UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

þ		ANNUAL 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
incorporation or organization)		Identification No.)
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes þ No o

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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. (Check one):

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of March 31, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was zero.

As of December 27, 2011, there were 100 shares of the registrant’s common stock, $0.01 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

TABLE OF CONTENTS

PART I
Item 1. Business			4
Item 1A. Risk Factors			14
Item 1B. Unresolved Staff Comments			24
Item 2. Properties			24
Item 3. Legal Proceedings			25
Item 4. (Removed and Reserved)			25
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			25
Item 6. Selected Financial Data			26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			42
Item 8. Financial Statements and Supplementary Data			42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			42
Item 9A. Controls and Procedures			43
Item 9B. Other Information			43
PART III
Item 10. Directors, Executive Officers and Corporate Governance			44
Item 11. Executive Compensation			46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			47
Item 13. Certain Relationships and Related Transactions, and Director Independence			48
Item 14. Principal Accounting Fees and Services			51
PART IV
Item 15. Exhibits and Financial Statement Schedules			51
Signatures			52
Exhibit 10.8.1
Exhibit 10.12
Exhibit 21
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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 I. Item 1A. Risk Factors” in this report as well as the following:

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changes in Medicaid or other funding or changes in budgetary priorities by federal, state and local governments;

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changes in reimbursement rates, policies or payment practices by our payors;

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our substantial amount of debt, our ability to meet our debt service obligations and our ability to incur additional debt;

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an increase in the number and nature of pending legal proceedings and the outcomes of those proceedings;

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failure to take advantage of organic growth opportunities;

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our ability to maintain, expand and renew existing services contracts and to obtain additional contracts;

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our ability to acquire new licenses or to maintain our status as a licensed service provider in certain jurisdictions;

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our ability to establish and maintain relationships with government agencies and advocacy groups;

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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;

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our ability to control operating costs and collect accounts receivable;

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our ability to attract and retain experienced personnel, including members of our senior management team;

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increased or more effective competition;

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successful integration of acquired businesses;

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credit and financial market conditions;

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changes in interest rates;

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the potential for conflict between the interests of our majority equity holder and those of our debt holders; and

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government regulations, changes in government regulations and our ability to comply with such regulations.

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.

PART I

Item 1.		Business

Company 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 22,000 clients in 33 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 believe that our broad range of services, high-quality reputation and longstanding relationships with a diverse group of payors have made us one of the largest providers of home and community-based health and human services in the United States. We believe that our substantial experience in the industry coupled with our ability to offer clinical resources and share best practices across our organization has made us a preferred provider for many of our referral sources. We derive approximately 90% of our revenue from a diverse group of state and local government payors.

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.

As of September 30, 2011, we provided our services through approximately 18,100 full-time equivalent employees, as well as approximately 5,300 independently contracted host home caregivers, or Mentors. We generated net revenue of $1,070.6 million, $1,011.5 million and $957.5 million during fiscal 2011, 2010 and 2009, respectively.

Description of Services by Segment

We have two reportable segments, Human Services and Post-Acute Specialty Rehabilitation Services (“SRS”).

Human Services

We are a leading provider of home and community-based human services to the I/DD and ARY populations. Our Human Services segment represented approximately 84% of our net revenue in fiscal 2011.

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. We provide services to these clients through small group homes, Intermediate Care Facilities for the Mentally Retarded (“ICFs-MR”), host homes, in-home settings and non-residential settings. We operate approximately 840 group homes and 150 ICFs-MR. As of September 30, 2011, we provided I/DD services to approximately 12,000 clients in 24 states. In fiscal 2011, our I/DD services generated net revenue of $682.7 million, representing 64% of our net revenue. We receive substantially all our revenue for I/DD services from a diverse group of state and local governmental payors.

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 individualized approach allows us to work with an ever-changing client population that is diverse demographically as well as in type and severity of condition. We provide services to these clients through host homes, group homes, educational settings, in their family homes and in other non-residential settings. As of September 30, 2011, we provided ARY services to approximately 9,000 children, adolescents and their families in 19 states. In fiscal 2011, our ARY services generated net revenue of $212.4 million, representing 20% of our net revenue. We receive substantially all our revenue for ARY services from a diverse group of state and local governmental payors.

Post-Acute Specialty Rehabilitation Services

Our SRS segment delivers health care and community-based health and 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 therapies, supported living, outpatient treatment, and pre-vocational services. Our goal is to provide a continuum of care that allows our clients to achieve the highest level of function possible while enhancing their quality of life. We provide services to these clients primarily through specialized community facilities, small group homes, in-home and non-residential settings. As of September 30, 2011, our SRS operations provided services in 20 states and served approximately 1,000 clients nationally. In fiscal 2011, our SRS operations generated net revenue of $175.5 million, representing 16% of our net revenue. In fiscal 2011, we received 51% of our SRS revenue from non-public payors, such as commercial insurers, workers’ compensation funds, managed care and other private payors and 49% from state and local governmental payors.

For additional information on the Company’s segments, please see note 18 to the consolidated financial statements.

Industry Overview

The health and human services industry provides services to people with a range of disabilities and special needs, including adults and children with I/DD, ABI and other catastrophic injuries and illnesses, and to youth with emotional, behavioral and/or medically complex challenges. The market for these services remains highly fragmented, with service providers consisting of not-for-profit organizations and for-profit entities of various sizes. The largest portion of this client base is adults and children with I/DD. Services for these clients are funded primarily through Medicaid, a joint federal and state health insurance program under which eligible state expenditures are matched with federal funding. In addition, funds are also provided by other federal, state and local governmental programs and, to a lesser extent, private payors.

Intellectual and/or Developmental Disabilities

Unless otherwise stated, all statistical information in this section has been obtained from reports prepared by Dr. David Braddock. Dr. Braddock is Associate Vice President of the University of Colorado (CU) System and Executive Director of the Coleman Institute for Cognitive Disabilities.

In 2010, approximately 1.6% of the U.S. population, or 4.9 million people, were considered to have I/DD, a life-long disability attributable to a mental or physical impairment. These individuals live in supervised residential settings, including institutions, with family caregivers or on their own. The number of persons with I/DD who received residential services outside of their family homes increased from 440,000 in 2000 to an estimated 607,000 in 2010, and the utilization of residential services is projected to increase during the next decade, in part due to the fact that caregivers for individuals with I/DD are growing older. In addition, the utilization of residential services is expected to increase as the life expectancy of individuals with I/DD increases. The average life expectancy has increased from 59 years in the 1970s to 66 years in the 1990s and we expect this trend to continue with continued improvement in medical care. As of 2006, approximately 60% of the I/DD population, or approximately 2.8 million individuals, remained in the care of their families, with 25% of such individuals in care of a person or persons over 60 years of age.

Over the past two decades, the delivery of services to the I/DD population in supervised residential settings has grown significantly and, at the same time, there has been a major shift from institutional settings to home and community-based settings, both in part due to the Americans with Disabilities Act (“ADA”) and the U.S. Supreme Court Olmstead decision in 1999. The U.S. Supreme Court held in its Olmstead decision that under the ADA, states are required to place persons with intellectual disabilities in community settings rather than in institutions when such placement is deemed appropriate by medical professionals, the affected individual does not oppose the transfer from institutional care to a less restrictive setting and the placement can be accommodated taking into account the resources available to the state and the needs of other individuals with intellectual disabilities. We believe that community settings provide a higher quality and, in most cases, lower-cost alternative to care provided in state institutions.

Public spending on I/DD services grew from an estimated $25.7 billion in 1998 to an estimated $53.0 billion in 2009, a compound annual growth rate (“CAGR”) of 6.8% per year. Of this, approximately 80% was spent to provide services in community settings of six or fewer beds, our target market, and for other non-institutional services, including supported living and employment and family assistance.

The Home and Community-Based Services (“HCBS”) Waiver program, a Medicaid program in which the federal government has waived the requirement that services be delivered in institutional settings, is the primary funding vehicle for home and community-based services. The HCBS Waiver program was instituted as an alternative to the ICF-MR program, described below, and authorized federal reimbursement for a wide variety of community supports and services, including supported living, life-skills training, supported employment, case management, respite care and other family support. In this program, the provider responds to the client’s identified needs and typically is paid on a fee-for-service basis. According to a research paper by Thomson Reuters, from 2004 to 2009, total expenditures for HCBS for all disability groups increased from $21.8 billion to $33.5 billion, a CAGR of 9.0%. In 2009, the HCBS Waiver program provided approximately $15.5 billion in federal funding for approximately 572,000 people with I/DD.

The federal ICF-MR program was established in 1971 when legislation was enacted to provide for federal financial participation for ICFs-MR as an optional Medicaid service. This congressional authorization allows states to receive federal matching funds for institutional services that are funded with state or local government dollars. To qualify for Medicaid reimbursement, ICFs-MR must be certified and comply with federal standards in eight areas: management, client protections, facility staffing, active treatment services, client behavior and facility practices, health care services, physical environment and dietetic services. The ICF-MR program is used by states to support I/DD housing programs in both smaller (up to 16 residents) and larger (16 residents or more) institutional settings. Individuals who live in ICFs-MR receive active treatment. According to the Research and Training Center on Community Living Institute on Community Integration/UCEDD at the University of Minnesota, in 2009, the ICF-MR program provided approximately $12.6 billion in total state and federal funding to 90,000 individuals living in public and private ICF-MR settings.

We believe that the following factors will continue to benefit the I/DD sector within the human services industry, and in particular, providers of home and community-based programs:

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Increasing Life Expectancy of the I/DD Population — The life expectancy of individuals with I/DD increased from 59 years in the 1970s to 66 years in the 1990s and we expect this trend to continue with continued improvement in medical care.

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Aging Caregivers — Approximately 2.9 million individuals with I/DD are cared for by a family member, and 25% of their caregivers are age 60 or older. As the caregivers grow older and are not able to provide continuous care, we expect the demand for I/DD services, and home and community-based services in particular, to expand.

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Active Advocacy — Individuals with I/DD are supported by active and well-organized advocacy groups. Using legislation prompted by the Olmstead decision, as well as lawsuits filed on behalf of those on waiting lists for home and community-based services, policy makers, civil rights lawyers, social workers and advocacy groups are forcing states to offer individuals with I/DD and other disabilities the option to live and receive services in home and community-based settings. The U.S. Justice Department has significantly intensified Olmstead enforcement actions over the past several years, most notably in a 2010 settlement with the state of Georgia under which the state must fund residential waiver services within the next five years for 1,150 people with I/DD who are currently living in state institutions or are waiting for such services. According to the Research and Training Center on Community Living Institute on Community Integration/UCEDD at the University of Minnesota, in 2009, an estimated 123,000 individuals were on state waiting lists nationally to receive residential services funded through the HCBS Waiver program.

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Continued Closure/Downsizing of State Institutions and Other Large, Congregate Care Facilities — Although most of the shift from institutions to home and community-based settings has already occurred, the closure of additional state institutions is ongoing. From 1999 to 2009, the number of individuals receiving residential services in settings for six and fewer residents grew by 76%, and in 2009, approximately 75% of individuals with I/DD, who were receiving services under the HCBS Waiver program, resided in settings for six or fewer residents. In 1967, there were approximately 195,000 individuals with I/DD living in large, state-run institutions and this number has declined each year since then through 2009. In 2009, approximately 34,000 individuals 16 years of age or older with I/DD were still living in large public institutions. State governments are still actively working to close many of the remaining state institutions, with several institutions identified for downsizing or closure in the coming years. We currently provide I/DD services to individuals with I/DD in six of the ten states with the highest institutional populations, including the states of California, Illinois and New Jersey, which are currently downsizing their facilities. Also, as of 2009, more than 26,000 individuals with I/DD resided in large private facilities and an additional 32,000 individuals with I/DD were cared for in nursing homes. These settings are often not as well equipped to care for individuals with I/DD and therefore represent an additional source of demand for services provided in home and community-based settings.

At-Risk Youth and Their Families

According to the U.S. Department of Health and Human Services, in federal fiscal year 2009, approximately 3.3 million referrals were made to child protection authorities involving the alleged maltreatment of approximately 6.0 million children. Approximately 763,000 of these children were determined to be maltreated, with only approximately 60% of these children receiving post-investigative services and support from child welfare systems. As a result of abuse or neglect, approximately 255,000 children were removed from their families and placed in foster care during federal fiscal year 2009. Approximately 424,000 children were in foster care in September 2009, the end of the federal fiscal year, with 48%, or approximately 205,500 children, placed in non-relative foster family homes and 16% referred to institutions or group homes. The remainder received in-home support services as the delivery of services to the ARY population has increasingly emphasized periodic support services intended to strengthen families and keep children from entering foster care.

State and federal child welfare reform initiatives are also promoting home and community-based alternatives for the ARY population. More states are shifting funds from promoting large, public and private group settings to encouraging more cost-effective, evidence-based care, such as periodic services, smaller community group homes and family reunification and preservation programs. For example, according to the Maryland Department of Human Resources, from 2007 to 2009 Maryland reduced the number of children in group homes by 43% by transitioning them to therapeutic foster care or traditional foster care, or, in many instances, to their original homes, or the homes of relatives, with the support of in-home periodic services. Similarly, in 2009 North Carolina began a two-year plan to transition half of the children residing in large group homes to therapeutic foster care, smaller group homes and other more appropriate settings.

ARY services are funded from a variety of sources, including Title IV-E of the Social Security Act (“Title IV-E”), The Adoption Assistance and Child Welfare Act of 1980, Medicaid and other state and local government appropriations. Title IV-E provides for an uncapped federal entitlement program that supports states’ expenditures on foster care and adoption support. For states that meet certain requirements, including Florida, Indiana and Ohio, the federal government permits the allocation of Title IV-E funds for family preservation and other prevention services. As of 2006, the most recent year for which data is available, according to a 2010 report by the Children’s Defense Fund, government spending on child welfare programs totaled $25.7 billion, including $6.0 billion in federal payments to states for foster care and adoption assistance programs and nearly $2.2 billion for prevention/early intervention and in-home support services for at-risk children and children with disabilities and their families.

Post-Acute Specialty Rehabilitation Services

The SRS market includes community-based health and human services to individuals who have suffered ABI, spinal injuries and other catastrophic injuries and illnesses. The largest portion of our services is provided to individuals recovering from ABI.

The treatment of ABI is an important public health challenge in the United States. In the coming years experts predict a significant unmet need for programmatic and residential options for those who suffer from ABI. According to the Brain Injury Association of America, 5.3 million people in the U.S. are estimated to be living with a permanent disability as a result of an ABI. In addition, an estimated 1.7 million new ABI cases in U.S. civilians occur each year, with approximately 85,000 resulting in permanent disability. Traumatic brain injury is considered the “signature wound” of soldiers fighting in Iraq and Afghanistan. The Government Accountability Office estimates that 20% of these veterans experience a traumatic brain injury. According to the Centers for Disease Control and Prevention, the market for acute care/rehabilitation for individuals with acquired brain injuries is estimated to be between $9.0 and $10.0 billion.

SRS services are an attractive alternative to higher-cost institutional care, and we believe that both public and non-public payors are emphasizing lower-cost community-based residential, outpatient and day treatment for effective and cost-efficient care for individuals recovering from ABI, spinal injuries and other catastrophic injuries and illnesses. SRS services are also sought out as a clinically appropriate and less expensive “step-down” for individuals who no longer require care in acute care settings.

Both the public and non-public sectors currently finance post-acute specialty rehabilitation services. Public funding for post-acute services for individuals with ABI are provided in some states under ABI waiver programs that provide access to Medicaid funds for ABI care, and other states utilize I/DD or global waivers to serve the same population. According to a research paper by Thomson Reuters, in 2009, 21 states utilized ABI waivers with state and federal expenditures of $475.0 million. From 2004 to 2009, the annual compound growth rate for these waiver expenditures was 20.3%. In addition, significant advocacy efforts are advancing at the federal and state levels to require insurers to pay for rehabilitative treatment for those who suffer a brain injury. Public funding for services for individuals with spinal injuries and other catastrophic injuries and illnesses is provided through specific Medicaid waivers for brain and spinal cord injuries, as well as other generic Medicaid waivers and state-specific programs. Non-public payors for SRS services include private insurance companies, workers’ compensation funds, managed care companies and private individuals.

Our Business Strategy

We believe home and community-based health and human services that increase client independence and participation in community life while reducing payor costs will continue to grow in market share. We intend to continue to capitalize on this trend, both in existing markets and in new markets where we believe significant opportunities exist. The primary aspects of our strategy include the following:

Maintain and Improve Quality of Care and Continue to Strengthen our Third-Party Payor Relationships. We focus on providing our clients and their families with an environment that minimizes the stress and uncertainty associated with their condition while fostering community integration and high quality living. We aim to enhance our clients’ overall quality of life by providing a broad range of services, carefully trained, qualified and committed employees and Mentors, and access to best practices from across our organization. We believe our focus on and reputation for client service at both a local and national level has strengthened our relationship with state and local government agencies that refer and pay for our services. As a result, our relationships with these agencies have enabled us to gain contract referrals and renewals and to cross-sell new services into existing markets. We further strengthen these relationships by providing quality assurance, reporting, billing, compliance and risk management programs designed to serve the needs of third-party payors. We seek to position ourselves as the provider of choice to state and local governments and other third-party payors by finding solutions to their most challenging human service delivery problems.

Grow our Census and Expand our Services in New and Existing Markets. We believe that our future growth will depend on our ability to expand existing service contracts and to win new contracts. Our organic expansion activities consist of new starts in both new and existing markets. Our 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 fiscal 2011, operating losses on new starts for programs started within the previous 18 months were $1.8 million.

We also “cross-sell” new services in existing markets. Depending on the nature of the program and the state or local government involved, we will seek new programs through either unsolicited proposals to government agencies or by responding to a request, generally known as a request for proposal, from a public sector agency. We believe that our broad range of services, relationships with third-party payors, reputation for quality care and national infrastructure give us the ability to increase the number of clients we serve in a cost-effective manner. We have successfully entered new service lines, including ABI, and new program areas, including family-based treatment services and other periodic services. As we continue to strengthen existing services, we will use our clinical skills, personnel and experience to provide new, related services.

Continue to Leverage Overhead and Reduce Costs. In recent years, we have launched a number of initiatives to leverage our overhead and reduce costs, including purchasing initiatives to obtain more favorable pricing for medical and office supplies, vehicles and technology, and establishing a shared services center (the “SSC”) that now processes all of our cash disbursements. To further leverage the efficiency of the SSC, we are continuing to centralize other accounting and human resources administrative functions. In addition, we believe we can further exploit our scale and reduce the cost of our organizational structure, particularly in our field administrative functions, based on our work with external consultants during fiscal 2011 to optimize our structure and realize some of these reductions in costs.

Continue to Expand in SRS Market and Further Diversify Payor Base. We believe the SRS market represents an attractive opportunity for us because (i) the demand for these services is growing, (ii) our SRS services typically generate a higher margin than our services in the Human Services segment and (iii) the SRS market represents an opportunity for us to diversify our payor base because approximately 51% of our SRS revenue in fiscal 2011 was derived from non-public payors. In addition, the SRS market is highly fragmented and consists of many small providers, which we believe represents an opportunity for us to continue to grow through acquisitions. In recent years, our growth strategy has emphasized expanding our SRS segment through both organic growth and acquisitions, and we have achieved significant growth in both revenue and profitability and become a leading provider of these services. From fiscal 2008 to fiscal 2011, we increased our SRS revenue by a CAGR of 26.9%.

Strategically Pursue Acquisitions. We have strategically supplemented our organic growth through acquisitions, which have allowed us to penetrate new geographies, leverage our systems, operating costs and best practices, and pursue cross-selling opportunities. The majority of our acquisitions are small and of a “tuck-in” nature although we have completed larger acquisitions, particularly in the SRS segment, from time to time. We monitor the market nationally for human services businesses that we can purchase at an attractive price and efficiently integrate with our existing operations. We have invested in our infrastructure and formalized processes to enable us to pursue and integrate acquisition opportunities. We believe we are often seen as a preferred acquiror in these situations due to our service offerings, experience, payor relationships, infrastructure, reputation for quality and overall resources. We intend to continue to pursue acquisitions that are philosophically compatible and can be readily integrated into our existing operations. During fiscal 2011, we acquired seven companies complementary to our business for total fair value consideration of $12.6 million. For additional information on the acquisitions made during fiscal 2011, see “— Fiscal 2011 Acquisitions” and note 5 to our consolidated financial statements.

Selectively Divest Underperforming or Non-Strategic Businesses. 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.

Customers and Contracts

Our customers, which pay us to provide services to our clients, are governmental agencies, not-for-profit organizations and non-public payors. Our I/DD and ARY services, as well as a significant portion of our SRS services, are delivered pursuant to contracts with various governmental agencies, such as departments of developmental disabilities, juvenile justice and child welfare. Such contracts may be issued at the county or state level, depending upon the structure of the service system of the state in question. In addition, a majority of our SRS revenue is derived from contracts with commercial insurers, workers’ compensation carriers and other non-public payors. Contracts may cover a range of individuals such as all children referred for host home services in a county or a particular set of individuals who will share group living arrangements. Contracts are sometimes issued for specific individuals, where rates are individually determined based on need. Although our contracts generally have a stated term of one year and generally may be terminated without cause on 60 days’ notice, the contracts are typically renewed annually if we have complied with licensing, certification, program standards and other regulatory requirements. As a provider of record, we contractually obligate ourselves to adhere to the applicable federal and state regulations regarding the provision of services, the maintenance of records and submission of claims for reimbursement under Medicaid.

During fiscal 2011 and 2010, revenue from our contracts with state and local governmental payors in the states of Minnesota, California, Florida, West Virginia and Indiana, our five largest revenue-generating states, comprised 46% of our net revenue. Revenue from our contracts with state and local governmental payors in the state of Minnesota, our largest state, accounted for 15% and 16% of our net revenue for fiscal 2011 and 2010, respectively.

Training and Supporting our Direct Service Professionals

We provide pre-service and in-service education to all of our direct service professionals, including employees and independent contractors, clinical and administrative staff, and we encourage staff and contractors to avail themselves of outside training opportunities whenever possible. Employees and independent contractors participate in orientation programs designed to increase understanding of our mission, philosophy of care, and our Code of Conduct and compliance program. In addition, education and skill development in competencies required for specific duties are provided in accordance with licensing and regulatory requirements and our internal operating standards. These include, but are not limited to, human rights, individual service plan development, universal precautions, first aid, mandated reporting of abuse and neglect, confidentiality, emergency procedures, medication management, risk management and incident reporting procedures. We maintain an extensive resource library of training materials and an intranet site that facilitates the identification and exchange of expertise across all of our operations. Pre-service and in-service education sessions are required as a condition of continued employment or a continued contractual relationship with us. This training helps our staff to understand their responsibilities to the program and its participants, and results in both personal and professional development of staff and contractors. We work to increase individual job satisfaction and retention of motivated and qualified employees and contractors.

In addition to pre-service and in-service orientation, the Mentors in our ARY business receive training which is specific to the individual or child placed in their home. A home study is conducted and interviews and criminal background checks are performed on all adult members of the Mentor household. Mentors are regularly monitored by our case manager or coordinator according to a prescribed schedule. Mentors have access to emergency telephone triage and on-site crisis intervention, when necessary. Many Mentors attend support groups offered at the program office.

Sales/Business Development and Marketing

We receive substantially all of our I/DD and ARY clients through third-party referrals, most frequently through recommendations to family members from state or local agencies. Since our operations depend heavily on these referrals, we seek to ensure that we provide high-quality services in all states in which we operate, allowing us to enhance our name recognition and maintain a positive reputation with the state and local agencies.

Relationships with referral sources are cultivated and maintained at the local level by key operations managers. Local programs may, however, avail themselves of corporate resources to help grow and diversify their businesses. Staff across the country has business development and marketing services available to promote both new and existing product lines.

Our marketing group works with operations to drive the growth of programs and services across the country and to divest underperforming or non-strategic businesses. The marketing group has implemented a “request for proposal” response program designed to expand core growth and promote new program starts and cross sell opportunities. It also conducts research on entry into new markets and the competitive landscape. Our marketing group is led by an executive officer. In addition, we have three dedicated mergers and acquisition professionals who identify, prioritize and implement the best acquisition growth opportunities. All of these activities are separated into three pipelines: new program starts (programs in new markets or new programs in existing markets in each case requiring an investment to fund operating losses); proposals (responses to requests-for-proposal); and acquisitions.

Our SRS sales activities are independently organized. We have dedicated geographically assigned sales staff cultivating relationships with public and private payors and conducting our marketing and sales activities.

Competition

I/DD

The I/DD market is highly fragmented, with both not-for-profit and for-profit providers ranging in size from small, local agencies to large, national organizations. While state and local governments continue to supply a small percentage of services, the majority of services are provided by the private sector. Not-for-profit organizations are also active in all states and range from small agencies serving a limited area with specific programs to multi-state organizations. Many of the not-for-profit companies are affiliated with advocacy and sponsoring groups such as community mental health and mental retardation centers as well as religious organizations.

ARY

Competition in the at-risk youth and troubled youth market is extremely fragmented, with several thousand providers in the United States. Competitors include both for-profit and not-for-profit local providers serving one particular geographic area to multi-state ARY providers, and to very limited extent, state and country providers.

SRS

We compete with local providers, both large and small, including hospitals, post-acute rehabilitation facilities, residential community-based facilities, day treatment centers and outpatient centers specializing in long-term catastrophic care and short-term rehabilitation. This market also includes several large national chains that provide inpatient and outpatient rehabilitation services.

Regulatory Framework

We must comply with comprehensive government regulation of our business, including federal, state and local statutes, regulations and policies governing the licensing of facilities, the quality of service, the revenues received for services, and reimbursement for the cost of services. State and federal regulatory agencies have broad discretionary powers over the administration and enforcement of laws and regulations that govern our operations.

The following regulatory considerations are paramount to our operations:

Funding. Federal and state funding for our services is subject to statutory and regulatory changes, contracting and managed care initiatives, level of care assessments, court orders, rate setting and state budgetary considerations, all of which may materially increase or decrease reimbursement for our services. We actively participate in local and national legislative initiatives that seek to impact funding and regulation of our services. We derive revenues for our I/DD and ARY services, and a significant portion of our SRS services from Medicaid programs.

Licensure and qualification to deliver service. We are required to comply with extensive licensing and regulatory requirements applicable to the services we deliver. These include requirements for participation in the Medicaid program, state and local contractual obligations, and requirements relating to individual rights, the credentialing of all of our employees and contract Mentors (including background and Office of Inspector General checks), the quality of care delivered, the physical plant and facilitation of community participation. Compliance with state licensing requirements is a prerequisite for participation in government-sponsored health care assistance programs, such as Medicaid. To qualify for reimbursement under Medicaid, facilities and programs are subject to various requirements imposed by federal and state authorities. We maintain a licensing database that tracks activity on licenses governing the provision of services.

In addition to Medicaid participation requirements, our facilities and services are subject to annual or semi-annual licensing and other regulatory requirements of state and local authorities. These requirements relate to the condition of the facilities, the quality and adequacy of personnel and the quality of services provided. State licensing and other regulatory requirements vary by jurisdiction and are subject to change and local interpretation.

From time to time we receive notices from regulatory inspectors that, in their opinion, there are deficiencies resulting from a failure to comply with various regulatory requirements. We review such notices and take corrective action as appropriate. In most cases we and the reviewing agency agree upon the steps to be taken to address the deficiency and, from time to time, we or one or more of our subsidiaries may enter into agreements with regulatory agencies requiring us to take certain corrective action in order to maintain our licenses. Serious deficiencies, or failure to comply with any regulatory agreements, may result in the assessment of fines or penalties and/or decertification or de-licensure actions by the Centers for Medicare and Medicaid Services (“CMS”) or state regulatory agencies.

We deliver services and support under a number of different funding and program provisions. Our most significant source of funding for our I/DD services are HCBS Waiver programs, Medicaid programs for which eligibility is based on a set of criteria (typically disability or age) established by the state and approved by the federal government. There is no uniformity among states and/or regulations governing our delivery of waivered services to individuals. Each state where we deliver services operates under a plan submitted by the state to CMS to use Medicaid funds in non-institutional settings. Typically the state writes its own regulations governing providers and services provided under the state waiver program. Consequently, there is no uniform method of describing or predicting the outcomes of regulations across states where we deliver HCBS Waiver services. In addition, our ICFs-MR are governed by federal regulations, and may also be subject to individual state rules that vary widely in application and content. Federal regulations require that in order to maintain Medicaid certification as an ICF-MR, the facility is subject to annual on site survey (a federal rule and process implemented by state agencies). Failure to successfully pass this inspection and remedy all defects or conditions cited may result in a finding of immediate jeopardy or other serious sanction and, ultimately, may cause a loss of both certification and funding for that particular facility.

Similarly, child foster care and other children’s services are largely governed by individual state regulations which vary both in terms and regulatory content. Failure to comply with any state’s regulations requires remedial action on our part and a failure to adequately remedy the problem may result in provider or contract termination.

All states in which we operate have adopted laws or regulations which generally require that a state agency approve us as a provider, and many require a determination that a need exists prior to the addition of covered individuals or services. Provider licenses are not transferable. Consequently, should we intend to acquire, develop, expand or divest services in any state or to enter a new state, we may be required to undergo a rigorous licensing, transfer and approval process prior to conducting business or completing any transaction.

Similarly, some states have a formal Certificate of Need (“CON”) process, whereby the state health care authority must first determine that a service proposed is needed under the state health plan, prior to any service being licensed or applied for. The CON process varies by state and may be formal in design, encompassing any transfer, organizational change, capital improvements, divestitures or acquisitions. Formal processes may include public notice, opportunity for affected parties to request a hearing prior to the health care authority approving the project, as well as an opportunity for the state authority to deny the project. Other states have a less formal process for CON application and approval and may be limited to new or institutional projects. Very few states require CON approval for waivered services. Failure to comply with a state CON process may result in a prohibition on Medicaid billing and may subject the provider to fines, penalties, other civil sanctions or criminal penalties for the operators or owners of an unapproved health service.

Other regulatory matters. The Health Insurance Portability and Accountability Act of 1996, or “HIPAA,” set national standards for the protection of health information created, maintained or transmitted by health providers. Under the law and regulations known collectively as the privacy and security rules, covered entities must implement standards to protect and guard against the misuse of individually identifiable health information.

Federal regulations issued pursuant to HIPAA contain, among other measures, provisions that require organizations to implement significant and expensive computer systems, employee training programs and business procedures. Rules have been established to protect the integrity, security and distribution of electronic health and related financial information. Many states have also implemented extensive data privacy and security laws and regulations. Failure to timely implement or comply with HIPAA or other data privacy and security regulations may, under certain circumstances, trigger the imposition of civil or criminal penalties.

The federal False Claims Act imposes civil liability on individuals and entities that submit or cause to be submitted false or fraudulent claims for payment to the government. Violations of the False Claims Act may include treble damages and penalties of up to $11,000 per false or fraudulent claim.

In addition to actions being brought by government officials under the False Claims Act, this statute and analogous state laws also allow a private individual with direct knowledge of fraud to bring a “whistleblower,” or qui tam suit on behalf of the government for violations. The whistleblower receives a statutory amount of up to 30% of the recovered amount from the government’s litigation proceeds if the litigation is successful or if the case is successfully settled. Recently, the number of whistleblower suits brought against healthcare providers has increased dramatically, and has included suits based (among other things) upon alleged violations of the Federal Anti-Kickback Law.

The Anti-Kickback Law prohibits 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 program.

Additionally we must comply with local zoning and licensing ordinances and requirements. The Federal Fair Housing Amendments Act of 1988 protects the interests of the individuals we serve, prohibits local discriminatory ordinance practices and provides additional opportunities and accommodations for people with disabilities to live in their community of choice.

Federal regulations promulgated by the Occupational Safety and Health Administration (“OSHA”) require us to have safety plans for blood borne pathogens and other work place risks. At any point in time OSHA investigators may receive a complaint which requires on-site inspection and/or audit, the outcome of which may adversely affect our operations.

Periodically, new statutes and regulations are written and adopted that directly affect our business. It is often difficult to predict the impact a new regulation will have on our operations until we have taken steps to implement its requirements. For example, the recently enacted Patient Protection and Affordable Care Act provided a mandate for more vigorous and widespread enforcement and directed state Medicaid agencies to establish Recovery Audit Contractor (“RAC”) programs. RACs are private entities which will perform audits on a contingency fee basis, giving them an incentive to identify discrepancies in payments, from which they may be permitted to extrapolate disproportionately large penalties and fines. States must be in compliance by January 1, 2012 unless they are granted an extension. This remains a fairly new federal initiative and the ultimate impact remains unclear. Only the passage of time and our experience with enforcement and compliance will permit our assessment of the exact impact the new statute and regulations have on our business.

Conviction of abusive or fraudulent behavior with respect to one facility or program may subject other facilities and programs under common control or ownership to disqualification from participation in the Medicaid program. Executive Order 12549 prohibits any corporation or facility from participating in federal contracts if it or its principals (included but not limited to officers, directors, owners and key employees) have been debarred, suspended or declared ineligible or have been voluntarily excluded from participating in federal contracts. In addition, some state regulators provide that all facilities licensed with a state under common ownership or control are subject to delicensure if any one or more of such facilities are delicensed.

We must also comply with the standards set forth by the Office of Inspector General (“OIG”) governing internal compliance and external reporting requirements. We regularly review and monitor OIG advisory opinions, although they are limited in their application to Medicaid programs. Significant legislative, media and public attention has recently focused on health care. Because the law in this area is complex and continuously evolving, ongoing or future governmental investigations or litigation may result in interpretations that are inconsistent with our current practices. It is possible that outside entities could initiate investigations or future litigation impacting our services and that such matters could result in penalties and adverse publicity. It is also possible that our executive and other management personnel could be included in these investigations and litigation or be named defendants.

Finally, we are also subject to a large number of employment related laws and regulations, including laws relating to discrimination, wrongful discharge, retaliation, and federal and state wage and hours laws.

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. Failure to comply with laws and regulations could have a material adverse effect on our business.

A dedicated Compliance Officer (vice president level position) oversees our compliance program and reports to our Chief Legal Officer, a management compliance committee and a board compliance committee. The program activities are reported regularly to the management compliance committee which includes the CEO, COO, CFO as well as medical, operations, HR, legal and quality expertise. In addition, the program activities are periodically reported at the board level.

Certain Transactions

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 NMH Holdings, LLC (“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 senior floating rate toggle notes issued by NMH Holdings (the “NMH Holdings notes”) at a premium, not including $13.3 million principal amount of NMH Holdings notes we held as an investment and that were also repurchased; and (v) pay related fees and expenses.

Our Sponsor

Vestar, certain affiliates of Vestar, members of management and certain directors own NMH Investment, LLC (“NMH Investment”), which indirectly owns the Company. Vestar is a leading private equity firm specializing in management buyouts and growth capital investments. Vestar’s investment in National Mentor Holdings, Inc. was funded by Vestar Capital Partners V, L.P., a $3.7 billion fund which closed in 2006, and an affiliate.

Since the firm’s founding in 1988, Vestar has completed 69 investments in North America and Europe in companies with a total value of approximately $40 billion. These companies have varied in size and geography and span a broad range of industries including healthcare, an area in which Vestar’s principals have had meaningful experience. Vestar currently manages funds totaling approximately $7 billion and has offices in New York, Denver and Boston. See “Certain Relationships and Related Party Transactions, and Director Independence,” “Security Ownership of Principal Shareholders and Management” and the documents incorporated by reference herein for more information with respect to our relationship with Vestar.

Item 1A.		Risk Factors

Reductions or changes in Medicaid funding or changes in budgetary priorities by the federal, 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 75% 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.

Efforts at the federal level to reduce the federal budget deficit pose risk for reductions in federal Medicaid matching funds to state governments. The Joint Select Committee on Deficit Reduction’s failure to meet the deadline imposed by the Budget Control Act of 2011 triggers automatic across-the-board cuts to discretionary funding, as well as a 2% reduction to Medicare, but specifically exempts Medicaid payments to states. While this development does not reduce federal Medicaid funding, reductions in other federal payments to states could put additional stress on state budgets, with the potential to negatively impact the ability of states to provide the state Medicaid matching funds necessary to maintain or increase the federal financial contribution to the program. Future efforts by Congress to adopt proposals to reduce the federal budget deficit could have a negative impact on state Medicaid budgets, including proposals to provide states with more flexibility to determine Medicaid benefits, eligibility or provider payments through the use of block grants or streamlined waiver approvals, as well as those that would reduce the amount of federal Medicaid matching funding available to states by curtailing the use of provider taxes or by adjusting the Federal Medical Assistance Percentage (FMAP). Additionally, any new Medicaid-funded benefits and requirements established by the Congress, particularly those included in The Patient Protection and Affordable Care Act of 2010, that mandate certain uses for Medicaid funds could have the effect of diverting those funds from the services we provide.

Budgetary pressures facing state governments, as well as other economic, industry, and political factors, could cause 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. In addition, there is risk that previously appropriated funds could be reduced through subsequent legislation. Many states in which we operate have recently experienced unprecedented budgetary deficits and have implemented or are considering initiating service reductions, rate freezes and/or rate reductions, including states such as Minnesota, California, Florida, 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. Eleven 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 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. The termination of the enhanced federal Medicaid funding after June 30, 2011 contributed to significant budgetary challenges that confronted state governments for fiscal 2012, which began July 1, 2011 in most states. The result is that some of our public payors have implemented, or are likely to implement in the coming months, additional rate reductions, particularly for our I/DD services. 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 September 30, 2011, we had total indebtedness of $784.1 million. During fiscal 2011, we borrowed $30.6 million under our senior revolver, which we repaid during the year, and we expect to continue to draw on the revolver during fiscal 2012. As we make new investments in organic growth and meet increased cash principal and interest payments compared with fiscal 2011, we will have less free cash flow in the business. 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 September 30, 2011, as calculated in accordance with the credit agreement is $73.0 million as compared to $43.2 million at September 30, 2010. As of September 30, 2011, our consolidated leverage ratio was 6.22 to 1.00, as calculated in accordance with the senior credit agreement.

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

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it may significantly curtail our acquisitions program and may limit our ability to invest in our infrastructure and in growth opportunities;

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it may diminish our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements and general corporate or other purposes;

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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;

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the debt service requirements of our indebtedness could make it more difficult for us to satisfy our indebtedness and contractual and commercial commitments;

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interest rates on the portion of our variable interest rate borrowings under the senior secured credit facilities that have not been hedged may increase;

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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;

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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

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it may prevent us from raising the funds necessary to repurchase senior 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 fiscal year ended September 30, 2011, our aggregate rental payments for these leases, including taxes and operating expenses, were $48.0 million. These obligations could further increase the risks described above.

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:

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incur additional debt or issue certain preferred shares;

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pay dividends on or make distributions in respect of capital stock or make other restricted payments;

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make certain investments;

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sell certain assets;

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create liens on certain assets to secure debt;

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enter into agreements that restrict dividends from subsidiaries;

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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

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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 subjects 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 or ask for recoupment of amounts paid. 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 and increase future insurance costs. As of October 1, 2010, we were 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. As of October 1, 2011, we are self-insured for the first $4.0 million of each and every claim with no aggregate limit. The Company may be subject to increased self-insurance retention limits in the future which could have a negative impact on our results. 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 and 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. 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.

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 materially 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, private whistleblowers, or Medicaid auditors 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 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 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:

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require us to refund amounts we have previously been paid;

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terminate or modify our existing contracts;

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suspend or prevent us from receiving new contracts or extending existing contracts;

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impose referral holds on us;

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impose fines, penalties or other sanctions on us; and

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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.

We are making investments to expand existing services, win new business and grow revenue, and we may not realize the anticipated benefits of those investments.

In order to grow our business, we must capitalize on opportunities to expand existing services and win new business, some of which require an investment of capital. For example, states such as California and New Jersey are in the process of closing institutions and their former residents will need care in community-based settings such as ours, and many payors are now seeking in-home periodic services as an alternative to residential care, especially for at-risk youth who otherwise would be placed in foster care. In fiscal 2011, we began increasing the amount spent on growth initiatives, such as new starts, and we expect to significantly increase our growth investments during fiscal 2012. If we fail to identify the evolving needs of our payors and respond with service offerings that meet their fiscal and programmatic requirements, we may not realize the anticipated benefits of our investments and the results of our operations may suffer.

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, 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.

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.

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 or the need to increase wages to retain staff, 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 new mandates on employers beginning in January 2011 and will continue to impose new mandates through 2014. Given the composition of our workforce, these mandates could be material to our costs, if the law survives pending court challenges.

Although our employees are generally not unionized, we have one business in New Jersey with approximately 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.

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.

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.

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 five 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. MIC audits expanded during fiscal 2011 and we expect that will continue throughout fiscal 2012. In addition to MICs, several other payors, including the state Medicaid agencies, have increased their review activities, including through the use of Recovery Audit Contractor (“RAC”) programs. State Medicaid agencies are required to have RAC programs in place by January 1, 2012 unless granted an extension by CMS. RACs are private entities which will perform audits on a contingency fee basis, giving them an incentive to identify underpayments, from which they may be permitted to extrapolate disproportionately large penalties and fines.

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 audits of fiscal 2011 and 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.

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

Tax revenue continued to be constrained in many jurisdictions due to the impact of the recent 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. 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. In the aftermath of the downgrading of the Federal government’s credit rating by Standard & Poor’s, it is possible there will be downgrades of state credit ratings and if they occur, this could make it more expensive for states to finance their cash-flow needs and put additional pressure on state budgets. Delays in payment could have a material adverse effect on our cash flows, liquidity and financial condition. 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.

Because a 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 September 30, 2011, we had $527.4 million of floating rate debt outstanding before giving effect to the interest rate swap agreement. As a result of the interest rate swap agreement, the floating rate debt has been effectively reduced to $127.4 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.

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 fiscal year ended September 30, 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% applicable for Medicaid Waiver services took effect in Minnesota on July 1, 2009 and, more recently, the state implemented a 1.5% rate cut for both Medicaid Waiver and ICF Services effective September 1, 2011. 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 2003, 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 and accounting functions being performed at the local level. This requires us to expend significant resources maintaining 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 support further 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 restructuring some of our field administrative functions. To the extent these optimization efforts and 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.

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. Furthermore, a loss of health care information could result in potential penalties in certain of our businesses if we fail to comply with privacy and security standards in violation of HIPAA.

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:

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accounting and financial reporting;

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billing and collecting accounts;

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coding and compliance;

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clinical systems, including census and incident reporting;

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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 62.2% and 65.7% of the total assets on our consolidated balance sheets as of September 30, 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. During fiscal 2011, we wrote-off $14.5 million, $5.8 million of which is recorded separately as discontinued operations in the consolidated statements of operations, for the write-off of goodwill, non-compete agreements, agency contracts, licenses and permits for underperforming programs as well as an impairment charge related to indefinite-lived intangible assets. We may record similar charges in the future and such charges 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 organic growth opportunities, 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 1B.		Unresolved Staff Comments

Not applicable.

Item 2.		Properties

Our principal executive office is located at 313 Congress Street, Boston, Massachusetts 02210. We operate a number of facilities and administrative offices throughout the United States. As of September 30, 2011, we provided services in 397 owned facilities and 966 leased facilities, as well as in homes owned by our Mentors. We also own one office and lease 279 offices. We believe that our properties are adequate for our business as presently conducted and we believe we can meet requirements for additional space by extending leases that expire or by finding alternative space.

Item 3.		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 1A. Risk Factors” and “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information

Item 4.		(Removed and Reserved)

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

We are an indirect wholly owned subsidiary of NMH Investment. Accordingly, there is no public trading market for our common stock.

Stockholders

There was one owner of record of our common stock as of December 1, 2011.

Dividends

During fiscal 2011, we 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.

Any determination to pay dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors deems relevant. In addition, our current financing arrangements limit the cash dividends we may pay in the foreseeable future. We are restricted from paying dividends to Parent in excess of $15 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 exceptions.

Equity Compensation Plan Information

The following table lists the number of securities of NMH Investment available for issuance as of September 30, 2011 under the NMH Investment, LLC Amended and Restated 2006 Unit Plan, as amended. For a description of the plan, please see note 19 to the consolidated financial statements included elsewhere in this report.

										Number of Securities Remaining
										Available for Future Issuance
		Number of Securities to be				Weighted-Average				under Equity Compensation
		Issued Upon Exercise of				Exercise Price of				Plans (excluding Securities
		Outstanding Options				Outstanding Options				Reflected in Column(a))
Plan Category		(a)				(b)				(c)
Equity compensation plans			N/A				N/A			Preferred Units: 20,539.50
approved by security holders										A Units: 212,995.03
										B Units: 35,850.08
										C Units: 37,616.28
										D Units: 106,302.47
										E Units: -
										F Units: -1,122,927.40
Equity compensation plans not approved by security holders			N/A				N/A			N/A
TOTAL			—				—			Preferred Units: 20,539.50
										A Units: 212,995.03
										B Units: 35,850.08
										C Units: 37,616.28
										D Units: 106,302.47
										E Units: -
										F Units: -1,122,927.40

Unregistered Sales of Equity Securities

No equity securities of the Company were sold during fiscal 2011; however, the Company’s indirect parent, NMH Investment, did issue equity securities during this period.

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

Dates		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
June 15, 2011		Class F Common Units			4,273,460.60			Certain employees		$	—

Repurchases of Equity Securities

No equity securities of the Company or NMH Investment were repurchased during the fourth quarter of fiscal 2011.

Item 6.		Selected Financial Data

We derived the selected historical consolidated financial data as of and for the years ended September 30, 2009, 2010, and 2011 from the historical consolidated financial statements of the Company and the related notes included elsewhere in this Annual Report on Form 10-K.

We have derived the selected historical consolidated financial data as of and for the years ended September 30, 2007 and 2008 from the historical consolidated financial statements of the Company and the related notes not included or incorporated by reference in this Annual Report on Form 10-K.

The selected information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and notes included elsewhere in this report.

		Year Ended September 30,
		2007				2008				2009				2010				2011
Statements of Operations Data:
Net revenue		$	867,889			$	918,270			$	957,525			$	1,011,469			$	1,070,610
Cost of revenue (exclusive of depreciation expense shown separately below)			657,144				698,624				731,372				776,656				829,032
General and administrative expenses			113,623				124,887				125,734				133,731				144,516
Depreciation and amortization			49,757				49,416				55,598				56,413				61,901
Income from operations			47,365				45,343				44,821				44,669				35,161
Management fee to related party			(892	)			(1,349	)			(1,146	)			(1,208	)			(1,271	)
Other expense, net			(424	)			(791	)			(503	)			(339	)			(159	)
Extinguishment of debt			—				—				—				—				(19,278	)
Gain from available for sale investment security			—				—				—				—				3,018
Interest income			1,060				684				193				42				22
Interest income from related party			—				—				1,202				1,921				684
Interest expense			(50,687	)			(48,947	)			(48,254	)			(46,693	)			(61,718	)
Loss from continuing operations before income taxes			(3,578	)			(5,060	)			(3,687	)			(1,608	)			(43,541	)
(Benefit) provision for income taxes			(708	)			186				(1,116	)			(205	)			(14,427	)
Loss from continuing operations			(2,870	)			(5,246	)			(2,571	)			(1,403	)			(29,114	)
Income (loss) from discontinued operations, net of tax			378				(1,989	)			(2,885	)			(5,464	)			(5,028	)
Net loss		$	(2,492	)		$	(7,235	)		$	(5,456	)		$	(6,867	)		$	(34,142	)
Balance Sheet Data (at end of period):
Cash and cash equivalents		$	29,373			$	38,908			$	23,650			$	26,448			$	263
Working capital(1)			57,297				55,878				47,836				34,904				12,028
Total assets			1,012,628				1,016,433				995,610				1,015,885				1,010,850
Total Debt(2)			516,295				513,920				509,976				506,182				784,124
Shareholder’s equity			246,031				237,128				223,728				225,133				(31,123	)

Item 7.		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 the historical consolidated financial statements and the related notes included elsewhere in this report. 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 22,000 clients in 33 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. And while our residential ARY services have been negatively impacted by a substantial decline in the number of children and adolescents in foster care placements during the last decade, this trend has led to significant increased demand for periodic, non-residential services to support at-risk youth and their families. 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. 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 from October 1, 2008 through September 30, 2011 have reduced annualized revenue by approximately $18 million or about 1.7% of fiscal 2011 revenue. In addition, the volume of referrals to our residential programs has also been constrained in many markets as payors have sought out in-home periodic services as an alternative to more expensive residential care. The termination of the enhanced federal Medicaid funding after June 30, 2011 contributed to significant budgetary challenges that confronted state governments for fiscal 2012, which began July 1, 2011 in most states. The result is that some of our public payors have implemented, or will implement in the coming months, additional rate reductions, particularly for our I/DD services, including our largest state payor, Minnesota, which announced rate reductions of approximately 1.5% for Medicaid Waiver and ICF Services effective September 1, 2011.

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 suffered rate reductions during and since the recent recession. 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

Various economic, fiscal, public policy and legal factors are contributing to an environment with an increased number of organic growth opportunities, particularly within the Human Services segment, and, as a result, we have a renewed emphasis on growing our business organically and making investments to support the effort. 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 fiscal year ended September 30, 2011, operating losses on new starts for programs started within the previous 18 months were $1.8 million.

Acquisitions

As of September 30, 2011, we have completed 27 acquisitions since 2006, 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 fiscal 2011, we acquired seven companies complementary to our business, five in the Human Services segment and two in the SRS segment, for total fair value consideration of $12.6 million.

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.

During fiscal 2011, we closed our business operations in the states of Nebraska, New Hampshire and New York and recognized a pre-tax loss of $8.2 million.

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 fiscal 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 accounting, consulting and legal 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 September 30, 2011, we owned 397 facilities and one office, and we leased 966 facilities and 279 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 1.0%, 0.5% and 0.5% of our net revenue for fiscal 2011, 2010 and 2009, respectively. We have incurred professional and general liability claims and insurance expense for professional and general liability of $10.2 million, $5.2 million and $5.1 million for fiscal 2011, 2010 and 2009, respectively. Claims paid by us and our insurers for professional and general liability have increased sharply in recent years. Commencing October 1, 2010, our self-insured retentions substantially exceed the amounts we previously had and we paid substantially higher premiums for our professional and general liability insurance. As of October 1, 2010, we were 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. As of October 1, 2011, we are self-insured for the first $4.0 million of each and every claim without an aggregate limit.

Our ability to maintain and grow our earnings in the future is dependent upon growing revenue, obtaining increases in rates and/or controlling our expenses. In fiscal 2011, 2010 and 2009, we invested in infrastructure initiatives and business process improvements, which had a net negative impact on our margin. Beginning in fiscal 2011, we also began increasing the amount spent in growth initiatives, such as new starts, and we expect to significantly increase our growth investments during fiscal 2012.

Results of Operations

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

						Post Acute Specialty
		Human				Rehabilitation
For the Year Ended September 30,		Services				Services				Corporate				Consolidated
		(In thousands)
2011
Net revenue		$	895,134			$	175,476			$	—			$	1,070,610
Income (loss) from operations			77,885				18,434				(61,158	)			35,161
Operating margin			8.7	%			10.5	%							3.3	%
2010
Net revenue		$	874,528			$	136,941			$	—			$	1,011,469
Income (loss) from operations			80,801				15,356				(51,488	)			44,669
Operating margin			9.2	%			11.2	%							4.4	%
2009
Net revenue		$	861,030			$	96,495			$	—			$	$957,525
Income (loss) from operations			74,828				12,805				(42,812	)			44,821
Operating margin			8.7	%			13.3	%							4.7	%

Fiscal Year Ended September 30, 2011 compared to Fiscal Year Ended September 30, 2010

Consolidated revenue for the fiscal year ended September 30, 2011 increased by $59.1 million, or 5.8%, compared to revenue for the fiscal year ended September 30, 2010. Revenue increased $43.0 million related to acquisitions that closed during and after fiscal 2010 and $16.1 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, Oregon and Wisconsin.

Consolidated income from operations decreased from $44.7 million or 4.4% of revenue, for the fiscal year ended September 30, 2010 to $35.2 million or 3.3% of revenue, for the fiscal year ended September 30, 2011.

Our operating margin was negatively impacted by non-cash charges of $8.7 million of expense recorded during fiscal 2011 related to the (i) impairment of our indefinite lived intangible assets and (ii) write-off of assets of under-performing programs, including goodwill and intangible assets.

We performed our annual impairment test of indefinite lived intangible assets during fiscal 2011 and concluded that our trade names were impaired by $5.3 million. The decline in the fair value of the trade names to below their book value was primarily the result of lower revenue growth relative to the assumptions made in the prior fiscal year. This impairment charge is included in General and administrative expense in the accompanying consolidated statements of operations.

In addition, we wrote-off of goodwill and intangible assets of underperforming programs which were closed as of September 30, 2011. The total charge was $3.4 million and included $2.7 million of intangible assets recorded in Depreciation and amortization expense and $0.7 million of goodwill recorded in General and administrative expense in the accompanying consolidated statements of operations.

Our operating margin was negatively impacted by an increase in expense relating to professional and general liability retentions and premiums and employment practices liabilities claims of $6.5 million. During the fiscal year ended September 30, 2011, we recorded higher reserves against higher self-insured retentions and paid higher premiums for professional and general liability insurance, which resulted in an additional $5.0 million of expense compared to the fiscal year ended September 30, 2010. In addition, we recorded an additional $1.5 million in reserves for employment practices liability claims. The expense relating to professional and general liability retentions and premiums and employment practices liability claims are included in Cost of revenue in the accompanying consolidated statements of operations.

During fiscal 2011, we recorded $6.2 million related to one-time bonuses. This amount includes the Company’s decision to pay a one-time cash bonus to direct care workers totaling $3.8 million. This bonus is recorded in Cost of revenue in the accompanying consolidated statement of operations. The balance of $2.4 million represents the payment of one-time discretionary bonuses in recognition of individuals’ contributions to enabling the successful closing of the refinancing transactions (the “discretionary recognition bonuses”). The discretionary recognition bonuses are included in General and administrative expense in the accompanying consolidated statement of operations.

Also during the fiscal year ended September 30, 2011, we recorded an additional $6.0 million in occupancy expense primarily related to (i) acquisitions in our Post-Acute Specialty Rehabilitation Services segment and (ii) $0.7 million of expense related to a lease termination fee associated with closing an underperforming program in the Human Services segment.

Our operating margin was negatively impacted by rate reductions in several states, including Indiana, Oregon and Wisconsin.

During the fiscal year ended September 30, 2011, we recorded an additional $3.0 million of stock-based compensation expense compared to the fiscal year ended September 30, 2010 as we issued new equity units of NMH Investment to members of management and accelerated the vesting of previously outstanding units. We also recorded an additional $2.7 million during the fiscal year ended September 30, 2011 related to restructuring of certain corporate and field functions.

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

During the fiscal year ended September 30, 2011, we recorded $19.3 million of debt extinguishment 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 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 fiscal year ended September 30, 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 to the carrying value. The gain was recorded on our consolidated statements of operations as Gain from available for sale investment security.

Interest expense increased by $15.0 million from the fiscal year ended September 30, 2010 primarily due to an increase in the average debt balance while our weighted average interest rate remained essentially constant at 8.2% during the fiscal years ended September 30, 2011 and 2010.

The Company sold its home health business, closed certain business operations in the state of Maryland and closed its business operations in the states of Colorado, Nebraska, New Hampshire and New York. The operations of these businesses are included in discontinued operations. Loss from discontinued operations for fiscal 2011 included expenses recorded to close our business operations in Nebraska, New Hampshire and New York.

Human Services

Human Services revenue for the fiscal year ended September 30, 2011 increased by $20.6 million, or 2.4%, compared to the fiscal year ended September 30, 2010. Revenue increased $10.9 million related to acquisitions that closed during and after fiscal 2010 and $9.7 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, Oregon and Wisconsin.

Income from operations decreased from $80.8 million during the fiscal year ended September 30, 2010 to $77.9 million during the fiscal year ended September 30, 2011 and operating margin decreased from 9.2% of revenue to 8.7% of revenue for the same periods.

Operating margin was negatively impacted by a $6.8 million increase in expense related to our higher self-insured retentions, premiums for professional and general liability insurance and increase in reserves for employment practices liability. During the fiscal year ended September 30, 2011, we recorded an additional $5.5 million related to higher self-insured retentions and paid higher premiums for professional and general liability expense and we recorded an additional $1.3 million related to employment practices liability as compared to the fiscal year ended September 30, 2010. The expense relating to professional and general liability retentions and premiums and employment practices liability claims are included in Cost of revenue in the accompanying consolidated statements of operations.

We also decided to pay a one-time cash bonus to direct care workers totaling $3.8 million which is recorded in Cost of revenue in the accompanying consolidated statement of operations. Operating margin was also negatively impacted by rate reductions in several states, including Indiana, Oregon and Wisconsin. In addition, we wrote-off goodwill and intangible assets of underperforming programs which were closed as of September 30, 2011. The total charge was $2.2 million and related primarily to the write-off intangible assets which was recorded in Depreciation and amortization expense.

Post-Acute Specialty Rehabilitation Services

Post-Acute Specialty Rehabilitation Services revenue for the fiscal year ended September 30, 2011 increased by $38.5 million, or 28.1%, compared to the fiscal year ended September 30, 2010. This increase was due to growth of $32.1 million related to acquisitions that closed during and after fiscal 2010 and $6.4 million related to organic growth, including growth related to new programs.

Income from operations increased from $15.4 million, for the fiscal year ended September 30, 2010 to $18.4 million for the fiscal year ended September 30, 2011 while operating margin decreased from 11.2% to 10.5% for the same period. Our margin was negatively impacted by a $4.9 million increase in occupancy expense as a result of acquisitions in this segment. In addition, we wrote-off goodwill and intangible assets of underperforming programs which were closed as of September 30, 2011. The total write-off was $1.2 million and included $0.7 million of intangible assets and $0.5 million of goodwill. During the fiscal year ended September 30, 2011, we recorded an additional $1.1 million related to higher self-insured retentions and paid higher premiums for professional and general liability expense and we recorded an additional $0.2 million related to employment practices liability as compared to the fiscal year ended September 30, 2010. This expense is included in Cost of revenue in the accompanying consolidated statements of operations.

Corporate

Total corporate expenses increased by $9.7 million from the fiscal year ended September 30, 2010 to $61.1 million for the fiscal year ended September 30, 2011. During the fiscal year ended September 30, 2011, we recorded an additional (i) $5.3 million expense related to the impairment of our indefinite lived intangible assets, (ii) $3.0 million of stock-based compensation expense (iii) $2.7 million related to the restructuring of certain corporate and field administrative functions and (iv) $2.4 million for the payment of discretionary recognition bonuses. Partially offsetting these increases, corporate expense decreased as fiscal 2010 included $1.6 million of expense related to a reserve for incurred but not yet reported professional and general liability claims. In addition, corporate expense decreased $1.9 million from fiscal 2010 due to the change in fair value of contingent consideration. Corporate expense for fiscal 2010 included an additional $0.9 million in consulting and legal costs related to a transaction which was not completed.

Fiscal Year Ended September 30, 2010 Compared to Fiscal Year Ended September 30, 2009

Consolidated

Consolidated revenue for fiscal 2010 increased by $53.9 million, or 5.6%, compared to revenue for fiscal 2009. Revenue increased $47.9 million related to acquisitions that closed during fiscal 2009 and fiscal 2010 and $13.1 million related to organic growth, including growth related to new programs. Organic growth increased despite the negative impact of rate reductions in several states, including Minnesota, Arizona and North Carolina, and the imposition of service limitations by the state of Indiana. Revenue growth was also partially offset by a reduction in revenue of $7.1 million from businesses we divested during fiscal 2009 and fiscal 2010.

Consolidated income from operations decreased from $44.8 million for fiscal 2009 to $44.7 million for fiscal 2010 and operating margin decreased from 4.7% of revenue to 4.4% of revenue for the same period. The operating margin was negatively impacted by rate reductions in several states, including Minnesota, our largest state, Arizona and North Carolina as well as the imposition of service limitations by the state of Indiana. Our operating margin also decreased due to a $3.3 million increased investment in growth initiatives. Income from operations was positively impacted by an increase in revenue noted above, as well as an expense reduction from our on-going cost containment efforts.

In fiscal 2010, as compared to fiscal 2009, we recorded an additional $1.6 million of expense related to a reserve for incurred but not yet reported professional and general liability claims. Income from operations for fiscal 2010 included an additional $1.4 million of expense related to a contingent earn-out adjustment from the Springbrook acquisition and $1.4 million in consulting and legal costs related to a transaction which was not completed. In addition, we incurred an additional $1.1 million related to expensed transaction costs from acquisitions.

Depreciation and amortization expense increased $0.8 million during fiscal 2010 due to the increase in depreciable and amortizable assets resulting from acquisitions in the period. This increase was partially offset by a decrease in depreciation expense. During fiscal 2009, as compared to fiscal 2010, we recorded an additional $3.4 million of depreciation expense related to disposals of furniture and fixtures and client home furnishings pertaining to periods prior to 2009 and for the reduction in the estimated useful life on furniture and fixtures and client home furnishings.

Interest expense for fiscal 2010 decreased $1.6 million to $46.7 million. The decrease is due to a decrease in the average debt balance as well as a decrease in the weighted average interest rate from 8.4% in fiscal 2009 to 8.2% in fiscal 2010, in part resulting from the expiration of our interest rate swaps.

The Company sold its home health business, closed certain business operations in the state of Maryland and closed its business operations in the states of Colorado, Nebraska, New Hampshire and New York. The operations of these businesses are included in discontinued operations. Loss from discontinued operations for fiscal 2010 included additional expenses recorded to close our business operations in Colorado and certain business operations in the state of Maryland.

Human Services

Human Services revenue for fiscal 2010 increased by $13.5 million, or 1.6%, compared to the fiscal 2009. Revenue increased $20.6 million related to acquisitions that closed during fiscal 2009 and fiscal 2010 but was partially offset by a reduction in revenue of $7.1 million from businesses we divested during the same period. Organic growth remained flat due to a reduction in revenue from programs we closed during the period, rate reductions in several states, including Minnesota, Arizona and North Carolina, and the imposition of service limitations by the state of Indiana.

Income from operations increased from $74.8 million, or 8.7% of revenue, during fiscal 2009 to $80.8 million, or 9.2% of revenue, during fiscal 2010. The increase was primarily due to our ongoing cost-containment efforts as well as a $2.4 million decrease in depreciation and amortization expense. Operating margin was negatively impacted by rate reductions in several states, including Minnesota, Arizona and North Carolina, and the imposition of service limitations by the state of Indiana.

Post-Acute Specialty Rehabilitation Services

Post-Acute Specialty Rehabilitation Services revenue for fiscal 2010 increased by $40.4 million, or 41.9%, compared to fiscal 2009. This increase was due to growth of $27.3 million related to acquisitions that closed during fiscal 2009 and fiscal 2010 and $13.1 million related to organic growth, including growth related to new programs.

Income from operations increased from $12.8 million for fiscal 2009 to $15.4 million for fiscal 2010, while operating margin decreased from 13.3% to 11.2% for the same period. Our margin decreased primarily due to a $3.3 million increased investment in growth initiatives, namely $2.7 million related to increased infrastructure and $0.6 million related to new or expanded facilities.

Corporate

Total corporate expenses increased by $8.7 million from fiscal 2009 to $51.5 million for fiscal 2010. In fiscal 2010, we recorded an additional $1.6 million of expense related to a reserve for incurred but not yet reported professional and general liability claims, as well as an additional $1.4 million in consulting and legal costs related to a transaction which was not completed. In addition, corporate expense increased $1.4 million related to the Springbrook contingent earn-out adjustment and $1.1 million related to expensed transaction costs from acquisitions. In consolidating our cash disbursement function from disparate field locations to a centralized shared services center, we transferred certain associated costs from the Human Services and Post-Acute Specialty Rehabilitation Services segments to corporate, and corporate expense increased $1.3 million. In addition, corporate expense was reduced during fiscal 2009 as a result of a $1.05 million reimbursement received from ESB Holdings, LLC. ESB Holdings used the proceeds of a contribution from NMH Investment to reimburse us for certain expenses we had incurred on its behalf in connection with exploring a strategic initiative.

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 were $30.2 million, $71.6 million and $58.4 million for the fiscal years ended September 30, 2011, 2010 and 2009, respectively. The decrease in cash flows provided by operating activities from fiscal 2010 to fiscal 2011 was due to a decrease in operating income primarily from an increase in interest expense as well as increase in expense from the refinancing transactions which included $10.8 million attributable to the tender premium and consent fees paid in connection with the repurchase of the senior subordinated notes. In addition, our working capital increased partially due to an increase in our days sales outstanding to 48 days at September 30, 2011 and a decrease in our liabilities due to the timing of vendor payments and tax payments.

The increase in cash flows provided by operating activities from fiscal 2009 to fiscal 2010 was primarily due to a decrease in working capital, primarily due to the timing of payments of liabilities. Partially offsetting the decrease in working capital was an increase in accounts receivable as our days sales outstanding increased from 46 days at September 30, 2009 to 47 days at September 2010.

Investing activities

Net cash used in investing activities was $82.5 million, $64.8 million and $61.8 million for the fiscal year ended September 30, 2011, 2010 and 2009, respectively.

Cash paid for acquisitions was $12.7 million, $49.3 million and $33.6 million for the fiscal year ended September 30, 2011, 2010 and 2009, respectively. We acquired seven companies in both fiscal 2011 and fiscal 2010 and four companies in fiscal 2009. In addition to the four companies acquired in fiscal 2009, we paid an earn-out payment of $12.0 million for CareMeridian, which we acquired in fiscal 2006.

Cash paid for property and equipment for the fiscal year ended September 30, 2011 was $20.9 million, or 2.0% of revenue, compared to $20.9 million, or 2.1% of revenue for the fiscal year ended September 30, 2010 and $27.4 million, or 2.9% of revenue for the fiscal year ended September 30, 2009. Fiscal 2010 cash paid for property and equipment included $1.2 million related to the purchase of real estate and $0.3 million related to the implementation of a new billing system compared to $4.4 million related to the purchase of real estate and $2.7 million related to the implementation of a new billing system in fiscal 2009. We did not purchase real estate or spend on the implementation of a new billing system in fiscal 2011.

In addition, during the fiscal year ended September 30, 2011, our restricted cash balance increased by $49.9 million primarily due to $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 (the “institutional letter of credit facility”). For fiscal year ended September 30, 2010 and 2009, restricted cash included cash related to certain insurance coverage provided by our captive insurance subsidiary. In connection with dissolution of the captive insurance subsidiary effective September 30, 2010, we released $5.5 million of restricted cash into operating cash.

Investing activities for fiscal 2009 also included the purchase of $11.5 million of senior floating rate toggle notes due 2014 (the “NMH Holdings notes”) issued by our indirect parent company, NMH Holdings Inc. (“NMH Holdings”) for $6.6 million.

Financing activities

Net cash provided by financing activities was $26.2 million for the fiscal year ended September 30, 2011 compared to $3.9 million and $11.9 million used in financing activities for the fiscal years ended September 30, 2010 and 2009, respectively.

Net cash provided by financing activities for the fiscal year ended September 30, 2011 include the following items related to the refinancing transactions:

		(In millions)
Repayment of long-term debt		$	(503.5	)
Proceeds from the issuance of long-term debt			760.8
Dividend to Parent			(206.4	)
Payments of financing costs			(14.4	)

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

In addition to the refinancing related items, net cash used in financing activities for the fiscal year ended September 30, 2011 included contingent consideration payments of $5.0 million. We paid $3.4 million for the IFCS acquisition, which we acquired in fiscal 2009 and we paid $3.4 million for the Springbrook acquisition which we acquired in fiscal 2010. The IFCS payment is reflected in the statements of cash flow as $3.4 million cash used in financing activities. The Springbrook payment is reflected in the statements of cash flow as (i) $1.6 million cash used in financing activities related to the liability recognized at fair value as of the acquisition date and (ii) $1.7 million cash used in operating activities related to the fair value adjustments previously recognized in earnings.

Also during the fiscal year ended September 30, 2011, we paid a dividend of $1.5 million to Parent, which used the proceeds of the dividend to make a distribution to NMH Holdings, Inc. (“NMH Holdings”), which in turn used the proceeds of the distribution to pay a dividend of $1.5 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 financing activities for both fiscal 2010 and 2009 included the repayment of long term debt of $3.7 million. Net cash used in financing activities for fiscal 2009 included two dividend payments to Parent for $8.0 million. During fiscal 2009, we paid a dividend of $7.0 million to Parent, which used the proceeds of the dividend to make distributions to NMH Holdings. NMH Holdings used the proceeds of the distribution to repurchase $13.9 million of the NMH Holdings notes. Also, during fiscal 2009, we paid a dividend of $1.05 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 $1.05 million to NMH Investment. NMH Investment used the proceeds of the dividend to make a contribution to its wholly owned subsidiary ESB Holdings, LLC, which is an affiliate of the Company. ESB Holdings, in turn, used the proceeds to reimburse us for certain expenses we had incurred on its behalf in connection with exploring a strategic initiative, which reduced our corporate expense by $1.05 million.

Our principal sources of funds are cash flows from operating activities and available borrowings under our senior revolver. During fiscal 2011, we borrowed $30.6 million under our senior revolver and repaid the entire amount during the year. At September 30, 2011, there was the full $75.0 million of availability under the senior revolver. We have continued to draw on the senior revolver during the first quarter of fiscal 2012 and expect this will continue. We believe that available 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. Our increased cash interest payments after the February refinancing and our growth investments will reduce our free cash flow in the business.

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, not including $13.3 million principal amount of NMH Holdings notes we held as an investment and that were also repurchased; 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 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) use the cash in 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 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 September 30, 2011, the variable interest rate on the term loan was 7.0%.

Senior revolver

We had no borrowings and the full $75.0 million of availability under the senior revolver at September 30, 2011 and had $35.9 million of standby 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 September 30, 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 September 30, 2011, our consolidated leverage ratio was 6.22 to 1.00, as calculated in accordance with the senior credit agreement and our consolidated interest coverage ratio was 1.62 to 1.00, as calculated in accordance with the senior credit agreement. As of September 30, 2011, total debt, net of cash and cash equivalents, was $733.9 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 September 30, 2011:

		(In thousands)
Net loss		$	(34,142	)
Loss from discontinued operations, net of tax			5,028
Benefit for income taxes			(14,427	)
Gain from available for sale investment security			(3,018	)
Interest income			(22	)
Interest income from related party			(684	)
Interest expense			61,718
Depreciation and amortization			61,901
Extinguishment of debt			19,278
Non-cash impairment charge			5,993
Stock-based compensation			3,675
Restructuring expense			2,984
Discretionary recognition bonuses			2,361
Management fee of related party			1,271
Lease termination fee			713
Acquisition costs			673
Claims made insurance liability			580
Terminated transaction costs			549
(Gain) loss on disposal of assets			(56	)
Change in fair value of contingent consideration			(479	)
Franchise taxes, transaction fees, costs, and expenses			(5	)
Acquired EBITDA			2,273
Operating losses from new starts			1,812
Consolidated adjusted EBITDA per the senior credit agreement		$	117,976

Set forth below is an annualized calculation of consolidated interest expense as of September 30, 2011, as calculated under the credit agreement:

		(In thousands)
Senior term B loan		$	37,545
Senior subordinated notes			31,410
Interest rate swap agreements			3,230
Unused line of credit			429
Capital leases			299
Standby letters of credit			92
Interest income			(23	)
Consolidated interest expense per the senior credit agreement		$	72,982

The consolidated leverage ratio and the consolidated interest coverage ratios are 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 September 30, 2011:

						Less Than												More Than
		Total				1 Year				1-3 Years				3-5 Years				5 Years
		(In thousands)
Long-term debt obligations(1)		$	1,176,189			$	73,938			$	146,544			$	145,137			$	810,570
Operating lease obligations(2)			145,004				38,811				54,082				30,657				21,454
Capital lease obligations			6,774				312				682				772				5,008
Standby letters of credit			35,924				35,924				—				—				—
Total obligations and commitments(3)		$	1,363,891			$	148,985			$	201,308			$	176,566			$	837,032

Inflation

We do not believe that general inflation in the U.S. economy has had a material impact on our financial position or results of operations.

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 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.

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.

The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

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. Sales adjustments are estimated based on an analysis of historical sales adjustments and recent developments in the payment trends. Revenue is recognized when evidence of an arrangement exists, the service has been provided, the price is fixed or determinable and collectibility is reasonably assured.

We recognize revenue for services performed pursuant to contracts with various state and local government agencies and private health care agencies as follows: cost-reimbursement contract revenue is recognized at the time the service costs are incurred and units-of-service contract revenue is recognized at the time the service is provided. For our cost-reimbursement contracts, the rate provided by the payor is based on a certain level of service and types of costs incurred in delivering the service. From time to time, we receive payments under cost-reimbursement contracts in excess of the allowable costs required to support those payments. In such instances, we estimate and record a liability for such excess payments. At the end of the contract period, any balance of excess payments is maintained as a liability until it is reimbursed to the payor. Revenue in the future may be affected by changes in rate-setting structures, methodologies or interpretations that may be enacted in states where we operate or by the federal government.

Accounts Receivable

Accounts receivable primarily consist of amounts due from government agencies, not-for-profit providers and commercial insurance companies. An estimated allowance for doubtful accounts is recorded to the extent it is probable that a portion or all of a particular account will not be collected. In evaluating the collectibility of accounts receivable, we consider a number of factors, including payment trends in individual states, age of the accounts and the status of ongoing disputes with third party payors. Complex rules and regulations regarding billing and timely filing requirements in various states are also a factor in our assessment of the collectibility of accounts receivable. Actual collections of accounts receivable in subsequent periods may require changes in the estimated allowance for doubtful accounts. Changes in these estimates are charged or credited to revenue as a contractual allowance in the consolidated statements of operations in the period of the change in estimate.

Goodwill and Indefinite-lived Intangible Assets

We review costs of purchased businesses in excess of the fair value of net assets acquired (goodwill), and indefinite-life intangible assets for impairment at least annually, unless significant changes in circumstances indicate a potential impairment may have occurred sooner. We conduct our annual impairment test for both goodwill and indefinite-life intangible assets on July 1 of each year.

We are required to test goodwill on a reporting unit basis, which is the same level as our operating segments. We perform a two-step impairment test. The first step is to compare the fair value of the reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value then the second step of the goodwill impairment test is performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill in order to determine the amount of impairment to be recognized. The excess of the carrying value of goodwill above the implied goodwill, if any, would be recognized as an impairment charge. Fair values are established using discounted cash flow and comparative market multiple methods.

The impairment test for indefinite-life intangible assets requires the determination of the fair value of the intangible asset. If the fair value of the indefinite-life intangible asset is less than its carrying value, an impairment loss is recognized in an amount equal to the difference. Fair values are established using the Relief from Royalty Method.

The fair value of a reporting unit is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s best estimates of future growth, capital expenditures, discount rates and market conditions over an estimate of the remaining operating period. As such, actual results may differ from these estimates and lead to a revaluation of our goodwill and indefinite-life intangible assets. If updated estimates indicate that the fair value of goodwill or any indefinite-life intangibles is less than the carrying value of the asset, an impairment charge is recorded in the consolidated statements of operations in the period of the change in estimate.

Impairment of Long-Lived Assets

We review long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded.

Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. These deferred tax assets and liabilities are separated into current and long-term amounts based on the classification of the related assets and liabilities for financial reporting purposes and netted by jurisdiction. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.

We also recognize the benefits of tax positions when certain criteria are satisfied. Companies may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to uncertain tax positions as a component of income tax expense which is consistent with the recognition of these items in prior reporting periods.

Stock-Based Compensation

NMH Investment, our indirect parent, adopted an equity-based compensation plan, and issued units of limited liability company interests consisting of Class B Units, Class C Units, Class D Units, Class E Units and Class F Units pursuant to such plan. The units are limited liability company interests and are available for issuance to our employees and members of the Board of Directors for incentive purposes. For purposes of determining the compensation expense associated with these grants, management values the business enterprise using a variety of widely accepted valuation techniques which considered a number of factors such as our financial performance, the values of comparable companies and the lack of marketability of our equity. We then used the option pricing method to determine the fair value of these units at the time of grant using valuation assumptions consisting of the expected term in which the units will be realized; a risk-free interest rate equal to the U.S. federal treasury bond rate consistent with the term assumption; expected dividend yield, for which there is none; and expected volatility based on the historical data of equity instruments of comparable companies. The estimated fair value of the units, less an assumed forfeiture rate, is recognized in expense on a straight-line basis over the requisite service periods of the awards.

Derivative Financial Instruments

We report derivative financial instruments on the balance sheet at fair value and establish criteria for designation and effectiveness of hedging relationships. Changes in the fair value of derivatives are recorded each period in current operations or in shareholder’s equity as accumulated other comprehensive income (loss) depending upon whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.

We, from time to time, enter into interest rate swap agreements to hedge against variability in cash flows resulting from fluctuations in the benchmark interest rate, which is LIBOR, on our debt. These agreements involve the exchange of variable interest rates for fixed interest rates over the life of the swap agreement without an exchange of the notional amount upon which the payments are based. On a quarterly basis, the differential to be received or paid as interest rates change is accrued and recognized as an adjustment to interest expense in the accompanying consolidated statement of operations. In addition, on a quarterly basis the mark to market valuation is recorded as an adjustment to accumulated other comprehensive income (loss) as a change to shareholder’s equity, net of tax. The related amount receivable from or payable to counterparties is included as an asset or liability, respectively, in our consolidated balance sheets.

Available-for-Sale Securities

Our investments in related party marketable debt securities have been classified as available-for-sale securities and, accordingly, are valued at fair value at the end of each reporting period. Unrealized gains and losses arising from such valuation are reported, net of tax, in accumulated other comprehensive income (loss).

Accruals for Self-Insurance

We maintain employment practices liability, professional and general liability, workers’ compensation, automobile liability and health insurance with policies that include self-insured retentions. We record expenses related to claims on an incurred basis, which includes estimates of fully developed losses for both reported and unreported claims. The accruals for the health and workers’ compensation, automobile and professional and general liability programs are based on analyses performed internally by management and may take into account reports by independent third parties. Accruals relating to prior periods are periodically reevaluated and increased or decreased based on new information. Changes in estimates are charged or credited to the consolidated statements of operations in a period subsequent to the change in estimate.

Legal Contingencies

We are regularly involved in litigation and regulatory proceedings in the operation of our business. 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 our legal proceedings is difficult to predict and we may settle legal claims or be subject to judgments for amounts that differ from our estimates. In addition, legal contingencies could have a material adverse impact on our results of operations in any given future reporting period. See “Part I, Item 1A. Risk Factors” for additional information.

Item 7A.		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 2.5465% 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 $527.4 million outstanding to $127.4 million outstanding as of September 30, 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 on the floating rate debt by approximately $1.3 million per annum.

Item 8.		Financial Statements and Supplementary Data

Our consolidated financial statements required by this Item are on pages F-1 through F-32 of this report.

Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A.		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 and the President (principal executive officers) and the Chief Financial Officer (principal 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 September 30, 2011, the end of the period covered by this Annual Report on Form 10-K, 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 September 30, 2011.

(b) Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d — 15(f) of the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2011.

Management’s evaluation did not include assessing the internal controls of seven businesses that were acquired by us in purchase business combination transactions during fiscal 2011. The combined financial statements of these companies are included in our consolidated financial statements for the fiscal year ended September 30, 2011, and represented 3.8% of our total assets as of September 30, 2011 and 1.2% of our net revenue for the fiscal year ended September 30, 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.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for issuers that are not “large accelerated filers” nor “accelerated filers” set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Item 9B.		Other Information

Not applicable.

PART III

Item 10.		Directors, Executive Officers and Corporate Governance

The following table sets forth the name, age and position of each of our directors and executive officers as of December 1, 2011:

Name		Age				Position
Gregory T. Torres			62			Chairman and Director
Edward M. Murphy			64			Chief Executive Officer and Director
Bruce F. Nardella			54			President and Chief Operating Officer
Denis M. Holler			57			Chief Financial Officer and Treasurer
Robert M. Melia			55			Cambridge Operating Group President
David M. Petersen			63			Redwood Operating Group President
Jeffrey M. Cohen			43			Chief Information Officer
Linda DeRenzo			52			Chief Legal Officer, General Counsel and Secretary
Kathleen P. Federico			52			Chief Human Resources Officer
Dwight D. Robson			40			Chief Public Strategy and Marketing Officer
Chris A. Durbin			46			Director
James L. Elrod, Jr.			57			Director
Pamela F. Lenehan			59			Director
Kevin A. Mundt			57			Director
Guy Sansone			47			Director

Directors are elected at the annual meeting of our sole stockholder and hold office until the next annual meeting or a special meeting in lieu thereof, and until their successors are elected and qualified, or upon their earlier resignation or removal. There are no family relationships between any of the directors and executive officers listed in the table. There are no arrangements or understandings between any executive officer and any other person pursuant to which he or she was selected as an officer.

Gregory T. Torres has served as Chairman of the board of directors since September 2004. He was also the Company’s Chief Executive Officer from January 1996 to January 2005, as well as its President from January 1996 until September 2004. Mr. Torres joined MENTOR in 1980 as a member of its first board of directors. Prior to joining the company, Mr. Torres held prominent positions within the public sector, including chief of staff of the Massachusetts Senate Committee on Ways and Means and assistant secretary of human services. Since May 2007, Mr. Torres has been president and chief executive officer of the Massachusetts Institute for a New Commonwealth (“MassINC”), an independent, nonpartisan research and educational institute in Boston. Mr. Torres was selected as a director for his knowledge and experience in the human services industry, in the nonprofit, public and private sectors.

Edward M. Murphy has served as Chief Executive Officer since January 2005 and was elected to the Board of Directors in September 2004. He also served as our President from September 2004 until December 2009. Mr. Murphy founded Alliance Health and Human Services, Inc. (“Alliance”) in 1999 and served as the organization’s President and CEO until September 2004. Prior to founding Alliance, he was a Senior Vice President at Tucker Anthony and President and Chief Operating Officer of Olympus Healthcare Group. Mr. Murphy is a former Commissioner of the Massachusetts Department of Youth Services and the Massachusetts Department of Mental Health, and the former Executive Director of the Massachusetts Health and Educational Facilities Authority. Mr. Murphy was selected as a director for his knowledge and experience in finance and the human services industry and experience in the public, private and nonprofit sectors.

Bruce F. Nardella was appointed President and Chief Operating Officer in December 2009, after being appointed Executive Vice President and Chief Operating Officer in May 2007. Mr. Nardella joined MENTOR in 1996 as a state director and in May 2003 he was named President of our Eastern Division. Prior to that, he was a deputy commissioner for the Massachusetts Department of Youth Services.

Denis M. Holler has served as our Chief Financial Officer and Treasurer since May 2007. Mr. Holler was named Senior Vice President of Finance in January 2002 and led the Company’s corporate finance functions through the 2006 purchase by Vestar Capital Partners V, L.P. In addition to overseeing all finance functions of the Company, he manages external relationships with our equity sponsor, banking partners and high-yield investors. Prior to joining MENTOR in October 2000 as Vice President of Financial Operations, Mr. Holler was Chief Financial Officer of the Fortress Corporation.

Robert M. Melia was named Cambridge Operating Group President on March 4, 2011, having joined the Company in November 2007, first as the head of our affiliated employment services business and then as Senior Vice President, Mergers & Acquisitions. Prior to joining the Company, Mr. Melia was employed at Maximus, Inc. from 1998 to 2007, ending as President of the Workforce Services Division. He also served for 12 years in a variety of positions at Massachusetts state agencies.

David M. Petersen served as our Senior Vice President and President of our Central Division from May 2003 until being named Senior Vice President and Redwood Operating Group President in June 2007. Prior to joining MENTOR, Mr. Petersen worked for REM since 1972, having managed various operations in Minnesota, Montana, North Dakota and Wisconsin.

Jeffrey M. Cohen joined the Company as its Chief Information Officer on November 9, 2011. From 2008 until joining MENTOR, Mr. Cohen served as Vice President of Information Technology for Magellan Biosciences, a private equity backed medical device company, where he oversaw the strategic transformation of Magellan’s worldwide IT and communications systems. Prior to that, Mr. Cohen was Director of Information Technology at Biogen Idec, where he was responsible for its ERP, SOX program and ancillary systems for finance, human resources, legal and business development. He started his career at Cambridge Technology Partners, in various consulting roles culminating as a Vice President for its eBusiness practice.

Linda DeRenzo was named our Chief Legal Officer on March 4, 2011, and has served as our General Counsel and Secretary since March 2006. Ms. DeRenzo oversees the litigation and risk management, regulatory compliance, labor and employment and corporate legal functions. An 18-year business law veteran before joining the Company, Ms. DeRenzo represented high-growth companies and their financiers in a variety of industries including information technology, life sciences and health services. Prior to joining MENTOR, Ms. DeRenzo was a partner at Testa, Hurwitz & Thibeault, LLP in Boston from 1992 to 2004.

Kathleen P. Federico joined the Company in December 2008 as our Senior Vice President, Human Resources, and was named our Chief Human Resources Officer on March 4, 2011. From 2005 until joining MENTOR, Ms. Federico served as Senior Vice President, Sales and Human Resources, for World Travel Holdings in Woburn, Massachusetts, and was its Senior Vice President, Human Resources, from 2002 to 2005. Prior to that, she served as Vice President of Human Resources for KaBloom LLC, NE Restaurant Company and Sodexho Marriott Services. Ms. Federico was also Chief Operating Officer for Sheehan Associates, an employee benefits brokerage firm.

Dwight D. Robson was named Chief Public Strategy and Marketing Officer on March 4, 2011 after serving as Vice President of Public Strategy since joining MENTOR in 2003. He leads the work of the Public Strategy Group, which is responsible for developing and implementing the Company’s agenda with respect to communications, investor relations, marketing and proposal development, and government and community affairs. Mr. Robson’s experience prior to joining the Company includes senior policy and management positions in Massachusetts state government, most recently as Assistant State Treasurer.

Chris A. Durbin was elected to our board of directors on December 3, 2010. He is a Managing Director in the Vestar Resources group of Vestar Capital Partners. Before joining Vestar in 2007, Mr. Durbin was Managing Director of Strategy and Business Development in Bank of America’s Global Wealth and Investment business from 2001 to 2007. Prior to this, he worked at Mercer Management Consulting and Corporate Decisions, Inc., where he designed and implemented growth strategies for clients including several Vestar portfolio companies. Mr. Durbin was selected as a director for his knowledge and experience in strategy and operations.

James L. Elrod, Jr. joined our board of directors in June 2006. Mr. Elrod is a Managing Director of Vestar Capital Partners, having joined Vestar in 1998. Previously, he was Executive Vice President, Finance and Operations for Physicians Health Service, a public managed care company. Prior to that, he was a Managing Director and Partner of Dillon, Read & Co. Inc. Mr. Elrod is currently a director of Radiation Therapy Services, Inc. Mr. Elrod was selected as a director for his knowledge and experience in finance and the health care industry.

Pamela F. Lenehan was elected to our board of directors in December 2008. Ms. Lenehan has served as President of Ridge Hill Consulting, a strategy consulting firm, since 2002. Prior to this, Ms. Lenehan was self-employed as a private investor. From 2000 to 2001, she was vice president and chief financial officer of Convergent Networks. From 1995 to 2000, she was senior vice president of corporate development and treasurer of Oak Industries Inc. Prior to that, Ms. Lenehan was a Managing Director in Credit Suisse First Boston’s Investment Banking division and a vice president of Corporate Banking at Chase Manhattan Bank. Ms. Lenehan is currently a member of the boards of directors of Spartech Corporation, where she is also the chair of the Compensation Committee, Monotype Imaging Holdings Inc., where she is a member of the Audit Committee and chair of the Compensation Committee and American Superconductor Corporation where she chairs the Audit Committee. From 2001 to 2007 she was a member of the board of directors of Avid Technology and at various times chair of the board, chair of the Audit Committee and a member of the Compensation Committee. Ms. Lenehan was selected as a director for her knowledge and experience in finance and strategy and holds an Advanced Professional Director Certification from the American College of Corporate Directors, a national public company director education organization.

Kevin A. Mundt joined our board of directors in March 2008. He is a Managing Director at Vestar Capital Partners, and is President of the Vestar Resources group. Before joining Vestar in 2004, Mr. Mundt spent 23 years as a strategy and operations consultant specializing in consumer products, retailing and multi-point distribution, as well as healthcare and industrial marketing. For 11 of those years, Mr. Mundt was a strategic adviser to Vestar, and served on the boards of several Vestar portfolio companies. He began his consulting career at Bain and Company, and went on from there to co-found Corporate Decisions, Inc. When that firm was acquired by Marsh and McLennan, Mr. Mundt became a Managing Director of Marsh and McLennan’s financial consulting arm, Mercer Oliver Wyman. Mr. Mundt is currently Chairman of the Board for Solo Cup Company and a Director at Del Monte Foods, MediMedia and The Sun Products Corp., companies in which Vestar or its affiliates have a significant equity interest. Mr. Mundt was selected as a director for his knowledge and experience in strategy and operations.

Guy Sansone was elected to our Board of Directors in December 2009. Mr. Sansone is a Managing Director at Alvarez & Marsal in New York and serves as head of its Healthcare Industry Group. Over the past 20 years, he has invested in and consulted as an executive to numerous companies, focusing on developing and evaluating strategic and operating alternatives designed to enhance value. While at Alvarez & Marsal, Mr. Sansone served as Chief Executive Officer and Chief Restructuring Officer at Saint Vincent Catholic Medical Centers in New York from October 2005 to August 2007 and as interim Chief Financial Officer of HealthSouth Corporation from March 2003 to October 2004, among other positions. He most recently served as Chief Restructuring Officer for Erickson Retirement Communities, which filed for bankruptcy protection in October 2009. Mr. Sansone was a director of Rotech Healthcare, Inc. from March 2002 to August 2005. Mr. Sansone was selected as a director for his knowledge and experience in strategy and operations, with an emphasis on the health care industry.

Code of Ethics

We have adopted a code of ethics that applies to our directors, officers and employees, including our principal executive officer and our principal financial and accounting officer. The MENTOR Network Code of Conduct is publicly available on our website at www.thementornetwork.com, via a link from our “Quality” page under the tab “Compliance”. If we make any substantive amendments to the Code, or grant any waiver from a provision of the Code to our principal executive officers, principal financial officer or principal accounting officer, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K.

The Board of Directors has determined that Ms. Lenehan, the chairman of the Company’s Audit Committee, is an Audit Committee financial expert. Our securities are not listed on any stock exchange, so we are not subject to listing standards requiring that we maintain an Audit Committee consisting of independent directors, but Ms. Lenehan would likely qualify as an independent director based on the definition of independent director set forth in Rule 5605(a)(2) of the Nasdaq Stock Market, LLC Listing Rules.

Item 11.		Executive Compensation

Compensation Discussion and Analysis

General Overview. The Company is an indirect wholly owned subsidiary of NMH Investment. NMH Investment is beneficially owned by Vestar and certain affiliates, certain of our directors and members of our management team. The Company’s directors include representatives of Vestar (Chris Durbin, James Elrod Jr. and Kevin Mundt) and management (Gregory Torres and Edward Murphy), as well as two outside directors (Pamela Lenehan and Guy Sansone). Messrs. Elrod, Durbin and Sansone serve as members of the Company’s Compensation Committee. Mr. Elrod was the Committee’s chairman until December 2, 2011, when Mr. Durbin was elected chairman.

In connection with the Company’s acquisition by Vestar on June 29, 2006 (the “Merger”), the Company entered into an amended and restated employment agreement with its Chief Executive Officer, Edward Murphy. It also entered into severance agreements with its other executive officers, including Bruce Nardella, the Company’s President and Chief Operating Officer, Denis Holler, the Company’s Chief Financial Officer, David Petersen, President of the Redwood Operating Group, and Linda DeRenzo, the Company’s Chief Legal Officer, and, subsequently upon his hire, Robert Melia, President of the Cambridge Operating Group. The compensation paid to Mr. Murphy reflects negotiations at the time of the Merger. Messrs. Holler, Nardella, Petersen and Melia and Ms. DeRenzo have all received raises since the Merger, upon being promoted or otherwise. As of September 30, 2011, the Company’s executive officers have invested approximately $3.0 million in the Preferred Units and Class A Common Units of NMH Investment.

Following the Merger, in January 2007, members of the Company’s management, including the executive officers, were awarded grants of Class B, Class C and Class D Common Units in NMH Investment. Messrs. Holler and Nardella were awarded additional grants of Class B, Class C and Class D Common Units following their promotions in fiscal 2007, Mr. Melia was awarded grants of Class B, Class C and Class D Common Units in fiscal 2008, and the Company’s executive officers were awarded further grants of Class D Common Units in fiscal 2008. Following the Refinancing, in June 2011, certain members of the Company’s management, including the executive officers, were awarded grants of Class F Common Units in NMH Investment. Throughout this analysis, Messrs. Murphy, Holler, Nardella, Petersen and Melia and Ms. DeRenzo are referred to as the “named executive officers”.

Compensation Policies and Practices. The primary objectives of our executive compensation program are to:

•

attract and retain top executive talent;

•

achieve accountability for performance by linking annual cash incentive awards to achievement of measurable performance objectives; and

•

align executives’ incentives with equity value creation.

Our executive compensation programs are designed to encourage our executive officers to operate the business in a manner that enhances equity value. The primary objective of our compensation program is to align the interests of our executive officers with our equityholders’ short- and long-term interests. This is accomplished by awarding a significant portion of our executives’ overall compensation based on our financial performance, specifically, revenue and achievement of earnings before interest, taxes, depreciation and amortization, or EBITDA (with certain adjustments). This year, we also provided a one-time discretionary recognition bonus to our executive officers and others after the successful Refinancing which closed on February 9, 2011. We also created a new class of equity, the Class F Common Units, and made substantial equity grants to our executive officers. Our compensation philosophy provides for a direct relationship between compensation and the achievement of our goals and seeks to include management in upside rewards.

We seek to achieve an overall compensation program that provides foundational elements such as base salary and benefits, as well as an opportunity for variable incentive compensation that constitutes a significant portion of an executive officer’s annual compensation in order to drive the Company’s achievement of performance goals.

The Company’s executive compensation program is overseen by the Compensation Committee (the “Committee”) of the Company’s Board of Directors. The role of the Committee is, among other things, to review and approve salaries and other compensation of the executive officers of the Company, to review and recommend equity grants under NMH Investment’s equity plan, and to review and approve the annual cash incentive plan in which the executive officers participate.

Elements of Compensation. Each element of the executive compensation program works to fulfill one or more of the objectives of the program. The elements of our compensation program are as follows:

•

base salary;

•

annual cash bonus incentives;

•

one-time cash recognition bonus in fiscal 2011;

•

long-term incentive compensation in the form of equity-based units;

•

deferred compensation;

•

severance benefits and equity vesting upon a change in control; and

•

other benefits.

Our base salary structure is designed to recognize the contributions of our senior management team. Our annual bonuses are designed to reward executive officers for achievement of annual objectives tied to EBITDA (with certain adjustments) and revenue. Our equity component of compensation, in the form of equity units in NMH Investment, is designed to reward equity value creation. The discretionary recognition bonuses were designed to reward contributions to enabling the successful Refinancing. Set forth below is a description of each element, including why we have chosen to pay the element, how we determine the amount to be paid and how each compensation element fits into our overall compensation objectives.

Base Salary. Base salary provides executives with a fixed amount of compensation paid on a regular basis throughout the year. The Committee’s charter charges the Committee with reviewing and determining each executive’s base salary on an annual basis. Effective February 28, 2011, the Compensation Committee increased Mr. Holler’s salary from $275,000 to $285,000, Mr. Petersen’s salary from $260,000 to $270,000, Mr. Melia’s salary from $240,000 to $260,000 and Ms. DeRenzo’s salary from $235,000 to $250,000. Factors considered in increasing these base salaries included the level and scope of responsibilities and a comparison with the base pay of the Company’s other executive officers, who are named in Item 10. The named executive officers’ base salaries were reviewed again in December 2011 as required by the Committee’s charter, and they were left unchanged.

Annual Incentive Compensation. In addition to base salary, each named executive officer participates in The MENTOR Network Incentive Compensation Plan, an annual cash incentive plan, which constitutes the variable, performance-based component of an executive’s cash compensation. The objective of this element of executive compensation is to drive individual performance and the achievement of organizational goals. The plan provides the executive officers with the opportunity to earn significant annual cash bonuses. The annual incentive plan for fiscal 2011 was structured to provide incentive compensation based upon the Company’s attainment of certain financial targets for the fiscal 2011, which were approved by the Compensation Committee, and individual performance on quality. For fiscal 2011, the incentive compensation payout opportunity for Messrs. Holler, Petersen and Melia and Ms. DeRenzo was 25% of base salary at the threshold performance level, 50% at target level and 75% at the maximum level. Mr. Nardella’s incentive compensation payout opportunity was 37.5%, 75% and 112.5% at the threshold, target and maximum levels, respectively. Mr. Murphy’s incentive compensation payout opportunity was 50%, 100% and 150% at the threshold, target and maximum levels, respectively.

The achievement of the payout targets is challenging, and the payout scale is designed to drive performance. For the named executive officers to receive any payout, the Company must achieve a minimum threshold of 92.5% of its adjusted EBITDA and revenue goals. For the named executive officers to receive their maximum payout, the Company must achieve at least 107.5% of its adjusted EBITDA and revenue goals. Payouts for performance levels between threshold and maximum are calculated proportionately. Under the terms of the plan, the incentive compensation is calculated by first determining potential incentive compensation based on the achievement of the goals for EBITDA (weighted 75%) and revenue (weighted 25%). This initial amount can be reduced by 10% for failure to achieve the free cash flow goal, and by up to 100% for the failure to meet individual quality goals. It can also be increased from a discretionary pool, if any, that arises when there are reductions under the Plan for failure to meet goals, and from a discretionary 3% pool. In April 2011, the Committee approved the following financial targets for fiscal 2011: adjusted EBITDA of $117.9 million, revenue of $1.101 billion and free cash flows of $17.5 million. These financial targets exclude the Company’s acquisition activity. The Committee chose these targets as profitability continues to be a major objective of the Company, while the focus on revenue is meant to incentivize management to expand the Company’s overall business and not just its EBITDA. Free cash flows are essential to repay debt and fund the Company’s growth and investment in infrastructure, and quality is central to our mission and vital to ensure that profitability is achieved only through delivery of safe and effective services. In December 2011, the Committee effectively reduced the adjusted EBITDA target by $3.8 million for fiscal 2011, neutralizing the impact on incentive compensation of the Company’s decision to grant the one-time bonuses to direct care workers.

This year, the Company came close to meeting its financial goals, achieving 97.2% of the adjusted EBITDA goal and 97.9% of the revenue goal. The Company achieved its goal for free cash flows. As a result, the named executive officers were eligible to receive 86.4% of the payout that was achievable had the targets been met.

On October 28, 2011, the Company amended and restated The MENTOR Network Incentive Compensation Plan, and it amended and restated it again on December 27, 2011, effective October 1, 2011. The amended and restated plan applies to fiscal years beginning with fiscal 2012. The threshold, target and maximum incentive compensation payout opportunities for the executive officers were left unchanged, but the methodology for calculating incentive payouts for fiscal 2012 will consist of three elements as follows.

First, a “potential payout” will be calculated. As in prior years, the potential payout will be based on achievement of adjusted EBITDA and revenue goals. In fiscal 2011 and in prior years, adjusted EBITDA was weighted 75 percent and revenue was weighted 25 percent. This aligned with the Company’s goal to achieve a successful refinancing, which it effected in fiscal 2011. For fiscal 2012, adjusted EBITDA will be weighted 50 percent, and revenue will be weighted 50 percent. This reflects the shift in strategic emphasis to encouraging organic growth in addition to profitability. Following fiscal 2012, the Compensation Committee will determine the weighting between Adjusted EBITDA and revenue for each year. For the Operating Group Presidents, Messrs. Petersen and Melia, the Company’s consolidated Adjusted EBITDA and revenue results will be weighted 25 percent, and operating group Adjusted EBITDA and revenue will be weighted 75 percent, in order to emphasize and reward performance by the relevant business unit that each manages. The other executive officers’ potential payouts will continue to be based on the Company’s consolidated Adjusted EBITDA and revenue results. The potential payout ranges from 50% of target for achievement of 92.5% of the Adjusted EBITDA or revenue goals, to 150% of target for achievement of 107.5% of the Adjusted EBITDA or revenue goals, except for the Operating Group Presidents. For the Operating Group Presidents, the maximum incentive compensation payout of 150% in relation to operating group revenue will be payable for achievement of 104.5% of the revenue goals.

Second, one-half of the potential payout may be reduced based on the results of each participant’s individual scorecard. Each participant’s individual scorecard contains up to five measurable objectives for the individual to achieve over the course of the fiscal year. Each objective on the scorecard has a corresponding percentage weighting, and the total of all of the percentages on the scorecard totals 100%. If a participant achieves a score of 100% on his or her scorecard, then he or she will receive 100% of the potential payout that was based on Adjusted EBITDA and revenue achievement. If the participant achieves a score of less than 100% on his or her scorecard, then one-half half of the potential payout will be reduced proportionally by the individual’s scorecard result.

Third, each participant may receive additional discretionary incentive compensation. In the case of executive officers, discretionary incentive compensation will be determined by the Chief Executive Officer and approved by the Compensation Committee.

The Compensation Committee must approve all incentive payouts for executive officers under this plan. A participant may receive no incentive payout, notwithstanding the potential payout calculation or individual scorecard results, if he or she engages in exceptionally poor conduct or poor performance during the fiscal year.

One-Time Cash Bonuses. In March, after the successful Refinancing, the Company paid discretionary recognition bonuses to reward contributions that enabled the Company’s success. Mr. Murphy recommended the bonuses for the executive officers based on each one’s position and level of responsibility relative to the other executive officers. The Compensation Committee considered and adopted the recommendations of Mr. Murphy. Ms. DeRenzo also received a bonus of $8,500 in June as part of a retroactive salary adjustment.

Equity-Based Compensation. Long-term incentive compensation is provided in the form of non-voting equity units in the Company’s indirect parent company, NMH Investment, pursuant to the NMH Investment 2006 Unit Plan. The plan allows certain officers, employees, directors and consultants of the Company to participate in the long-term growth and financial success of the Company through acquisition of equity interests in NMH Investment, including Class B, Class C, Class D, Class E and Class F Common Units of NMH Investment. The purpose of the plan is to promote the Company’s long-term growth and profitability by aligning the interests of the Company’s management with the interests of the ultimate parent of the Company and by encouraging retention. A pool of units was set aside for management employees, including the named executive officers, as part of the Merger and granted to executive officers during the second quarter of fiscal 2007. Messrs. Holler and Nardella received grants of B, C and D Common Units during fiscal 2007 in recognition of their promotions. NMH Investment granted additional Class B, C and D Common Units to the executive officers, including the named executive officers, during the fourth quarter of fiscal 2008.

On May 10, 2011, the terms of the Class B, C and D Units were amended to accelerate their vesting so that they became fully vested to the extent not already vested. Also in May 2011, a new pool of Class F Common Units was created and in June 2011 units were issued to management employees, including the named executive officers. Upon their issuance, the F Units were 75% vested with respect to the named executive officers, based on the fact that their respective hire dates were before December 31, 2008. The remaining 25% will vest in December 2012 assuming continued employment of the employee with the Company. They were designed to motivate management to achieve financial results that would enhance the valuation of the Company upon a sale of the Company or other liquidity event. Pursuant to the terms of NMH Investment’s limited liability company agreement, holders of the Class B, C, D and F Units would receive 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. The Company eliminated performance-based vesting in order to simplify the equity plan, increase transparency and understanding and influence longer-term behavior, instead of setting annual performance targets, as it had done in prior years.

If an executive’s employment is terminated, NMH Investment may repurchase the executive’s units. Units that are already vested will be purchased for fair market value, except in the case of a termination for cause. In the case of a termination for cause, the Units would be purchased at cost (or forfeited, in the case of the F Units). If an 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 (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 percentages for the named executive officers are as follows: Mr. Murphy, 38.15%; Mr. Nardella, 52.23%; Mr. Holler, 65.29%; Mr. Petersen, 59.37%; Mr. Melia, 30.06%; and Ms. DeRenzo, 75.26%.

The plan is administered by the Compensation Committee which recommends awards to the management committee of NMH Investment. The management committee determines, among other things, specific participants in the plan as well as the amount and value of any units awarded. In recommending the equity grants for the executive officers, the Compensation Committee considered and adopted the recommendations of Mr. Murphy regarding allocations to the executive officers. Mr. Murphy’s recommendations were based on each executive officer’s position and level of responsibility relative to the other executive officers.

Deferred Compensation. Under the National Mentor Holdings, LLC Executive Deferred Compensation Plan, the named executive officers receive an allocation to their account based on a percentage of base salary, as follows: Mr. Murphy, 13%; Mr. Nardella, 12%; Mr. Holler, 11%; and Mr. Petersen, Mr. Melia and Ms. DeRenzo, 9%. The Company contributed an additional $20,000 to Ms. DeRenzo’s account under the plan with respect to fiscal 2011 as part of a retroactive salary adjustment. These allocations are made as of the end of the plan year, December 31, for service rendered during the prior fiscal year. The Company elected to suspend these allocations for the 2009 plan year in light of economic conditions. It recommenced these allocations for the 2010 plan year, and during fiscal 2011 it made a retroactive allocation for the 2009 plan year to the accounts of the named executive officers in recognition of contributions that enabled the Company’s successful Refinancing. The balances earn a return, which for plan years 2011, 2010 and 2009, was a fixed rate of 6%. The plan is an unfunded, nonqualified deferred compensation arrangement, which provides deferred compensation to the executive officers. We may make additional discretionary allocations to the plan, although we did not do so in fiscal 2010 or 2009. A participant’s account balance is 100% vested and non-forfeitable and will be distributed to a participant following his or her retirement or termination from the Company, disability or death, or at the Company’s direction under certain circumstances.

A 401(k) plan is available to eligible employees, including the named executive officers. Under the plan, we may make an annual discretionary matching contribution and/or profit-sharing contribution. To supplement the 401(k) plan, the National Mentor Holdings, LLC Executive Deferral Plan is available to highly compensated employees (as defined by Section 414(q) of the Internal Revenue Code), including the named executive officers. Participants may contribute up to 100% of salary and/or incentive compensation bonus earned during the plan year. This plan is a nonqualified deferred compensation arrangement and is coordinated with our 401(k) plan so as to maximize a participant’s contributions and the Company’s matching contributions to the 401(k) plan, with the residual remaining in the Executive Deferral Plan. Distributions are made upon a participant’s termination of employment, disability, death, retirement or at a time specified by the participant when he or she makes a deferral election. Participants can elect to have distributions made in a lump sum or in monthly installments over a five-year period. A specific-date election may be made only in a lump sum. We have established a grantor trust to accumulate assets to provide for the obligations under the plan. Any assets of the grantor trust are subject to the claims of our general creditors.

Severance and Change-in-Control Benefits. As part of the Merger, the Company entered into an amended and restated employment agreement with Mr. Murphy and entered into severance agreements with each of the other named executive officers who were employed by the Company at that time. Mr. Melia entered into a severance agreement when he joined the Company in November 2007. Each of these agreements provides for severance benefits to be paid to the named executive officer if the Company terminates his or her employment without “cause” or he or she resigns for “good reason”, each as defined in the applicable agreement. See “— Severance Agreements”.

If any of the named executive officers terminates employment, for any reason other than by the Company for cause, he or she would be entitled to receive fair market value for his or her B, C, D and vested F units, and the 25% of the F Units that do not vest until December 2012 would be forfeited. Under each executive officer’s management unit subscription agreement, NMH Investment has the right to repurchase the units upon termination of employment. Fair market value is as determined in good faith by the management committee of NMH Investment (valuing the Company and its subsidiaries as a going concern, disregarding any discount for minority interest or marketability of the units).

In addition, upon a change in control of the Company any unvested F units will vest immediately. The Company believes that such accelerated vesting could align the interests of the named executive officers with the interests of the indirect parent of the Company in the event of a sale of the Company prior to December 2012 by encouraging the named executive officers to remain with the Company and enhancing their focus on the Company during a sale of the Company.

Other Benefits. The named executive officers are entitled to participate in group health and welfare benefits on the same basis as all regular, full-time employees. These benefits include medical, dental, vision care, flexible spending accounts, term life insurance, short-term and long-term disability insurance and an employee assistance program. In addition, all employees, including the executive officers, have the option of purchasing supplemental group term life insurance for themselves as well as coverage for their spouses and dependent children. Executive officers may also elect to receive supplemental disability insurance and long-term care insurance, with the premiums paid for by the Company.

Compensation Risk. The Compensation Committee has considered the compensation policies and practices throughout the Company to assess the risks presented by such policies and practices. Based on this review, we have determined that such policies and practices are not reasonably likely to have a material adverse effect on the Company. In reaching this determination, we have taken into account the following design elements of our compensation programs and policies and practices: mixture of cash and equity opportunities, mixture of time-based and performance-based pay vehicles, use of financial metrics that are easily capable of review and avoidance of uncapped rewards.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on that review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

		Respectfully submitted,
		Chris A. Durbin (Chairman)
		James L. Elrod Jr.
		Guy Sansone

Fiscal 2011 Summary Compensation Table

																		Non-Equity				Nonqualified
																		Incentive				Deferred
														Equity				Plan				Compensation				All Other
		Fiscal				Salary				Bonus				Awards				Compensation				Earnings				Compensation				Total
Name and Principal Position		Year				($)(a)				($)(b)				($)(c)				($)(d)				($)(e)				($)(f)				($)
Edward M. Murphy			2011				350,000				175,000				715,270				302,406				4,585				112,526				1,659,787
Chief Executive Officer			2010				350,000												247,146				2,885				42,195				642,226
			2009				350,000												213,755				1,511				19,523				584,789
Bruce F. Nardella			2011				302,500				150,000				464,730				196,025				3,204				77,535				1,193,994
President and			2010				297,634												160,203				6,549				33,668				498,054
Chief Operating Officer			2009				275,000												83,975				788				13,956				373,719
Denis M. Holler			2011				280,962				135,000				362,730				123,123				3,110				72,653				977,578
Chief Financial Officer and			2010				275,000												97,093				18,433				29,589				420,115
Treasurer			2009				275,000												83,975				784				14,376				374,135
David M. Petersen			2011				265,833				112,000				321,076				116,643				3,096				59,157				877,805
President, Redwood Operating			2010				260,000												92,702				5,041				22,888				380,631
Group			2009				260,000												79,395				815				11,132				351,342
Robert M. Melia			2011				251,923				100,000				339,213				112,323				2,740				131,578				937,777
President, Cambridge Operating Group
Linda DeRenzo			2011				243,942				108,500				244,809				108,003				1,880				73,517				780,651
Chief Legal Officer, General Counsel and Secretary

		Company				Company
		Contributions				Match on
		to Executive				Contributions
		Deferred				to 401(k) and												Group				Supplemental				Long-Term
		Compensation				Executive				Company								Term Life				Disability				Care
		Plan $(1)				Deferral Plan $				Paid Parking $				Gross-ups $				Insurance $				Insurance $				Insurance $
Edward M. Murphy			91,000				3,675				1,440				670				2,376				5,563				7,803
Bruce F. Nardella			66,156				3,675				1,440				670				698				2,313				2,583
Denis M. Holler			60,683				3,675				1,440				670				1,173				2,565				2,446
David M. Petersen			46,950				3,675				0				0				1,706				3,652				3,174
Robert M. Melia(2)			43,500				0				0				0				938				2,399				1,465
Linda DeRenzo			63,088				3,637				1,440				670				526				2,162				2,412

Grants of Plan-Based Awards in Fiscal 2011
Estimated Possible Payouts Under Non-Equity Incentive Plan

Name		Threshold(a) ($)				Target(a) ($)				Maximum(a) ($)
Edward M. Murphy			175,000				350,000				525,000
Bruce F. Nardella			113,437				226,875				340,312
Denis M. Holler			71,250				142,500				213,750
David M. Petersen			67,500				135,000				202,500
Robert M. Melia			65,000				130,000				195,000
Linda DeRenzo			62,250				125,000				187,250

During fiscal 2011, the named executive officers were issued Class F Common Units of NMH Investment in the following amounts.

														Grant Date
										Number				Fair Value of
Name		Grant Date				Approval Date				of Units				Unit Awards
Edward M. Murphy		June 15, 2011				May 10, 2011					701,246			$	0.00
Bruce F. Nardella		June 15, 2011				May 10, 2011					455,618			$	0.00
Denis M. Holler		June 15, 2011				May 10, 2011					355,618			$	0.00
David M. Petersen		June 15, 2011				May 10, 2011					314,781			$	0.00
Robert M. Melia		June 15, 2011				May 10, 2011					332,562			$	0.00
Linda DeRenzo		June 15, 2011				May 10, 2011					240,008			$	0.00

Outstanding Equity Awards at Fiscal 2011 Year-End

Shares and stock options are not included in this table because none were issued during the fiscal year and none were outstanding at fiscal year-end.

		Equity Incentive Plan Awards
												Payout Value
		Number and Class				Payout Value				Number and Class		of Unearned
		of Earned Units				of Earned Units				of Unearned Units		Units Not
Name		Not Vested (#)				Not Vested ($)(f)				Not Vested (#)		Vested ($)(f)
Edward M. Murphy		664.13 B Common Units(a)					33.21
		696.90 C Common Units(a)					20.91
		26,095.96 D Common Units(a)					260.96
		6,737.50 B Common Units(b)					336.88
		7,070.00 C Common Units(b)					212.10
		7,490.00 D Common Units(b)					74.90
		525,934.13 F Common Units(c)					—			175,311.38 F Common Units(c)			—
Bruce F. Nardella		664.13 B Common Units(a)					33.21
		696.90 C Common Units(a)					20.91
		21,723.95 D Common Units(a)					217.24
		962.50 B Common Units(c)					48.13
		1,010.00 C Common Units(c)					30.30
		1,070.00 D Common Units(c)					10.70
		5,775.00 B Common Units(b)					288.75
		6,060.00 C Common Units(b)					181.80
		6,420.00 D Common Units(b)					64.20
		341,713.14 F Common Units(c)					—			113,904.38 F Common Units(c)			—
Denis M. Holler		664.13 B Common Units(a)					33.21
		696.90 C Common Units(a)					20.91
		21,723.95 D Common Units(a)					217.24
		481.25 B Common Units(d)					24.06
		505.00 C Common Units(d)					15.15
		535.00 D Common Units(d)					5.35
		6,256.25 B Common Units(d)					312.81
		6,565.00 C Common Units(b)					196.95
		6,955.00 D Common Units(b)					69.55
		266,713.14 F Common Units(c)								88,904.38 F Common Units (c)			—
David M. Petersen		664.13 B Common Units(a)					33.21
		696.90 C Common Units(a)					20.91
		15,603.14 D Common Units(a)					156.03
		5,775.00 B Common Units(b)					288.75
		6,060.00 C Common Units(b)					181.80
		6,420.00 D Common Units(b)					64.20
		236,085.62 F Common Units(c)					—			78,695.21 F Common Units (c)			—
Robert M. Melia		5,513.56 B Common Units(e)					275.68
		5,788.72 C Common Units(e)					173.66
		6,136.19 D Common Units(e)					61.36
		249,421.15 F Common Units(c)					—			83,140.38 F Common Units (c)			—
Linda DeRenzo		664.13 B Common Units(a)					33.21
		696.90 C Common Units(a)					20.91
		13,854.33 D Common Units(a)					138.54
		6,256.25 B Common Units(b)					312.81
		6,565.00 C Common Units(b)					196.95
		6,955.00 D Common Units(b)					69.55
		180,006.29 F Common Units(c)					—			60,002.10 F Common Units (c)			—

Option Exercises and Stock Vested

No options were issued, outstanding or exercised during fiscal 2011. For purposes of this disclosure item, certain of the units were vested during fiscal 2011 such that if the named executive officer terminated his or her employment voluntarily during fiscal 2011 and NMH Investment had elected to repurchase his or her units, it would have been required to repurchase them at fair market value. The units that vested are set forth in the table below.

		Number of B				Number of C				Number of D				Number of F
		Common Units				Common Units				Common Units				Common Units
		Acquired on				Acquired on				Acquired on				Acquired on
Name		Vesting (#)(a)				Vesting (#)(a)				Vesting (#)(a)				Vesting (#)(a)
Edward M. Murphy			0				0				0				525,934
Bruce F. Nardella			154				0				0				341,713
Denis M. Holler			77				0				0				266,713
David M. Petersen			0				0				0				236,086
Robert M. Melia			1,638				5,789				6,136				249,421
Linda DeRenzo			0				0				0				180,006