required to pay substantial amounts of money in damages, settlement amounts or penalties arising from these legal proceedings.

We reserve for costs related to contingencies when a loss is probable and the amount is reasonably estimable. While we believe our provision for legal contingencies is adequate, the outcome of the legal proceedings is difficult to predict and we may settle legal claims or be subject to judgments for amounts that differ from our estimates.

See “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II. Item 1A. Risk Factors” for additional information.

Item 1A.		Risk Factors.

Reductions or changes in Medicaid funding or changes in budgetary priorities by the state and local governments that pay for our services could have a material adverse effect on our revenue and profitability.

We derive the vast majority of our revenue from contracts with state and local governments. These governmental payors fund a significant portion of their payments to us through Medicaid, a joint federal and state health insurance program through which state expenditures are matched by federal funds typically ranging from 50% to approximately 76% of total costs, a number based largely on a state’s per capita income. Our revenue, therefore, is determined by the level of federal, state and local governmental spending for the services we provide. For the period from October 1, 2008 through June 30, 2011, under the American Recovery and Reinvestment Act of 2009, the federal government had temporarily increased its share of the costs. As a result, it is providing state governments with more than $100 billion in federal Medicaid funding during this period to help address state budget gaps caused by a steep decline in tax collections and significantly increased Medicaid enrollment, among other factors, during the recent recessionary period. Budgetary pressures, particularly during the recent recessionary period as well as other economic, industry, political and other factors, could cause the federal and state governments to limit spending, which could significantly reduce our revenue, referrals, margins and profitability and adversely affect our growth strategy. Governmental agencies generally condition their contracts with us upon a sufficient budgetary appropriation. If a government agency does not receive an appropriation sufficient to cover its contractual obligations with us, it may terminate a contract or defer or reduce our reimbursement. Furthermore, the termination of enhanced federal Medicaid funding, scheduled for July 1, 2011, is expected to occur well before state revenues are projected to return to pre-recessionary levels and is expected to significantly increase the budgetary challenges confronting state governments for fiscal year 2012, which begins July 1, 2011 in most states. In addition, there is risk that previously appropriated funds could be reduced through subsequent legislation. The Patient Protection and Affordable Care Act of 2010 mandates certain uses for Medicaid funds, which could have the effect of diverting those funds from the services we provide. Many states in which we operate have been experiencing unprecedented budgetary deficits and constraints and have implemented or are considering initiating service reductions, rate freezes and/or rate reductions, including states such as Minnesota, California, Indiana and Arizona. Similarly, programmatic changes such as conversions to managed care with related contract demands regarding billing and services, unbundling of services, governmental efforts to increase consumer autonomy and reduce provider oversight, coverage and other changes under state Medicaid plans, may cause unanticipated costs and risks to our service delivery. The loss or reduction of or changes to reimbursement under our contracts could have a material adverse effect on our business, financial condition and operating results.

Reductions in reimbursement rates or failure to obtain increases in reimbursement rates could adversely affect our revenue, cash flows and profitability.

Our revenue and operating profitability depend on our ability to maintain our existing reimbursement levels and to obtain periodic increases in reimbursement rates to meet higher costs and demand for more services. Ten percent of our revenue is derived from contracts based on a cost reimbursement model where we are reimbursed for our services based on our costs plus an agreed-upon margin. If we are not entitled to, do not receive or cannot negotiate increases in reimbursement rates, or are forced to accept a reduction in our reimbursement rates at approximately the same time as our costs of providing services increase, including labor costs and rent, our margins and profitability could be adversely affected. Changes in how federal and state government agencies operate reimbursement programs can also affect our operating results and financial condition. Some states have, from time to time, revised their rate-setting or methodologies in a manner that has resulted in rate decreases. In some instances, changes in rate-setting methodologies have resulted in third-party payors disallowing, in whole or in part, our requests for reimbursement. Any reduction in or the failure to maintain or increase our reimbursement rates could have a material adverse effect on our business, financial condition and results of operations. Changes in the manner in which state agencies interpret program policies and procedures or review and audit billings and costs could also adversely affect our business, financial condition and operating results and our ability to meet obligations under our indebtedness.

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

We have a significant amount of indebtedness and substantial leverage. As of March 31, 2011, we had total indebtedness of $786.9 million, no borrowings under our senior revolver and $75.0 million of availability under our senior revolver. Interest on our indebtedness is payable entirely in cash, whereas as of September 30, 2010, our total indebtedness was lower and our indirect parent, NMH Holdings, paid interest on the NMH Holdings notes as PIK Interest. Our annualized interest expense as of March 31, 2011 is $73.0 million as compared to $43.2 million at September 30, 2010. As of March 31, 2011, our consolidated leverage ratio was 6.06 to 1.00, as calculated in accordance with the senior credit agreement.

Our substantial degree of leverage could have important consequences, including the following:

	•		it may significantly curtail our acquisitions program and may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, and general corporate or other purposes;
	•		a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and will not be available for other purposes, including our operations, future business opportunities and acquisitions and capital expenditures;
	•		the debt service requirements of our indebtedness could make it more difficult for us to satisfy our indebtedness and contractual and commercial commitments;
	•		interest rates on the portion of our variable interest rate borrowings under the senior secured credit facilities that have not been hedged may increase;
	•		it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have less debt and a lower degree of leverage;
	•		we may be vulnerable if the current downturn in general economic conditions continues or if there is a downturn in our business, or we may be unable to carry out activities that are important to our growth; and
	•		it may prevent us from raising the funds necessary to repurchase senior subordinated notes tendered to us if there is a change of control, which would constitute a default under the senior credit agreement governing our senior secured credit facilities.

Subject to restrictions in the indenture governing our senior notes and the senior credit agreement, we may be able to incur more debt in the future, which may intensify the risks described in this risk factor. All of the borrowings under the senior secured credit facilities are secured by substantially all of the assets of the Company and its subsidiaries.

In addition to our high level of indebtedness, we have significant rental obligations under our operating leases for our group homes, other service facilities and administrative offices. For the three and six months ended March 31, 2011, our aggregate rental payments for these leases, including taxes and operating expenses, were $11.9 million and $23.6 million, respectively. These obligations could further increase the risks described above.

Current credit and economic conditions could have a material adverse effect on our cash flows, liquidity and financial condition.

Due to the general tightening of the credit markets over the last several years, our government payors or other counterparties that owe us money, such as counterparties to swap contracts, could be delayed in obtaining, or may not be able to obtain, necessary funding and/or financing to meet their cash-flow needs. Moreover, tax revenue continues to be down in many jurisdictions due to the economic recession and high rates of unemployment and government payors may not be able to pay us for our services until they collect sufficient tax revenue. Delays in payment could have a material adverse effect on our cash flows, liquidity and financial condition. In addition, in the event that our payors or other counterparties are financially unstable or delay payments to us, our financial condition could be further impaired if we are unable to borrow additional funds under our senior credit agreement to finance our operations.

Our variable cost structure is directly related to our labor costs, which may be adversely affected by labor shortages, a deterioration in labor relations or increased unionization activities.

Our variable cost structure and operating profitability are directly related to our labor costs. Labor costs may be adversely affected by a variety of factors, including a limited supply of qualified personnel in any geographic area, local competitive forces, the ineffective utilization of our labor force, increases in minimum wages, health care costs and other personnel costs, and adverse changes in client service models. We typically cannot recover our increased labor costs from payors and must absorb them ourselves. We have incurred higher labor costs in certain markets from time to time because of difficulty in hiring qualified direct service staff. These higher labor costs have resulted from increased wages and overtime and the costs associated with recruitment and retention, training programs and use of temporary staffing personnel. In part to help with the challenge of recruiting and retaining direct care employees, we offer these employees a benefits package that includes paid time off, health insurance, dental insurance, vision coverage, life insurance and a 401(k) plan, and these costs can be significant. In addition, The Patient Protection and Affordable Care Act signed into law on March 23, 2010 imposed and will continue to impose new mandates on employers beginning in January 2011. Given the composition of our workforce, these mandates could be material to our costs, and we are studying the potential impact of these mandates.

Although our employees are generally not unionized, we recently acquired a business in New Jersey with fifty employees who are represented by a labor union. Future unionization activities could result in an increase of our labor and other costs. The President and the National Labor Relations Board may take regulatory and other action that could result in increased unionization activities and make it easier for employees to join unions. We may not be able to negotiate labor agreements on satisfactory terms with any future labor unions. If employees covered by a collective bargaining agreement were to engage in a strike, work stoppage or other slowdown, we could experience a disruption of our operations and/or higher ongoing labor costs, which could adversely affect our business, financial condition and results of operations.

Covenants in our debt agreements restrict our business in many ways.

The senior credit agreement governing the senior secured credit facilities and the indenture governing the senior notes contain various covenants that limit our ability and/or our subsidiaries’ ability to, among other things:

	•		incur additional debt or issue certain preferred shares;
	•		pay dividends on or make distributions in respect of capital stock or make other restricted payments;
	•		make certain investments;
	•		sell certain assets;
	•		create liens on certain assets to secure debt;
	•		enter into agreements that restrict dividends from subsidiaries;
	•		consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
	•		enter into certain transactions with our affiliates.

The senior credit agreement governing the senior secured credit facilities also contains restrictive covenants and requires the Company and its subsidiaries to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests may be affected by events beyond our control, and we cannot assure you that we will meet those tests. The breach of any of these covenants or financial ratios could result in a default under the senior secured credit facilities and the lenders could elect to declare all amounts borrowed there under, together with accrued interest, to be due and payable and could proceed against the collateral securing that indebtedness.

The nature of our operations could subject us to substantial claims, litigation and governmental investigations.

We are in the health and human services business and, therefore, we have been and continue to be subject to substantial claims alleging that we, our employees or our Mentors failed to provide proper care for a client. We are also subject to claims by our clients, our employees, our Mentors or community members against us for negligence, intentional misconduct or violation of applicable laws. Included in our recent claims are claims alleging personal injury, assault, battery, abuse, wrongful death and other charges, and our claims for professional and general liability have increased sharply in recent years. Regulatory agencies may initiate administrative proceedings alleging that our programs, employees or agents violate statutes and regulations and seek to impose monetary penalties on us. We could be required to incur significant costs to respond to regulatory investigations or defend against civil lawsuits and, if we do not prevail, we could be required to pay substantial amounts of money in damages, settlement amounts or penalties arising from these legal proceedings.

A litigation award excluded by, or in excess of, our third-party insurance limits and self-insurance reserves could have a material adverse impact on our operations and cash flow and could adversely impact our ability to continue to purchase appropriate liability insurance. Even if we are successful in our defense, civil lawsuits or regulatory proceedings could also irreparably damage our reputation.

We also are subject to potential lawsuits under the False Claims Act and other federal and state whistleblower statutes designed to combat fraud and abuse in the health care industry. These lawsuits can involve significant monetary awards and bounties to private plaintiffs who successfully bring these suits. If we are found to have violated the False Claims Act, we could be excluded from participation in Medicaid and other federal healthcare programs. The Patient Protection and Affordable Care Act provides a mandate for more vigorous and widespread enforcement activity.

Finally, we are also subject to employee-related claims under state and federal law, including claims for discrimination, wrongful discharge or retaliation; claims for wage and hour violations under the Fair Labor Standards Act or state wage and hour laws; and novel intentional tort claims.

Our financial results could be adversely affected if claims against us are successful, to the extent we must make payments under our self-insured retentions, or if such claims are not covered by our applicable insurance or if the costs of our insurance coverage increase.

We have been and continue to be subject to substantial claims against our professional and general liability and automobile liability insurance. Any claims, if successful, could result in substantial damage awards which might require us to make payments under our self-insured retentions. We had historically self-insured amounts of up to $1.0 million per claim and up to $2.0 million in the aggregate, but as of October 1, 2010, we are self-insured for $2.0 million per claim and $8.0 million in the aggregate, and for $500,000 per claim in excess of the aggregate. An award may exceed the limits of any applicable insurance coverage, and awards for punitive damages may be excluded from our insurance policies either contractually or by operation of state law. In addition, our insurance does not cover all potential liabilities including, for example, those arising from employment practice claims, governmental fines and penalties. As a result, we may become responsible for substantial damage awards that are uninsured.

Insurance against professional and general liability and automobile liability can be expensive. Our insurance premiums have increased and may increase in the near future. Insurance rates vary from state to state, by type and by other factors. The rising costs of insurance premiums, as well as successful claims against us, could have a material adverse effect on our financial position and results of operations.

It is also possible that our liability and other insurance coverage will not continue to be available at acceptable costs or on favorable terms.

If payments for claims exceed actuarially determined estimates, are not covered by insurance, or our insurers fail to meet their obligations, our results of operations and financial position could be adversely affected.

Because a substantial portion of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing short-term interest rates, we are vulnerable to interest rate increases.

A portion of our indebtedness, including borrowings under the senior revolver and borrowings under the term loan facility for which we have not hedged our interest rate exposure under an interest rate swap agreement, bears interest at rates that fluctuate with changes in certain short-term prevailing interest rates. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same.

As of March 31, 2011, we had $530.0 million of floating rate debt outstanding before giving effect to the swap agreement. As a result of the interest rate swap agreement, the floating rate debt has been effectively reduced to $130.0 million. A 1% increase in the interest rate on our floating rate debt would increase cash interest expense of the floating rate debt by approximately $1.3 million per annum. If interest rates increase dramatically, the Company and its subsidiaries could be unable to service their debt.

The nature of services that we provide could subject us to significant workers’ compensation related liability, some of which may not be fully reserved for.

We use a combination of insurance and self-insurance plans to provide for potential liability for workers’ compensation claims. Because of our high ratio of employees per client, and because of the inherent physical risk associated with the interaction of employees with our clients, many of whom have intensive care needs, the potential for incidents giving rise to workers’ compensation liability is relatively high.

We estimate liabilities associated with workers’ compensation risk and establish reserves each quarter based on internal valuations, third-party actuarial advice, historical loss development factors and other assumptions believed to be reasonable under the circumstances. Our results of operations have been adversely impacted and may be adversely impacted in the future if actual occurrences and claims exceed our assumptions and historical trends.

If any of the state and local government agencies with which we have contracts determines that we have not complied with our contracts or have violated any applicable laws or regulations, our revenue may decrease, we may be subject to fines or penalties and we may be required to restructure our billing and collection methods.

We derive the vast majority of our revenue from state and local government agencies, and a substantial portion of this revenue is state-funded with federal Medicaid matching dollars. If we fail to comply with federal and state documentation, coding and billing rules, we could be subject to criminal and/or civil penalties, loss of licenses and exclusion from the Medicaid programs, which could harm us. In billing for our services to third-party payors, we must follow complex documentation, coding and billing rules. These rules are based on federal and state laws, rules and regulations, various government pronouncements, and on industry practice. Failure to follow these rules could result in potential criminal or civil liability under the False Claims Act, under which extensive financial penalties can be imposed. It could further result in criminal liability under various federal and state criminal statutes. We annually submit a large volume of claims for Medicaid and other payments and there can be no assurance that there have not been errors. The rules are frequently vague and confusing and we cannot assure that governmental investigators, private insurers or private whistleblowers will not challenge our practices. Such a challenge could result in a material adverse effect on our business.

If any of the state and local government payors determine that we have not complied with our contracts or have violated any applicable laws or regulations, our revenue may decrease, we may be subject to fines or penalties and we may be required to restructure our billing and collection methods. We are routinely subject to governmental reviews, audits and investigations to verify our compliance with applicable laws and regulations. As a result of these reviews, audits and investigations, these governmental payors may be entitled to, in their discretion:

	•		require us to refund amounts we have previously been paid;
	•		terminate or modify our existing contracts;
	•		suspend or prevent us from receiving new contracts or extending existing contracts;
	•		impose referral holds on us;
	•		impose fines, penalties or other sanctions on us; and
	•		reduce the amount we are paid under our existing contracts.

As a result of past reviews and audits of our operations, we have been and are subject to some of these actions from time to time. While we do not currently believe that our existing audit proceedings will have a material adverse effect on our financial condition or significantly harm our reputation, we cannot assure you that similar actions in the future will not do so. In addition, such proceedings could have a material adverse impact on our results of operations in a future reporting period.

In some states, we operate on a cost reimbursement model in which revenue is recognized at the time costs are incurred. In these states, payors audit our historical costs on a regular basis, and if it is determined that our historical costs are insufficient to justify our rates, our rates may be reduced, or we may be required to return fees paid to us in prior periods. In some cases we have experienced negative audit adjustments which are based on subjective judgments of reasonableness, necessity or allocation of costs in our services provided to clients. These adjustments are generally required to be negotiated as part of the overall audit resolution and may result in paybacks to payors and adjustments of our rates. We cannot assure you that our rates will be maintained, or that we will be able to keep all payments made to us, until an audit of the relevant period is complete. Moreover, if we are required to restructure our billing and collection methods, these changes could be disruptive to our operations and costly to implement. Failure to comply with laws and regulations could have a material adverse effect on our business.

If we fail to establish and maintain relationships with state and local government agencies, we may not be able to successfully procure or retain government-sponsored contracts, which could negatively impact our revenue.

To facilitate our ability to procure or retain government-sponsored contracts, we rely in part on establishing and maintaining relationships with officials of various government agencies. These relationships enable us to maintain and renew existing contracts and obtain new contracts and referrals. The effectiveness of our relationships may be reduced or eliminated with changes in the personnel holding various government offices or staff positions. We also may lose key personnel who have these relationships and such personnel are generally not subject to non-compete or non-solicitation covenants. Any failure to establish, maintain or manage relationships with government and agency personnel may hinder our ability to procure or retain government-sponsored contracts, and could negatively impact our revenue.

Negative publicity or changes in public perception of our services may adversely affect our ability to obtain new contracts and renew existing ones.

Our success in obtaining new contracts and renewals of our existing contracts depend upon maintaining our reputation as a quality service provider among governmental authorities, advocacy groups, families of our clients and the public. Negative publicity, changes in public perception, legal proceedings and government investigations with respect to our operations could damage our reputation and hinder our ability to retain contracts and obtain new contracts, and could reduce referrals, increase government scrutiny and compliance or litigation costs, or generally discourage clients from using our services. Any of these events could have a material adverse effect on our business, financial condition and operating results.

We face substantial competition in attracting and retaining experienced personnel, and we may be unable to maintain or grow our business if we cannot attract and retain qualified employees.

Our success depends to a significant degree on our ability to attract and retain qualified and experienced human service and other professionals who possess the skills and experience necessary to deliver quality services to our clients and manage our operations. We face competition for certain categories of our employees, particularly service provider employees, based on the wages, benefits and other working conditions we offer. Contractual requirements and client needs determine the number, education and experience levels of human service professionals we hire. Our ability to attract and retain employees with the requisite credentials, experience and skills depends on several factors, including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. The inability to attract and retain experienced personnel could have a material adverse effect on our business.

We may not realize the anticipated benefits of any future acquisitions and we may experience difficulties in integrating these acquisitions.

As part of our growth strategy, we intend to make acquisitions. Growing our business through acquisitions involves risks because with any acquisition there is the possibility that:

	•		we may be unable to maintain and renew the contracts of the acquired business;
	•		unforeseen difficulties may arise in integrating the acquired operations, including information systems and accounting controls;
	•		we may not achieve operating efficiencies, synergies, economies of scale and cost reductions as expected;
	•		the business we acquire may not continue to generate income at the same historical levels on which we based our acquisition decision;
	•		management may be distracted from overseeing existing operations by the need to integrate the acquired business;

	•		we may acquire or assume unexpected liabilities or there may be other unanticipated costs;
	•		we may encounter unanticipated regulatory risk;
	•		we may experience problems entering new markets or service lines in which we have limited or no experience;
	•		we may fail to retain and assimilate key employees of the acquired business;
	•		we may finance the acquisition by incurring additional debt and further increase our leverage ratios; and
	•		the culture of the acquired business may not match well with our culture.

As a result of these risks, there can be no assurance that any future acquisition will be successful or that it will not have a material adverse effect on our financial condition and results of operations.

A loss of our status as a licensed service provider in any jurisdiction could result in the termination of existing services and our inability to market our services in that jurisdiction.

We operate in numerous jurisdictions and are required to maintain licenses and certifications in order to conduct our operations in each of them. Each state and local government has its own regulations, which can be complicated, and each of our service lines can be regulated differently within a particular jurisdiction. As a result, maintaining the necessary licenses and certifications to conduct our operations can be cumbersome. Our licenses and certifications could be suspended, revoked or terminated for a number of reasons, including:

	•		the failure by our employees or Mentors to properly care for clients;
	•		the failure to submit proper documentation to the applicable government agency, including documentation supporting reimbursements for costs;
	•		the failure by our programs to abide by the applicable regulations relating to the provision of human services; or
	•		the failure of our facilities to comply with the applicable building, health and safety codes and ordinances.

From time to time, some of our licenses or certifications, or those of our employees, are temporarily placed on probationary status or suspended. If we lost our status as a licensed provider of human services in any jurisdiction or any other required certification, we would be unable to market our services in that jurisdiction, and the contracts under which we provide services in that jurisdiction would be subject to termination. Moreover, such an event could constitute a violation of provisions of contracts in other jurisdictions, resulting in other contract, license or certification terminations. Any of these events could have a material adverse effect on our operations.

We are subject to extensive governmental regulations, which require significant compliance expenditures, and a failure to comply with these regulations could adversely affect our business.

We must comply with comprehensive government regulation of our business, including statutes, regulations and policies governing the licensing of our facilities, the maintenance and management of our work place for our employees, the quality of our service, the revenue we receive for our services, and reimbursement for the cost of our services. Compliance with these laws, regulations and policies is expensive, and if we fail to comply with these laws, regulations and policies, we could lose contracts and the related revenue, thereby harming our financial results. State and federal regulatory agencies have broad discretionary powers over the administration and enforcement of laws and regulations that govern our operations. A material violation of a law or regulation could subject us to fines and penalties and in some circumstances could disqualify some or all of the facilities and programs under our control from future participation in Medicaid or other government programs. The Health Insurance Portability and Accountability Act of 1996 (as amended, “HIPAA”) and other federal and state data privacy and security laws, which require the establishment of privacy standards for health care information storage, retrieval and dissemination as well as electronic transmission and security standards, could result in potential penalties in certain of our businesses if we fail to comply with these privacy and security standards.

Expenses incurred under governmental agency contracts for any of our services, as well as management contracts with providers of record for such agencies, are subject to review by agencies administering the contracts and services. Representatives of those agencies visit our group homes to verify compliance with state and local regulations governing our home operations. A negative outcome from any of these examinations could increase government scrutiny, increase compliance costs or hinder our ability to obtain or retain contracts. Any of these events could have a material adverse effect on our business, financial condition and operating results.

The federal anti-kickback law and non-self referral statute, and similar state statutes, prohibit kickbacks, rebates and any other form of remuneration in return for referrals. Any remuneration, direct or indirect, offered, paid, solicited, or received, in return for referrals of patients or business for which payment may be made in whole or in part under Medicaid could be considered a violation of law. The language of the anti-kickback law also prohibits payments made to anyone to induce them to recommend purchasing, leasing, or ordering any goods, facility, service, or item for which payment may be made in whole or in part by Medicaid. Criminal penalties under the anti-kickback law include fines up to $25,000, imprisonment for up to 5 years, or both. In addition, acts constituting a violation of the anti-kickback law may also lead to civil penalties, such as fines, assessments and exclusion from participation in the Medicaid programs.

CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. Throughout 2011, we expect MIC audits will continue to expand. In addition to MICs, several other contractors, including the state Medicaid agencies, have increased their review activities.

Should we be found out of compliance with any of these laws, regulations or programs, depending on the nature of the findings, our business, our financial position and our results of operations could be materially adversely impacted.

If a federal or state agency asserts a different position or enacts new laws or regulations regarding illegal payments under Medicaid or other governmental programs, we may be subject to civil and criminal penalties, experience a significant reduction in our revenue or be excluded from participation in Medicaid or other governmental programs.

Any change in interpretations or enforcement of existing or new laws and regulations could subject our current business practices to allegations of impropriety or illegality, or could require us to make changes in our homes, equipment, personnel, services, pricing or capital expenditure programs, which could increase our operating expenses and have a material adverse effect on our operations or reduce the demand for or profitability of our services.

We have identified material weaknesses in our internal control over financial reporting in prior periods.

As reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, we identified material weaknesses in our internal control over financial reporting relating to our revenue and accounts receivable balances as of September 30, 2009, and management concluded that as of that date, our internal control over financial reporting was not effective and, as a result, our disclosure controls and procedures were not effective. We also reported material weaknesses as of September 30, 2008, including a material weakness in controls to verify the existence of our fixed asset balances. As a result of this material weakness, we identified errors during the quarter ended June 30, 2009 which resulted in an adjustment to reduce property and equipment by $1.8 million. While we have taken action to remediate our identified material weaknesses and continue to improve our internal controls, the decentralized nature of our operations and the manual nature of many of our controls increases our risk of control deficiencies.

We did not experience similar material weaknesses in connection with our audit of fiscal 2010. No evaluation can provide complete assurance that our internal controls will detect or uncover all failures of persons within our company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments. We may in the future identify material weaknesses or significant deficiencies in connection with the continuing implementation of our billing and accounts receivable system and the consolidation of our cash disbursement and accounts receivable functions at one centralized location. As we introduce new processes and people into our accounting systems, our risk of controls deficiencies and weaknesses may temporarily increase. In addition, if we continue to make acquisitions, as we expect to, the challenges involved in implementing appropriate internal controls will increase and will require that we continue to improve our internal controls. Any future material weaknesses in internal control over financial reporting could result in material misstatements in our financial statements. Moreover, any future disclosures of additional material weaknesses, or errors as a result of those weaknesses, could result in a negative reaction in the financial markets if there is a loss of confidence in the reliability of our financial reporting.

Management continues to devote significant time and attention to improving our internal controls, and we will continue to incur costs associated with implementing appropriate processes, which could include fees for additional audit and consulting services, which could negatively affect our financial condition and operating results.

The high level of competition in our industry could adversely affect our contract and revenue base.

We compete with a wide variety of competitors, ranging from small, local agencies to a few large, national organizations. Competitive factors may favor other providers and reduce our ability to obtain contracts, which would hinder our growth. Not-for-profit organizations are active in all states and range from small agencies serving a limited area with specific programs to multi-state organizations. Smaller local organizations may have a better understanding of the local conditions and may be better able to gain political and public acceptance. Not-for-profit providers may be affiliated with advocacy groups, health organizations or religious organizations that have substantial influence with legislators and government agencies. Increased competition may result in pricing pressures, loss of or failure to gain market share or loss of clients or payors, any of which could harm our business.

We rely on third parties to refer clients to our facilities and programs.

We receive substantially all of our clients from third-party referrals and are governed by the federal anti-kickback/non-self referral statute. Our reputation and prior experience with agency staff, care workers and others in positions to make referrals to us are important for building and maintaining our operations. Any event that harms our reputation or creates negative experiences with such third parties could impact our ability to receive referrals and grow our client base.

Home and community-based human services may become less popular among our targeted client populations and/or state and local governments, which would adversely affect our results of operations.

Our growth depends on the continuation of trends in our industry toward providing services to individuals in smaller, community-based settings and increasing the percentage of individuals served by non-governmental providers. The continuation of these trends and our future success are subject to a variety of political, economic, social and legal pressures, all of which are beyond our control. A reversal in the downsizing and privatization trends could reduce the demand for our services, which could adversely affect our revenue and profitability.

Government reimbursement procedures are time-consuming and complex, and failure to comply with these procedures could adversely affect our liquidity, cash flows and operating results.

The government reimbursement process is time-consuming and complex, and there can be delays before we receive payment. Government reimbursement, group home credentialing and Medicaid recipient eligibility and service authorization procedures are often complicated and burdensome, and delays can result from, among other things, securing documentation and coordinating necessary eligibility paperwork between agencies. These reimbursement and procedural issues occasionally cause us to have to resubmit claims several times before payment is remitted. If there is a billing error, the process to resolve the error may be time-consuming and costly. To the extent that complexity associated with billing for our services causes delays in our cash collections, we assume the financial risk of increased carrying costs associated with the aging of our accounts receivable as well as increased potential for write-offs. We can provide no assurance that we will be able to collect payment for claims at our current levels in future periods. The risks associated with third-party payors and the inability to monitor and manage accounts receivable successfully could have a material adverse effect on our liquidity, cash flows and operating results.

We conduct a significant percentage of our operations in Minnesota and, as a result, we are particularly susceptible to any reduction in budget appropriations for our services or any other adverse developments in that state.

For the six months ended March 31, 2011, 15% of our revenue was generated from contracts with government agencies in the state of Minnesota. Accordingly, any reduction in Minnesota’s budgetary appropriations for our services, whether as a result of fiscal constraints due to recession, changes in policy or otherwise, could result in a reduction in our fees and possibly the loss of contracts. A rate cut of 2.6% took effect in Minnesota on July 1, 2009. We cannot assure you that we will not receive further rate reductions this year or in the future. The concentration of our operations in Minnesota also makes us particularly susceptible to many of the other risks described above occurring in this state, including:

	•		the failure to maintain and renew our licenses;
	•		the failure to maintain important relationships with officials of government agencies; and
	•		any negative publicity regarding our operations.

Any of these adverse developments occurring in Minnesota could result in a reduction in revenue or a loss of contracts, which could have a material adverse effect on our results of operations, financial position and cash flows.

We depend upon the continued services of certain members of our senior management team, without whom our business operations could be significantly disrupted.

Our success depends, in part, on the continued contributions of our senior officers and other key employees. Our management team has significant industry experience and would be difficult to replace. If we lose or suffer an extended interruption in the service of one or more of our key employees, our financial condition and operating results could be adversely affected. The market for qualified individuals is highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise.

Our success depends on our ability to manage growing and changing operations and successfully optimize our cost structure.

Since 1998, our business has grown significantly in size and complexity. This growth has placed, and is expected to continue to place, significant demands on our management, systems, internal controls and financial and physical resources. Our operations are highly decentralized, with many billing, accounting and collection functions being performed at the local level. This requires us to expend significant resources implementing and monitoring compliance at the local level. In addition, we expect that we will need to further develop our financial and managerial controls and reporting systems to accommodate future growth. This will require us to incur expenses for hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding our information technology infrastructure. The nature of our business is such that qualified management personnel can be difficult to find. We also are continuing to take actions to optimize our cost structure, including most recently centralizing certain functions and implementing a review of our field administrative functions. To the extent these optimization efforts and any related reductions in force disrupt our operations, there could be an adverse effect on our financial results. In addition, our cost structure optimization efforts may not achieve the cost savings we expect within the anticipated time frame, or at all. Our inability to manage growth and implement cost structure optimization effectively could have a material adverse effect on our results of operations, financial position and cash flows.

Our information systems are critical to our business and a failure of those systems could materially harm us.

We depend on our ability to store, retrieve, process and manage a significant amount of information, and to provide our operations with efficient and effective accounting, census, incident reporting and scheduling systems. Our information systems require maintenance and upgrading to meet our needs, which could significantly increase our administrative expenses.

Furthermore, any system failure that causes an interruption in service or availability of our critical systems could adversely affect operations or delay the collection of revenues. Even though we have implemented network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering. The occurrence of any of these events could result in interruptions, delays, the loss or corruption of data, or cessations in the availability of systems, all of which could have a material adverse effect on our financial position and results of operations and harm our business reputation.

The performance of our information technology and systems is critical to our business operations. Our information systems are essential to a number of critical areas of our operations, including:

	•		accounting and financial reporting;
	•		billing and collecting accounts;
	•		coding and compliance;
	•		clinical systems, including census and incident reporting;
	•		records and document storage; and
	•		monitoring quality of care and collecting data on quality and compliance measures.

Our financial results may suffer if we have to write-off goodwill or other intangible assets.

A portion of our total assets consists of goodwill and other intangible assets. Goodwill and other intangible assets, net of accumulated amortization, accounted for 63.3% and 65.7% of the total assets on our balance sheet as of March 31, 2011 and September 30, 2010, respectively. We may not realize the value of our goodwill or other intangible assets and we expect to engage in additional transactions that will result in our recognition of additional goodwill or other intangible assets. We evaluate on a regular basis whether events and circumstances have occurred that indicate that all or a portion of the carrying amount of goodwill or other intangible assets may no longer be recoverable, and is therefore impaired. Under current accounting rules, any determination that impairment has occurred would require us to write-off the impaired portion of our goodwill or the unamortized portion of our intangible assets, resulting in a charge to our earnings. Such a write-off could have a material adverse effect on our financial condition and results of operations.

We may be more susceptible to the effects of a public health catastrophe than other businesses due to the vulnerable nature of our client population.

Our primary clients are individuals with developmental disabilities, brain injuries, or emotionally, behaviorally or medically complex challenges, many of whom may be more vulnerable than the general public in a public health catastrophe. For example, in a flu pandemic, we could suffer significant losses to our client population and, at a high cost, be required to pay overtime or hire replacement staff and Mentors for workers who drop out of the workforce. Accordingly, certain public health catastrophes such as a flu pandemic could have a material adverse effect on our financial condition and results of operations.

We are controlled by our principal equityholder, which has the power to take unilateral action.

Vestar controls our business affairs and material policies. Circumstances may occur in which the interests of Vestar could be in conflict with the interests of our debt holders. In addition, Vestar may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to our debt holders. Vestar is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Vestar may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by Vestar continue to own a significant amount of our equity interests, even if such amount is less than 50%, Vestar will continue to be able to significantly influence or effectively control our decisions.

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

No equity securities of the Company were sold during the three months ended March 31, 2011; however, the Company’s indirect parent, NMH Investment, LLC (“NMH Investment”), did sell equity securities during this period.

The following table sets forth the number of units of common equity of NMH Investment issued during the quarter ended March 31, 2011 pursuant to the NMH Investment, LLC Amended and Restated 2006 Unit Plan, as amended. The units were issued under Rule 701 promulgated under the Securities Act of 1933.

Date		Title of Securities				Amount				Purchasers				Consideration
February 23, 2011		Class B Common Units					1,925.00			One employee				$	96.25
		Class C Common Units					2,020.00							$	60.60
		Class D Common Units					2,140.00							$	21.40

Repurchases of Equity Securities

No equity securities of the Company were repurchased during the three months ended March 31, 2011.

The following table sets forth information in connection with repurchases made by NMH Investment of its common equity units during the three months ended March 31, 2011:

														(d) Maximum
														Number (or
										(c) Total Number				Approximate Dollar
										of Units Purchased				Value) of Shares (or
		(a) Class and								as Part of Publicly				Units) that May Yet
		Total Number of				(b) Average Price				Announced Plans				be Purchased Under
		Units Purchased				Paid per Unit				or Programs				the Plans or Programs
Month #1 (January 1, 2011 through January 31, 2011)		2,500.00 A Units				$	10.00				—				N/A
		4,812.50 B Units				$	0.05				—				N/A
		5,050.00 C Units				$	0.03				—				N/A
		5,350.00 D Units				$	0.01				—				N/A
Month #2 (February 1, 2011 through February 28, 2011)			—				—				—				N/A
			—				—				—				N/A
			—				—				—				N/A
Month #3 (March 1, 2011 through March 31, 2011)		3,100.00 A Units				$	10.00				—				N/A
		4,812.50 B Units				$	0.05				—				N/A
		5,050.00 C Units				$	0.03				—				N/A
		5,350.00 D Units				$	0.01				—				N/A

The Company did not repurchase any of its common stock as part of an equity repurchase program during the three months ended March 31, 2011. NMH Investment purchased all of the units listed in the table from four of its employees upon or after their departures.

Item 3.		Defaults Upon Senior Securities.

None.

Item 4.		(Removed and Reserved).

Item 5.		Other Information.

Amendment to NMH Investment, LLC Amended and Restated 2006 Unit Plan

On May 10, 2011, the board of directors NMH Investment, LLC (“NMH Investment”), the indirect parent company of the Company, approved an amendment (the “Amendment”) to the NMH Investment, LLC Amended and Restated 2006 Unit Plan (the “2006 Unit Plan”) to authorize the issuance of Class F Common Units (the “Class F Common Units”) of NMH Investment, a new class of non-voting equity units of NMH Investment, under the 2006 Unit Plan. Pursuant to the Amendment, up to 5,396,388 Class F Common Units may be issued under the 2006 Unit Plan to senior managers of the Company as equity-based compensation.

On May 10, 2011, the compensation committee of the board of directors of the Company granted, for no cost, 4,296,387.32 Class F Common Units to senior managers of the Company, including the named executive officers in the amounts set forth below:

		Number of Class F
Name		Common Units
Edward M. Murphy			701,245.51
Bruce F. Nardella			455,617.52
Denis M. Holler			355,617.52
David M. Petersen			314,780.83

The Class F Common Units will be issued pursuant to a management unit subscription agreement for Series 1 Class F Common Units (the “management unit subscription agreement”) between NMH Investment and each participant, the form of which is attached to this Quarterly Report on Form 10-Q and is incorporated by reference herein.

Management Unit Subscription Agreement

Each of the participants will enter into a management unit subscription agreement with NMH Investment with respect to his or her Class F Common Units. The management unit subscription agreement provides for vesting of the Class F Common Units depending on the length of employment with the Company. For participants who have been continuously employed by the Company since December 31, 2008, 75% of the Class F Common Units vest upon grant and 25% of the Class F Common Units will vest on the date that is 18 months following the date of grant if the participant continues to be employed by the Company on that date. For participants who have not been continuously employed by the Company since December 31, 2008, 50% of the Class F Common Units vest upon grant, 25% of the Class F Common Units vest on the date that is 18 months following the date of grant and 25% of the Class F Common Units vest on the date that is 36 months following the date of grant, in each case, if the participant continues to be employed by the Company on that date. Class F Common Units that are awarded after the initial issuances approved on May 10, 2011 will vest in three equal tranches on each of the first three anniversaries of the date on which such Class F Common Units are awarded.

The management unit subscription agreement for each of the named executive officers provides that if the named executive officer’s employment is terminated due to death, disability or retirement prior to the earlier of (i) an initial public offering by or involving NMH Investment or any of its subsidiaries or (ii) a sale of the Company, the named executive officer and each of his or her permitted transferees (collectively, an “executive officer group”) has the right, subject to certain limitations, for 45 days following the six month anniversary of his or her termination, to sell to NMH Investment, on one occasion, a number of vested Class F Common Units equal to a specified percentage (the “specified percentage”) of the total number of vested Class F Common Units held by the executive officer group, at a purchase price equal to fair market value as determined pursuant to the terms of the management unit subscription agreement (the “put right”). In order to exercise this put right, the executive officer group will also be required to simultaneously sell to NMH Investment a number of Class B, C and D Common Units equal to the specified percentage of the total number of such Class B, C and D Common Units held by the executive officer group. The specified percentage for Mr. Murphy is 38.15%, the specified percentage for Mr. Nardella is 52.23%, the specified percentage for Mr. Holler is 65.29% and the specified percentage for Mr. Petersen is 59.37%. Upon execution of the management unit subscription agreement, any existing put rights that the named executive officers may have had under the terms of existing agreements with respect to the Class B, C and D Common Units will be terminated.

If a participant’s employment with the Company is terminated prior to a sale of the Company, or if the participant engages in “competitive activity” (as defined in the management unit subscription agreement), all of the participant’s unvested Class F Common Units will be forfeited on the date of termination, and the Company has the right to purchase all of the participant’s vested Class B, C, D and F Common Units (in the case of the named executive officers, less the number of units that may have been repurchased by the Company pursuant to the put right for named executive officers) during the eight-month period following the termination date. In the event of a purchase of units at the option of the Company, (i) if the named executive officer is terminated for cause, or if the named executive officer engages in “competitive activity,” the purchase price will be equal to the lesser of fair market value and the original cost, and (ii) if the participant is terminated for any other reason, the purchase price will be equal to fair market value. If there is a sale of the Company, all Class F Common Units that have not yet vested will vest on the date of the consummation of the sale of the Company if the participant has been continuously employed by the Company through the date of the sale. Pursuant to the terms of the management unit subscription agreement, the Class F Common Units will not vest upon an initial public offering by or involving NMH Investment or any of its subsidiaries.

The management unit subscription agreement contains non-compete and non-solicitation provisions that apply through the later of (x) the first anniversary of the termination of employment and (y) the maximum number of years of base salary the participant is entitled to receive as severance upon a termination event. These restrictions are substantially the same as the existing restrictions in the management unit subscription agreements for the existing Class B, C and D Common Units. The Class F Common Units are subject to substantially the same restrictions on transfer as the existing Class B, C and D Common Units and are subject to the terms of the fifth amended and restated limited liability company agreement of NMH Investment and the securityholders agreement among NMH Investment, Vestar Capital Partners V, L.P. (“Vestar”), an affiliate of Vestar, the management investors and each of the other investors party thereto.

Amendments to Existing Preferred Units and Equity Awards

In connection with the amendment to the 2006 Unit Plan and the issuance of the Class F Common Units, NMH Investment entered into a fifth amended and restated limited liability company with Vestar, an affiliate of Vestar, and the members party thereto (the “LLC Agreement”), which amends and restates the fourth amended and restated limited liability company agreement of NMH Investment, LLC. Pursuant to the LLC Agreement, all of the Preferred Units of NMH Investment were amended such that the amount distributable in respect of each outstanding Preferred Unit was fixed based on a specified return as of December 31, 2010. In addition, the terms of the Class B, C and D Common Units were amended to accelerate the vesting of any unvested Class B, C and D Common Units so that they became 100% vested on May 10, 2011. The LLC Agreement also provides for the issuance of the Class F Common Units and the allocation of distributions of assets among the classes of Common Units. As amended, the allocations in the LLC Agreement would result in holders of the Class B, C, D and F Common Units receiving distributions of assets representing 10% of the total return on investment to common equity holders upon a sale or other liquidity event involving NMH Investment.

Item 6.		Exhibits.

The Exhibit Index is incorporated herein by reference.

SIGNATURES

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.

EXHIBIT INDEX

Exhibit
No.				Description
	3.1			Amended and Restated Certificate of Incorporation of National Mentor Holdings, Inc.		Incorporated by reference to Exhibit 3.1 of National Mentor Holdings, Inc. Form 10-Q for the quarterly period ended March 31, 2007 (the “March 2007 10-Q”)
	3.2			By-Laws of National Mentor Holdings, Inc.		Incorporated by reference to Exhibit 3.2 of the March 2007 10-Q
	4.1			Indenture, dated as of February 9, 2011, among National Mentor Holdings, Inc., the subsidiary guarantors named therein, and Wells Fargo Bank, National Association, as trustee.		Incorporated by reference to Exhibit 4.1 of National Mentor Holdings, Inc. Current Report on Form 8-K filed on February 9, 2011 (the “February 9, 2011 8-K”)
	4.2			Form of 12.50% Senior Note due 2018 (included as Exhibit A to Exhibit 4.1).		Incorporated by reference to Exhibit 4.1
	4.3			Supplemental Indenture, dated as of January 27, 2011, between National Mentor Holdings, Inc. and U.S. Bank National Association		Incorporated by reference to Exhibit 10.3 of the February 9, 2011 8-K.
	10.1			Credit Agreement, dated as of February 9, 2011, by and among NMH Holdings, LLC, as parent guarantor, National Mentor Holdings, Inc., as borrower, the several lenders from time to time party thereto, and UBS, as Administrative Agent.		Incorporated by reference to Exhibit 10.1 of the February 9, 2011 8-K.
	10.2			Guarantee and Security Agreement, dates as of February 9, 2011, among NMH Holdings, LLC, as parent guarantor, National Mentor Holdings, Inc., as borrower, certain subsidiaries of National Mentor Holdings, Inc., as subsidiary guarantors, and UBS AG, as administrative agent.		Incorporated by reference to Exhibit 10.3 of the February 9, 2011 8-K.
	10.3			Management Agreement, dated as of February 9, 2011, among National Mentor Holdings, Inc., National Mentor Holdings, LLC, NMH Investment, LLC, NMH Holdings, Inc., NMH Holdings, LLC and Vestar Capital Partners.		Incorporated by reference to Exhibit 10.3 of the February 9, 2011 8-K.
	10.4	*		Letter Agreement between National Mentor Holdings, Inc. and Juliette E. Fay dated February 11, 2011		Incorporated by reference to Exhibit 10.2 of National Mentor Holdings, Inc.’s Current Report on Form 10-Q for the quarterly period ended December 31, 2010.
	10.5	*		The MENTOR Network Incentive Compensation Plan effective March 4, 2011.		Filed herewith
	10.6	*		Second Amendment to NMH Investment, LLC Amended and Restated 2006 Unit Plan.		Filed herewith
	10.7	*		Form of Management Unit Subscription Agreement (Series 1 Class F Common Units).		Filed herewith
	31.1			Certification of principal executive officer.		Filed herewith
	31.2			Certification of principal executive officer.		Filed herewith
	31.3			Certification of principal financial officer.		Filed herewith
	32			Certifications furnished pursuant to 18 U.S.C. Section 1350.		Filed herewith