National Mentor (NMH) 10-Q/A 2012 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q /A

(Amendment No.1)

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

For the quarterly period ended June 30, 2012

OR

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

For the transition period from                     to                    

Commission file number: 333-129179

NATIONAL MENTOR HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ¨    No  x

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x  (Do not check if smaller reporting company)	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  ¨    No  x

As of August 14, 2012, there were 100 shares outstanding of the registrant’s common stock, $.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE:

EXPLANATORY NOTE

This Amendment No. 1 (the “Amendment”) to the National Mentor Holdings, Inc. (the “Company”) Form 10-Q for the quarter ended June 30, 2012 (the “Form 10-Q”) filed with the Securities and Exchange Commission on August 14, 2012 (the “Filing Date”) is filed solely to correct errors on the Company’s Condensed Consolidated Statements of Cash Flows (the “Statements of Cash Flows”), including the Supplemental Disclosure of cash flow information, and to correct errors in Note 12, “Accruals for Self-Insurance and Other Commitments and Contingencies” (“Note 12”) to the Company’s financial statements in Part I, Item 1 and to make corresponding changes to Exhibit 101 to the Form 10-Q, which contains the XBRL (Extensible Business Reporting Language) Interactive Data File for the financial statements and notes included in Part I, Item 1 of the Form 10-Q.

Due to a lapse in our review process, certain clerical errors were not detected, resulting in the miscalculation of certain line items on the Statements of Cash Flows for June 30, 2012. The change in Accrued payroll and related costs was understated by $4.4 million, The change in Other accrued liabilities was overstated by $0.3 million and the change in Other long-term liabilities was overstated by $4.1 million. The misstatement of these line items had no impact on the subtotal, Net cash provided by operating activities, which was $27.5 million at June 30, 2012.

An additional clerical error that was not detected resulted in the misstatement of pro forma figures for liabilities in paragraph five of the footnote related to Accruals for Self-Insurance and Other Commitment and Contingencies. Current and total liabilities, pro forma for September 30, 2011, were overstated by $42.3 million and $42.2 million, respectively, as $190.3 million and $1,120.2 million.

The Amendment also corrects the June 30, 2012 figure for Cash paid for interest under Supplemental Disclosure of cash flow information, which was understated in the Form 10-Q by $10.3 million, as $36.8 million. The correct number is $47.1 million. This was the result of a calculation error which was not detected.

These errors were not reflected in the Company’s earnings release that was issued on the Filing Date and furnished to the Securities and Exchange Commission on the Filing Date. These errors had no impact on any other items presented on the Company’s Condensed Consolidated Statements of Cash Flows or any other disclosures included in the Notes to the Consolidated Financial Statements. The errors had no impact on the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations or Comprehensive Income (Loss) nor on Revenue, Operating Income, Net income (loss) and Net income (loss) discussed in Part I Item 2, and Management’s Discussion and Analysis. No other changes to our Form 10-Q are made in this Amendment. This Amendment speaks as of the Filing Date, does not reflect events that may have occurred subsequent to the Filing Date, and, other than as set forth below, does not modify or update the disclosures made in the Form 10-Q. Accordingly, this Amendment should be read in conjunction with the Form 10-Q.

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Index

National Mentor Holdings, Inc.

	Page
PART I. FINANCIAL INFORMATION		4
Item 1. Financial Statements		4
Condensed Consolidated Balance Sheets as of June 30, 2012 and September 30, 2011		4
Condensed Consolidated Statements of Operations for the three and nine months ended June  30, 2012 and 2011		5
Condensed Consolidated Statements of Cash Flows for the nine months ended June  30, 2012 (restated) and 2011		6
Notes to Condensed Consolidated Financial Statements		7
Item 6. Exhibits		17
Signatures		18

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

National Mentor Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

	(Unaudited)
	June 30, 2012			September 30, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	—		$	263
Restricted cash		860			936
Accounts receivable, net		150,630			134,071
Deferred tax assets, net		18,160			20,956
Prepaid expenses and other current assets		22,765			9,969
Total current assets		192,415			166,195
Property and equipment, net		151,085			146,256
Intangible assets, net		374,255			397,514
Goodwill		232,794			231,015
Restricted cash		50,000			50,000
Other assets		43,002			19,870
Total assets	$	1,043,551		$	1,010,850
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	28,762		$	27,059
Accrued payroll and related costs		59,350			74,968
Other accrued liabilities		57,215			46,528
Obligations under capital lease, current		450			312
Current portion of long-term debt		8,800			5,300
Total current liabilities		154,577			154,167
Other long-term liabilities		68,972			15,536
Deferred tax liabilities, net		97,939			111,066
Obligations under capital lease, less current portion		8,503			6,462
Long-term debt, less current portion		752,985			754,742
Commitments and contingencies
SHAREHOLDER’S EQUITY
Shareholders’ equity:
Common stock		—			—
Additional paid-in capital		33,525			33,098
Accumulated other comprehensive loss		(3,626	)		(4,017	)
Accumulated deficit		(69,324	)		(60,204	)
Total shareholder’s equity		(39,425	)		(31,123	)
Total liabilities and shareholder’s equity	$	1,043,551		$	1,010,850

See accompanying notes.

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National Mentor Holdings, Inc.

Condensed Consolidated Statements of Operations

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2012			2011			2012			2011
Net revenue	$	285,348		$	269,701		$	838,610		$	799,143
Cost of revenue (exclusive of depreciation expense shown below)		221,423			208,254			653,433			617,335
Operating expenses:
General and administrative		35,837			36,423			105,047			105,465
Depreciation and amortization		15,393			16,518			45,657			45,948
Total operating expenses		51,230			52,941			150,704			151,413
Income from operations		12,695			8,506			34,473			30,395
Other income (expense):
Management fee of related party		(314	)		(297	)		(924	)		(952	)
Other income (expense), net		(181	)		48			374			533
Extinguishment of debt		—			—			—			(19,278	)
Gain from available for sale investment security		—			—			—			3,018
Interest income		53			11			261			22
Interest income from related party		—			—			—			684
Interest expense		(19,799	)		(19,660	)		(59,574	)		(41,950	)
Loss from continuing operations before income taxes		(7,546	)		(11,392	)		(25,390	)		(27,528	)
Benefit for income taxes		(4,466	)		(3,178	)		(16,459	)		(8,489	)
Loss from continuing operations		(3,080	)		(8,214	)		(8,931	)		(19,039	)
Income (loss) from discontinued operations, net of tax		100			(115	)		(189	)		(583	)
Net loss	$	(2,980	)	$	(8,329	)	$	(9,120	)	$	(19,622	)

See accompanying notes.

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National Mentor Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended June 30,
	2012			2011
	(As Restated)
	(unaudited)
Operating activities
Net loss	$	(9,120	)	$	(19,622	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Accounts receivable allowances		9,878			8,352
Depreciation and amortization of property and equipment		18,082			17,546
Amortization of other intangible assets		27,577			29,286
Amortization of original issue discount and initial purchasers discount		2,218			1,183
Amortization and write-off of financing costs		1,796			9,927
Accretion of investment in related party debt securities		—			(325	)
Stock-based compensation		502			3,509
Deferred income taxes		(10,596	)		(9,410	)
Gain from available for sale investment security		—			(3,018	)
Loss (gain) on disposal of assets		137			(148	)
Change in the fair value of contingent consideration		—			(1,745	)
Non-cash impairment charge		94			20
Non-cash interest income from related party		—			(359	)
Changes in operating assets and liabilities:
Accounts receivable		(26,707	)		(6,349	)
Other assets		(2,312	)		2,416
Accounts payable		2,114			(1,262	)
Accrued payroll and related costs		4,173			6,979
Other accrued liabilities		14,344			4,840
Other long-term liabilities		(4,679	)		992
Net cash provided by operating activities		27,501			42,812
Investing activities
Cash paid for acquisitions, net of cash received		(6,244	)		(12,678	)
Purchases of property and equipment		(21,714	)		(14,633	)
Changes in restricted cash		76			(49,916	)
Proceeds from sale of assets		1,018			753
Net cash used in investing activities		(26,864	)		(76,474	)
Financing activities
Repayments of long-term debt		(3,975	)		(506,689	)
Issuance of long term debt, net of original issue discount		—			761,667
Proceeds from borrowings under senior revolver		494,100			—
Repayments of borrowings under senior revolver		(490,600	)		—
Repayments of capital lease obligations		(291	)		(169	)
Cash paid for contingent consideration		—			(4,930	)
Dividend to parent		(75	)		(207,855	)
Payments of financing costs		(59	)		(14,233	)
Net cash (used in) provided by financing activities		(900	)		27,791
Net increase (decrease) in cash and cash equivalents		(263	)		(5,871	)
Cash and cash equivalents at beginning of period		263			26,448
Cash and cash equivalents at end of period	$	—		$	20,577
Supplemental disclosure of cash flow information
Cash paid for interest	$	47,124		$	31,291
Cash paid for income taxes	$	731		$	865
Supplemental disclosure of non-cash investing activities:
Accrued property, plant and equipment	$	1,083		$	614
Supplemental disclosure of non-cash financing activities:
Capital lease obligation incurred to acquire assets	$	2,434		$	5,302

See accompanying notes.

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National Mentor Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

June 30, 2012

(Unaudited)

1. Restatements

Subsequent to the issuance of the Company’s Form 10-Q for the period ended June 30, 2012 as filed on August 14, 2012, the Company’s management determined that there were several errors in the statement of cash flows for the nine months ended June 30, 2012 and certain disclosures. Within the consolidated statements of cash flows for the nine months ended June 30, 2012, Accrued payroll and related costs was understated by $4.4 million, Other accrued liabilities was overstated by $0.3 million and Other long-term liabilities was overstated by $4.1 million. Also, the amount paid for interest was understated by $10.3 million. Additionally, the amounts disclosed in Note 13 Accruals for Self-Insurance and Other Commitments and Contingencies as it relates to the pro-forma impact of Accounting Standards Update No. 2012-24,Health Care Entities (Topic 954), Presentation of Insurance Claims and Related Insurance Recoveries on current liabilities and total liabilities as of September 30, 2011 was overstated by $42.3 million and $42.4 million, respectively.

Condensed Consolidated Statements of Cash Flows

(in thousands)	As Previously Reported			Adjustments			As Restated
For the nine months ended June 30, 2012:
Changes in operating assets and liabilities:
Accrued payroll and related costs	$	(200	)	$	4,373		$	4,173
Other accrued liabilities	$	14,658		$	(314	)	$	14,344
Other long-term liabilities	$	(620	)	$	(4,059	)	$	(4,679	)
Supplemental disclosure of cash flow information
Cash paid for interest	$	36,798		$	10,326		$	47,124

Note 13. Accruals for Self-Insurance and Other Commitments and Contingencies

	As Previously Reported		Adjustments	As Restated
Pro-forma at September 30, 2011:
Current liabilities	$	190.3 million	$(42.3) million	$148.0 million
Total liabilities	$	1,120.2 million	$(42.2) million	$1,078.0 million

2. Basis of Presentation

National Mentor Holdings, Inc., through its wholly owned subsidiaries (collectively, the “Company”), is a leading provider of home and community-based health and human services to adults and children with intellectual and/or developmental disabilities, acquired brain injury and other catastrophic injuries and illnesses; and to youth with emotional, behavioral and/or medically complex challenges. Since the Company’s founding in 1980, the Company’s operations have grown to 33 states. The Company provides residential services to approximately 11,600 clients, some of whom also receive periodic services. Approximately 16,700 clients receive periodic services from the Company.

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

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements herein should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011, which is on file with the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal and recurring accruals, necessary to present fairly the financial statements in accordance with GAAP. Intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. Operating results for the three and nine months ended June 30, 2012 may not necessarily be indicative of results to be expected for any other interim period or for the full year.

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

3. Recent Accounting Pronouncements

Presentation of Comprehensive Income —In June 2011, the FASB issued Accounting Standards Update No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income(“ASU 2011-05”). ASU 2011-05 eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The final standard requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 is effective for the Company beginning in the first quarter of fiscal 2013. The Company does not expect the adoption of this standard to have a material impact to its financial statements.

Intangibles — Goodwill and Other —In September 2011, the FASB issued Accounting Standards Update No. 2011-08,Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment(“ASU 2011-08”). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether further impairment testing is necessary. Additionally, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the impairment test, and perform the qualitative assessment in any subsequent period. ASU 2011-08 is effective for the Company beginning fiscal 2013. The Company does not expect the adoption of this standard to have a material impact to its financial statements.

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Balance Sheet: Disclosures about Offsetting Assets and Liabilities —In December 2011, the FASB issued Accounting Standards Update 2011-11,Balance Sheet: Disclosures about Offsetting Assets and Liabilities. The differences in the requirements for offsetting assets and liabilities in the presentation of financial statements prepared in accordance with U.S. GAAP and financial statements prepared in accordance with International Financial Reporting Standards (IFRS) makes the comparability of those statements difficult. The objective of this update is to facilitate comparison between those financial statements, specifically within the scope instruments and transactions eligible for offset in the form of derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. This update is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within that fiscal year. The Company is evaluating the impact of this guidance on its financial statements.

Intangibles-Goodwill and Other—In July 2012, the FASB issued Accounting Standards Update No. 2012-02,Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2012-02”). ASU 2012-02 amends the guidance in ASC 350, to provide an option to first make a qualitative assessment of whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount before applying the quantitative impairment test. An entity is required to perform the quantitative test only if it determines that it is more likely than not that the fair value of an indefinitely-lived intangible asset is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption being permitted. The Company does not expect the adoption of this standard to have a material impact to its financial statements.

Recently Adopted

Business Combinations (Topic 805),Disclosure of Supplementary Pro Forma Information for Business Combinations(“ASU 2010-29”). ASU 2010-29 requires a public entity to disclose pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the fiscal year had been as of the beginning of the annual reporting period or the beginning of the comparable prior annual reporting period if showing comparative financial statements. ASU 2010-29 was adopted during the first quarter of fiscal 2012. Pro forma information for businesses acquired during the nine months ended June 30, 2012 has not been included herein because the impact of the acquisitions on the Company’s consolidated results of operations was not material.

During the first quarter of fiscal 2012, the Company adopted Accounting Standards Update No. 2010-24,Health Care Entities (Topic 954), Presentation of Insurance Claims and Related Insurance Recoveries(“ASU 2010-24”), which clarifies that companies should not net insurance recoveries against related claim liabilities. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. The Company adopted ASU 2010-24 prospectively and the impact of the adoption is reflected on the June 30, 2012 consolidated balance sheets.

4. Comprehensive Loss

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

	Three Months Ended June 30,						Nine Months Ended June 30,
	2012			2011			2012			2011
	(in thousands)
Net loss	$	(2,980	)	$	(8,329	)	$	(9,120	)	$	(19,622	)
(Increase) decrease in unrealized loss on derivatives net of taxes of $151 and $(1,476) for the three months ended June 30, 2012 and 2011, respectively and $265 and $(1,476) for the nine months ended June 30, 2012 and 2011 respectively		223			(2,175	)		391			(2,175	)
Decrease in unrealized gain on available-for-sale debt securities net of taxes of $(390) for the nine months ended June 30, 2011		—			—			—			(575	)
Comprehensive loss	$	(2,757	)	$	(10,504	)	$	(8,729	)	$	(22,372	)

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5. Long-Term Debt

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

(in thousands)	June 30, 2012			September 30, 2011
Term loan, principal and interest due in quarterly installments through February 9, 2017	$	523,375		$	527,350
Original issue discount on term loan, net of accumulated amortization		(6,072	)		(7,081	)
Senior notes, due February 15, 2018; semi-annual cash interest payments due each February 15th and August 15th (interest rate of 12.50%)		250,000			250,000
Original issue discount and initial purchase discount on senior notes, net of accumulated amortization		(9,018	)		(10,227	)
Senior revolver, due February 9, 2016; quarterly cash interest payments at a variable interest rate		3,500			—
		761,785			760,042
Less current portion		8,800			5,300
Long-term debt	$	752,985		$	754,742

Senior Secured Credit Facilities

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

In connection with the February 2011 Refinancing, the Company incurred $19.3 million of expenses, including (i) $10.8 million related to the tender premium and consent fees paid in connection with the repurchase of its 11.25% Senior Subordinated Notes due 2014 (the “Senior Subordinated Notes”), (ii) $7.9 million in connection with the acceleration of deferred financing costs related to the prior indebtedness and (iii) $0.6 million related to transaction costs. These expenses were recorded on the Company’s fiscal 2011 consolidated statements of operations as Extinguishment of debt.

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 an annual 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 the Company’s leverage ratio, if the Company generates certain levels of cash flow. The Company was not required to make such a prepayment of its term loan during fiscal 2011. The variable interest rate on the term loan is equal to (i) a rate equal to the greater of (a) the prime rate, (b) the federal funds rate plus 1/2 of 1% and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points, plus 4.25%; or (ii) the Eurodollar rate (provided that the rate shall not be less than 1.75% per annum), plus 5.25%, at the Company’s option. At June 30, 2012, the variable interest rate on the term loan was 7.0%.

Senior revolver

During the nine months ended June 30, 2012, the Company drew $494.1 million under the senior revolver and repaid $490.6 million during the period. At June 30, 2012, the Company had $3.5 million of outstanding borrowings under the senior revolver and $71.5 million of availability under the senior revolver. The Company had $38.4 million of standby letters of credit issued under the institutional letter of credit facility primarily related to the Company’s workers’ compensation insurance coverage. Letters of credit can be issued under the Company’s institutional letter of credit facility up to the $50.0 million limit and letters of credit in excess of that amount reduce availability under the Company’s senior revolver. The interest rates for any borrowings under the senior revolver are the same as the term loan.

The senior revolver includes borrowing capacity available for borrowings on same-day notice, referred to as the “swingline loans.” The outstanding borrowings at June 30, 2012 were borrowed under the swingline, which have maturities less than one year, and are reflected under Current portion of long-term debt on the Company’s consolidated balance sheets.

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Senior Notes

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

Covenants

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

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

Derivatives

The Company entered into an interest rate swap in a notional amount of $400.0 million effective March 31, 2011, maturing on September 30, 2014. The Company entered into this interest rate swap to hedge the risk of changes in the floating rate of interest on borrowings under the term loan. Under the terms of the swap, the Company receives from the counterparty a quarterly payment based on a rate equal to the greater of 3-month LIBOR and 1.75% per annum, and the Company makes payments to the counterparty based on a fixed rate of 2.5% per annum, in each case on the notional amount of $400.0 million, settled on a net payment basis. Based on the applicable margin of 5.25% under the Company’s term loan, this swap effectively fixes the Company’s cost of borrowing for $400.0 million of the term loan at 7.8% per annum for the term of the swap.

The Company accounts for the interest rate swap as a cash flow hedge and the effectiveness of the hedge relationship is assessed on a quarterly basis. The fair value of the swap agreement, representing the price that would be paid to transfer the liability in an orderly transaction between market participants, was $6.1 million or $3.6 million after taxes at June 30, 2012 and $6.7 million or $4.0 million after taxes at September 30, 2011. The fair value was recorded in current liabilities (under Other accrued liabilities) and was determined based on pricing models and independent formulas using current assumptions. The entire change in fair market value is recorded in shareholder’s equity, net of tax, on the consolidated balance sheets as accumulated other comprehensive loss.

6. Shareholder’s Equity

Common Stock

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

Dividend to Parent

On February 9, 2011, as part of the February 2011 Refinancing described in note 4, the Company declared 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 (ii) repurchase an additional $13.3 million principal amount of NMH Holdings notes the Company held as an investment and (ii) pay related fees and expenses.

7. Business Combinations

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

During the nine months ended June 30, 2012, the Company separately acquired five companies complementary to its business for $6.2 million.

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Copper Family Community Care,Inc. On April 5, 2012, the Company acquired the assets of Copper Family Community Care, Inc. (“Copper Family”) for $2.6 million. Copper Family is located in Wisconsin and provides group home services and related services to individuals with developmental disabilities. As a result of the acquisition, the Company recorded $0.7 million of goodwill in the Human Services segment, which is expected to be deductible for tax purposes. The Company acquired $0.1 million of tangible assets and $1.8 million of intangible assets which included $1.4 million of agency contracts with a weighted average useful life of eleven years and $0.4 million of licenses and permits with a weighted average useful life of ten years.

SCVP, Inc. On March 26, 2012, the Company acquired the assets of SCVP, Inc. (“SCVP”) for $0.4 million. SCVP is located in Oregon and provides day program services and related services to individuals with developmental disabilities. The Company acquired $0.3 million of agency contracts with a weighted average useful life of ten years and $0.1 million of goodwill in the Human Services segment. The goodwill is expected to be deductible for tax purposes.

Families Together, Inc.On November 30, 2011, the Company acquired the assets of Families Together, Inc. (“Families Together”) for $3.0 million. Families Together is located in North Carolina and provides intensive in-home services, day treatment, case management, outpatient therapy and similar periodic services to children and their families. As a result of this acquisition, the Company recorded $0.9 million of goodwill in the Human Services segment, which is expected to be deductible for tax purposes. The Company acquired $2.1 million of intangible assets which included $1.0 million of non-compete agreement with a useful life of five years, $0.8 million of agency contracts with a weighted average useful life of eleven years, and $0.3 million of licenses and permits with a weighted average useful life of ten years.

Other Acquisitions.Additionally, during the first quarter of 2012, the Company acquired selected assets of Zumbro House, Inc., which provides group home services to individuals with developmental disabilities in the Mankato, Minnesota area and Georgia Rehabilitation Institute d/b/a Walton Rehabilitation Health System, a provider of acquired brain injury services, for total cash of $0.2 million, $0.1 million of which was allocated to intangible assets.

The following table summarizes the recognized amounts of identifiable assets acquired and liabilities assumed at the date of the acquisition:

(in thousands)	Copper Family		Families Together		SCVP		Other Acquisitions		TOTAL
Identifiable intangible assets	$	1,836	$	2,102	$	291	$	89	$	4,318
Property and equipment		120		6		5		20		151
Total identifiable net assets		1,956		2,108		296		109		4,469
Goodwill		687		892		154		46		1,779

8. Goodwill and Intangible Assets

Goodwill

The changes in goodwill for the nine months ended June 30, 2012 are as follows:

	Human Services		Post Acute Specialty Rehabilitation Services		Total
	(In thousands)
Balance as of September 30, 2011	$	167,877	$	63,138	$	231,015
Goodwill acquired through acquisitions		1,775		4		1,779
Balance as of June 30, 2012	$	169,652	$	63,142	$	232,794

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Intangible Assets

Intangible assets consist of the following as of June 30, 2012:

Description	Gross Carrying Value		Accumulated Amortization		Intangible Assets, Net
(in thousands)
Agency contracts	$	461,607	$	160,668	$	300,939
Non-compete/non-solicit		3,762		1,137		2,625
Relationship with contracted caregivers		11,118		6,596		4,522
Trade names		3,774		1,982		1,792
Trade names (indefinite life)		42,400		—		42,400
Licenses and permits		44,322		22,852		21,470
Intellectual property		904		397		507
	$	567,887	$	193,632	$	374,255

Intangible assets consist of the following as of September 30, 2011:

Description	Gross Carrying Value			Accumulated Amortization		Intangible Assets, Net
(in thousands)
Agency contracts	$	459,044		$	138,105	$	320,939
Non-compete/non-solicit		2,693	��		664		2,029
Relationship with contracted caregivers		11,118			5,765		5,353
Trade names		3,774			1,688		2,086
Trade names (indefinite life)		42,400			—		42,400
Licenses and permits		43,636			19,532		24,104
Intellectual property		904			301		603
	$	563,569		$	166,055	$	397,514

Amortization expense for continuing operations was $9.2 million and $10.7 million for the three months ended June 30, 2012 and 2011, respectively, and $27.6 million and $28.5 million for the nine months ended June 30, 2012 and 2011, respectively. Amortization expense for discontinued operations was $0.3 million and $0.8 million for the three and nine months ended June 30, 2011, respectively.

The estimated remaining amortization expense related to intangible assets with finite lives for the three months remaining in fiscal year 2012 and each of the four succeeding years and thereafter is as follows:

Year Ending September 30,
(in thousands)
2012	$	9,250
2013		36,924
2014		36,246
2015		34,402
2016		32,740
Thereafter		182,293
	$	331,855

9. Related Party Transactions

Management Agreement

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

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

This agreement was amended and restated effective February 9, 2011 to provide for the payment of reasonable and customary fees to Vestar for services in connection with a sale of the Company, an initial public offering by or involving NMH Investment, LLC (“NMH Investment”) or any of its subsidiaries or any extraordinary acquisition by or involving NMH Investment or any of its subsidiaries; provided, that such fees shall only be paid with the consent of the directors of the Company who are not affiliated with or employed by Vestar. The Company recorded $0.3 million of management fees and expenses for both the three months ended June 30, 2012 and 2011, and $0.9 million and $1.0 million for the nine months ended June 30, 2012 and 2011, respectively. The accrued liability related to the management agreement was $0.3 million and $0.4 million at June 30, 2012 and September 30, 2011, respectively.

Consulting Agreements

During fiscal 2011, the Company engaged Alvarez & Marsal Healthcare Industry Group (“Alvarez & Marsal”) to provide certain transaction advisory and other services. A Company director, Guy Sansone, is a Managing Director at Alvarez & Marsal and the head of its Healthcare Industry Group. The engagement resulted in aggregate fees of $0.6 million for the nine months ended June 30, 2011, and was approved by the Company’s Audit Committee. Mr. Sansone is not a member of the Company’s Audit Committee and was not personally involved in the engagement.

The Company engaged Duff & Phelps, LLC as a financial advisor in connection with the refinancing transactions described in note 4, including the repurchase of the NMH Holdings notes, and related matters. According to public filings, at the time of this transaction Vestar owns 12.4% of the Class A common stock of Duff & Phelps Corporation, the parent company of Duff & Phelps, LLC, and one of Vestar’s principals serves on the Board of Directors of Duff & Phelps Corporation but was not personally involved in this engagement. This engagement resulted in fees of approximately $0.2 million during the nine months ended June 30, 2011 and was approved by the Company’s Board of Directors, with the Vestar members abstaining from voting.

Lease Agreements

The Company leases several offices, homes and other facilities from its employees, or from relatives of employees, primarily in the states of Minnesota, Florida, and California which have various expiration dates extending out as far as July 2016. Related party lease expense was $0.4 million and $1.2 million for the three months ended June 30, 2012 and 2011, respectively, and $1.3 million and $3.7 million for the nine months ended June 30, 2012 and 2011, respectively.

10. Fair Value Measurements

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

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

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

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

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

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

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

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Assets and liabilities recorded at fair value at June 30, 2012 consist of:

(in thousands)	Total			Quoted Market Prices (Level 1)		Significant Other Observable  Inputs (Level 2)			Significant Unobservable  Inputs (Level 3)
Interest rate swap agreements	$	(6,088	)	$	—	$	(6,088	)	$	—

Assets and liabilities recorded at fair value at September 30, 2011 consist of:

(in thousands)	Total			Quoted Market Prices (Level 1)		Significant Other Observable  Inputs (Level 2)			Significant Unobservable  Inputs (Level 3)
Interest rate swap agreements	$	(6,744	)	$	—	$	(6,744	)	$	—

Interest rate swap agreements.The fair value of the swap agreements was recorded in current liabilities (under Other accrued liabilities) in the Company’s consolidated balance sheets. The fair value of these agreements was determined based on pricing models and independent formulas using current assumptions that included swap terms, interest rates and forward LIBOR curves and the Company’s credit risk.

At June 30, 2012 and September 30, 2011, the carrying values of cash, accounts receivable, accounts payable and variable rate debt approximated fair value. The carrying value and fair value of the Company’s fixed rate debt instruments are set forth below:

	June 30, 2012				September 30, 2011
(in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Senior notes (issued February 9, 2011)	$	240,982	$	242,500	$	239,773	$	228,750

The fair values were estimated using calculations based on quoted market prices when available and company – specific credit risk. If the Company’s long-term debt was measured at fair value, it would have been categorized as Level 2 in the fair value hierarchy.

11. Income Taxes

The Company’s effective income tax rate for the interim periods was based on management’s estimate of the Company’s annual effective tax rate for the applicable year. For the three months ended June 30, 2012, the Company’s effective income tax rate was a benefit of 59.2% compared to an effective tax rate benefit of 27.9% for the three months ended June 30, 2011. For the nine months ended June 30, 2012, the Company’s effective income tax rate was a benefit of 64.8% compared to an effective tax rate benefit of 30.8% for the nine months ended June 30, 2011. These rates differ from the federal statutory income tax rate primarily due to nondeductible permanent differences, net operating losses not benefited, and uncertain tax positions.

NMH Holdings files a federal consolidated return and files various state income tax returns. The Company files various state income tax returns and, generally, is no longer subject to income tax examinations by the taxing authorities for years prior to September 30, 2009. The Company’s reserve for uncertain income tax positions, including interest and penalties, decreased from $6.1 million at September 30, 2011 to zero at June 30, 2012 as a result of favorable settlements of audits. The Company does not expect any significant changes to unrecognized tax benefits within the next twelve months. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as charges to income tax expense.

12. Segment Information

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

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

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

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

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

For the three months ended June 30,	Human Services		Post Acute Specialty Rehabilitation Services		Corporate			Consolidated
	(In thousands)
2012
Net revenue	$	238,340	$	47,008	$	—		$	285,348
Income (loss) from operations		20,550		5,699		(13,554	)		12,695
Total assets		785,422		175,644		82,485			1,043,551
Depreciation and amortization		11,050		3,644		699			15,393
Purchases of property and equipment		4,324		2,949		262			7,535
Income (loss) from continuing operations before income taxes		3,679		2,521		(13,746	)		(7,546	)
2011
Net revenue	$	225,919	$	43,782	$	—		$	269,701
Income (loss) from operations		19,727		4,878		(16,099	)		8,506
Depreciation and amortization		12,442		3,134		942			16,518
Purchases of property and equipment		3,157		1,969		313			5,439
Income (loss) from continuing operations before income taxes		3,069		1,755		(16,216	)		(11,392	)
For the nine months ended June 30,	Human Services		Post Acute Specialty Rehabilitation Services		Corporate			Consolidated
	(In thousands)
2012
Net revenue	$	701,880	$	136,730	$	—		$	838,610
Income (loss) from operations		59,247		14,814		(39,588	)		34,473
Total assets		785,422		175,644		82,485			1,043,551
Depreciation and amortization		32,789		10,697		2,171			45,657
Purchases of property and equipment		12,657		7,321		1,736			21,714
Income (loss) from continuing operations before income taxes		8,593		5,498		(39,481	)		(25,390	)
2011
Net revenue	$	668,793	$	130,350	$	—		$	799,143
Income (loss) from operations		62,608		14,123		(46,336	)		30,395
Depreciation and amortization		33,520		9,215		3,213			45,948
Purchases of property and equipment		8,369		4,680		1,584			14,633
Income (loss) from continuing operations before income taxes		20,083		6,174		(53,785	)		(27,528	)

Revenue from contracts with state and local governmental payors in the state of Minnesota, the Company’s largest state, which is included in the Human Services segment, accounted for 15% of the Company’s net revenue for the three months ended June 30, 2012 and 2011 and 15% and 16% of the Company’s net revenue for the nine months ended June 30, 2012 and 2011, respectively.

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

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

The Company records 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, workers’ compensation, automobile, and professional and general liability programs are based on analyses performed by management and take into account reports by independent third parties. Accruals are periodically reevaluated and increased or decreased based on new information.

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For professional and general liability, from October 1, 2010 through September 30, 2011, the Company was 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. Commencing October 1, 2011, the Company is self-insured for the first $4.0 million of each and every claim with no aggregate limit. In connection with the Merger on June 29, 2006, subject to $1.0 million per claim and up to $2.0 million in aggregate retentions, the Company purchased additional insurance for certain claims relating to pre-Merger periods.

For workers’ compensation, the Company has a $350 thousand per claim retention with statutory limits. Automobile liability has a $100 thousand per claim retention, with additional insurance coverage above the retention. The Company purchases specific stop loss insurance as protection against extraordinary claims liability for health insurance claims. Stop loss insurance covers claims that exceed $300 thousand on a per member basis.

During the first quarter of fiscal 2012, the Company adopted Accounting Standards Update No 2010-24,Health Care Entities (Topic 954), Presentation of Insurance Claims and Related Insurance Recoveries(“ASU 2010-24”), which clarifies that companies should not net insurance recoveries against related claim liabilities. Additionally, the amount of the claim liability should be determined without consideration of insurance recoveries. The Company adopted ASU 2010-24 prospectively and the impact of the adoption is reflected on the June 30, 2012 consolidated balance sheets. Had the Company adopted ASU 2010-24 as of September 30, 2011, current assets and current liabilities would have been $187.1 million and $148.0 million, respectively. Total assets and liabilities would have been $1,046.8 million and $1,078.0 million, respectively.

A summary of the assets and liabilities related to the Company’s insurance programs at June 30, 2012 and pro forma at September 30, 2011 are as follows:

(in thousands)	June 30, 2012 (1)		September 30, 2011 (2)
Assets
Anticipated insurance recoveries
Current	$	12,640	$	20,872
Long term		22,720		15,110
Total Assets	$	35,360	$	35,982
Liabilities
Self-insured liabilities
Current	$	31,089	$	36,149
Long term		58,562		42,125
Total Liabilities	$	89,651	$	78,274

(1) Anticipated insurance recoveries are presented in Prepaid expenses and other current assets and Other assets on the Company’s consolidated balance sheets. Self-insured liabilities are presented in Accrued payroll and related costs, Other accrued liabilities and Other long-term liabilities on the Company’s consolidated balance sheets.

(2) Pro forma – as if the Company adopted as of September 30, 2011.

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

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

14. Subsequent Events

The Company evaluated all events and transactions that occurred after the balance sheet date through the date of this filing. Except as disclosed below, the Company did not have any other material subsequent events that impacted its financial statements or disclosures.

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On August 13, 2012, NMH Investment, LLC (“NMH Investment”), the Company’s indirect parent, approved a third amendment to the Amended and Restated 2006 Unit Plan. The approved amendment authorizes the issuance of two new classes of non-voting equity units of NMH Investment of up to 130,000 Class G Common Units and up to 1,200,000 Class H Common Units. Also on August 13, 2012, NMH Investment approved the grants of 130,000 Class G Common Units and 1,000,000 Class H Common Units to certain members of the Company’s management as equity-based compensation.

Item 6. Exhibits.

The Exhibit Index is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NATIONAL MENTOR HOLDINGS, INC.
August 20, 2012	By:	/s/ Denis M. Holler
		Denis M. Holler
		Its:	Chief Financial Officer,
			Treasurer and duly authorized officer

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification of principal executive officer.	Filed herewith
31.2	Certification of principal executive officer.	Filed herewith
31.3	Certification of principal financial officer.	Filed herewith
32	Certifications furnished pursuant to 18 U.S.C. Section 1350.	Filed herewith
101	Interactive Data Files

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