UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30,
2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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COMMISSION FILE NUMBER:
333-129179
NATIONAL MENTOR HOLDINGS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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31-1757086
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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313 Congress Street, 6th Floor
Boston, Massachusetts 02210
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(617) 790-4800
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(Address of principal executive
offices,
including zip code)
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(Registrants telephone
number,
including area code)
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Securities Registered Pursuant to Section 12(b) of the
Act:
None.
Securities Registered Pursuant to Section 12(g) of the
Act:
None.
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 o No þ
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 o 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 registrants 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):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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, 2009, the last business day of the
registrants most recently completed second fiscal quarter,
was zero.
As of December 13, 2010, there were 100 shares of the
registrants common stock, $0.01 par value, issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
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, investments in our infrastructure and business
process improvements, our margins, our liquidity and our
financing plans. 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 funding or changes in budgetary priorities
by state and local governments;
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changes in reimbursement rates, policies or payment practices by
our payors;
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our significant amount of debt, our ability to meet our debt
service obligations and our ability to incur additional debt;
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current credit and financial market conditions;
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changes in interest rates;
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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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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 maintain, expand and renew existing services
contracts and to obtain additional contracts;
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our ability to attract and retain experienced personnel,
including members of our senior management team;
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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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government regulations and our ability to comply with such
regulations;
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our ability to establish and maintain relationships with
government agencies and advocacy groups;
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increased or more effective competition;
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successful integration of acquired businesses; and
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the potential for conflict between the interests of our majority
equity holder and those of our debt holders.
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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.
3
PART I
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 23,600 clients in
36 states.
We design customized service plans to meet the unique needs of
our clients, which we deliver in home and community-based
settings. Most of our service plans involve residential support,
typically in small group homes, host home settings or
specialized community facilities, designed to improve our
clients quality of life and to promote 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. 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. Despite a challenging state
reimbursement environment over the past three years, we have
been able to grow our revenue, EBITDA and number of clients
through a combination of (i) organic growth, including new
programs in new and existing geographic markets (which we refer
to as new starts) and (ii) our highly
disciplined acquisition strategy which has enabled us to
complete acquisitions that have, as a portfolio, been accretive
to our EBITDA. During fiscal 2009 and fiscal 2010, we spent
$83.0 million in cash on acquisitions and initiated 25 new
starts. The majority of the acquisitions were in our Post-Acute
Specialty Rehabilitation Services (SRS) segment.
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 from 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, 2010, we provided our services through
approximately 16,900 full-time equivalent employees, as
well as approximately 5,300 independently contracted host home
caregivers, or Mentors. We generated net revenue of
$1,022.0 million, $970.2 million and
$929.8 million during fiscal 2010, 2009 and 2008,
respectively.
Description
of Services by Segment
We have two reportable segments, Human Services and 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 87% of our net revenue in
fiscal 2010.
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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. As of
September 30, 2010, we provided I/DD services to
approximately 12,200 clients in 26 states. In fiscal 2010,
our I/DD services generated net revenue of $660.7 million,
representing 65% 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,
2010, we provided ARY services to approximately 10,600 children,
adolescents and their families in 22 states. In fiscal
2010, our ARY services generated net revenue of
$224.4 million, representing 22% 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, 2010, our SRS
operations provided services in 24 states and served
approximately 800 clients nationally. In fiscal 2010, our SRS
operations generated net revenue of $136.9 million,
representing 13% of our net revenue. In fiscal 2010, we received
57% of our SRS revenue from non-public payors, such as
commercial insurers, workers compensation funds, managed
care and other private payors, and 43% from state and local
governmental payors.
For additional information, 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
In 2009, approximately 1.6% of the U.S. population, or
4.84 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. As of 2006,
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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
$40.0 billion in 1998 to an estimated $52.9 billion in
2009, a compound annual growth rate of 5.3% 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 clients identified needs and
typically is paid on a
fee-for-service
basis. From 2004 to 2009, total expenditures for HCBS for all
disability groups increased from $21.8 billion to
$33.5 billion, a compound annual growth rate of 9.0%. In
2009, the HCBS Waiver program provided approximately
$15.5 billion in federal funding for approximately 525,000
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. In 2008, the ICF-MR program provided approximately
$12.0 billion in total state and federal funding to 93,000
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 2.8 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
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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
two 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. In 2008, an estimated 115,000
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 expected. 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 74%
of individuals with I/DD, who were receiving services under the
HCBS Waiver program, resided in settings for six or fewer
residents. However, 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, Georgia and Illinois, 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.
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At-Risk
Youth and Their Families
In federal fiscal year 2008, approximately 3.3 million
referrals were made to child protection authorities involving
the alleged maltreatment of approximately 6.0 million
children. Approximately 772,000 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 269,000 children were removed from their families
and placed in foster care during federal fiscal year 2008.
Approximately 463,000 children were in foster care in
September 2008, the end of the federal fiscal year, with 47%, or
approximately 217,000 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 therapeutic foster
care, smaller community group homes and family reunification and
preservation programs. For example, 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,
government spending on child welfare programs totaled
$25.7 billion, including $6.0 billion in federal
payments to states for foster care 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.
7
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. Currently, 5.3 million
people in the U.S. are living with a permanent disability
as a result of an ABI. In addition, an estimated
1.4 million new ABI cases 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, and
the Government Accountability Office estimates that 20% of these
veterans experience a traumatic brain injury.
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. 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 waivers 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 Strengths
We believe that the following attributes have enabled us to
achieve and maintain our position as a leading provider of home
and community-based services to our target population groups:
National Platform with Diverse Payor and Program
Mix. We currently serve clients in
36 states, states which are home to approximately 88% of
the U.S. population. We believe that we deliver a broader range
of high quality and services and a greater level of
responsiveness than many smaller local service providers are
able to offer. As a result, we believe we have been able to
forge strong relationships with state and local agencies that
refer and pay for our services. Our extensive history of serving
adults and children with a range of challenges and needs has led
to the development of operational expertise in quality
assurance, customer satisfaction survey implementation and
analysis, and risk management. Finally, the more than 30
different types of programs that we offer, coupled with our
diverse base of more than 1,000 state and county payors,
provide a stable revenue base and serve to mitigate the impact
of changes in public policy, rates or reimbursement policies in
any particular state, county or program.
Our national platform has also enabled us to implement best
practices across our organization and leverage economies of
scale in various direct and indirect costs, ranging from the
retention of clinical experts to advise and consult with local
operations to the purchase of technology and medical supplies.
In addition, our national platform, reputation and knowledge
enable us to respond quickly and efficiently to new
opportunities. As a result, we have established a long track
record of expanding into new geographic markets and developing
the clinical expertise to offer new service offerings, including
ABI programs, family-based treatment services and specialty
group homes for ARY with extremely challenging behaviors.
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Client-Oriented Care Model. We have the
expertise to design customized service plans to meet the unique
needs of our clients in community-based settings. We specialize
in adapting our service offerings to a wide range of intensities
of care and other client requirements, as well as in providing
cost-effective, high quality services that are accountable to
clients, their families and payors. For example, in recent
years, we worked closely with key payors in the State of
California to transition individuals with
I/DD and
highly complex medical conditions from state institutions to
specialized, community residences that were developed to meet
their needs. These individuals had not been previously moved
into home and community-based settings because of concerns that
their medical needs were too complex to allow them to live
outside of large institutional settings. Also, our program for
foster children with complex medical conditions serves children
in family foster homes with the support of medical
professionals, as opposed to expensive hospital or nursing home
settings, and provides a holistic approach to each childs
medical, physical and emotional needs. We also work with state
and local school districts to provide therapeutic foster care,
family reunification, adoption assistance and specialized school
services for children who had previously been served in
out-of-state
residential schools. Additionally, through our evidence-based
family preservation and prevention treatment model, we work with
youth who are not responding to typical community-based services
or who have been found to need institutional placement, as well
as those returning from incarceration or institutional placement.
Strong, Recurring Base of Revenue with Stable Cash
Flow. There are several factors that we believe
contribute to the stability and performance of our business,
most notably the following: (i) the average and growing
length of stay for our largest population group, persons with
I/DD, which
is currently seven years, (ii) the increasing life
expectancy of our clients with I/DD, ABI and other catastrophic
injuries, as a result of improved medical resources and
technology, (iii) active political advocacy and legal
protections encouraging home and community-based services; and
(iv) the vulnerable nature of our clients who are
must serve. We believe that these factors help to
insulate our programs from deep rate and service cuts. Despite
the state budget crisis in 2009 and 2010, we were able to
increase revenue through a combination of acquisitions and
organic growth and only realized rate adjustments in fiscal year
2009 and 2010 with an annualized net negative impact which
represents approximately 1.4% of our net revenue for fiscal year
2010. In addition, our business model has historically required
minimal capital expenditures of 2 to 3% of net revenue per year
and has modest working capital needs. As a result, we have
stable and significant free cash flow which enables us to either
reinvest in our business through acquisitions and growth
initiatives
and/or
reduce indebtedness, each as determined by our business and
financial strategies.
Flexible Cost Structure. We believe that our
fixed costs are lower than those of large institutional care
providers, enabling us to adapt quickly to market developments
and regulatory changes. A substantial portion of our caregivers
are hourly employees or independently contracted clinicians and
Mentors, which allows us to respond quickly to changes in our
staffing needs. As of September 30, 2010, nearly 70% of our
facilities were leased, which we believe allows us to respond to
changes in our service levels.
Strong Track Record of Successful Acquisitions and
Development of New Start Programs. We have grown
at a measured pace through a focused and disciplined strategy of
acquisitions and development of new starts in existing and new
markets. During fiscal 2009 and fiscal 2010, we completed
11 acquisitions, and we have a track record of successfully
integrating our acquisitions through significant investment in
resources, training and processes. The health and human services
markets in which we compete are highly fragmented with a limited
number of providers of scale. As a result, we believe that
acquisitions will remain a significant part of our growth
strategy. During fiscal 2009 and fiscal 2010, we have also
commenced 25 new starts and we continue to seek opportunities to
develop additional new starts as a means to strengthen our local
market share as well as enter new markets and programs.
Experienced and Committed Management Team and Equity
Sponsor. Our management team, having served
previously as policy makers, fiscal managers and service
providers, has extensive public and private sector experience in
health and human services. Our senior management team has been
with us for an average of 14 years and averages
approximately 23 years in the health and human services
industry. Members of our management team have helped us to
increase our net revenue from $219.1 million in fiscal 2000
to $1,022.0 million in fiscal 2010 through organic growth
and acquisitions. Members of management have helped to integrate
more than 40 acquisitions in the past 10 years. Our
executive officers have invested $4.2 million
9
in Preferred Units and Class A Common Units in our indirect
parent company, NMH Investment LLC (NMH Investment).
In addition, our equity sponsor, Vestar Capital Partners
(Vestar) has considerable experience making
investments in a wide variety of industries, including
healthcare.
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 existing markets and new 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 2010, operating losses on new starts for
programs started within the previous 18 months were
$2.5 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
intend 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,
and we are currently working with external consultants 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 human services and
(iii) the SRS market represents an opportunity for us to
diversify our payor base because approximately 57% of our SRS
revenue in fiscal 2010 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
10
and acquisitions, and we have achieved significant growth in
both revenue and profitability and become a leading provider of
these services. In fiscal 2010, we increased our SRS revenue by
41.9% and our SRS income from operations by 19.9%.
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 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. We have invested in the infrastructure and
formalized processes to enable us to pursue acquisition
opportunities and integrate acquisitions. During fiscal 2010, we
acquired seven companies complimentary to our business for total
fair value consideration of $52.1 million, including
$3.0 million of contingent consideration. For additional
information on the acquisitions made during fiscal 2010, see
Fiscal Year 2010 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 2010 and 2009, revenue from our contracts with
state and local governmental payors in the states of Minnesota,
California, West Virginia, Florida and Indiana, our five largest
revenue-generating states, comprised 40% of our net revenue.
Revenue from our contracts with state and local governmental
payors in the state of Minnesota, our largest state, accounted
for 16% of our net revenue for both fiscal 2010 and 2009.
We have long-standing service agreements with Alliance Health
and Human Services, Inc. (Alliance), an independent,
not-for-profit
organization, to provide ARY services for state and local
governments that prefer or choose not to enter into contracts
with for-profit corporations to provide those services. In these
cases, Alliance has licenses or contracts with state or local
agencies, and we have entered into service agreements with
Alliance in Illinois, Ohio and Pennsylvania to provide certain
treatment services in local programs for ARY. Approximately 2%
and 3% of our revenue for fiscal 2010 and 2009, respectively,
was derived from contracts with Alliance.
11
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, 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 have the following business development and marketing
services available to promote both new and existing product
lines.
Our business development group works with operations to drive
the growth of programs and services across the country and to
divest non-performing business units. The business development
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 business development group is led by two senior
executives. In addition, we have four dedicated mergers and
acquisition professionals who identify, prioritize, and
implement the best acquisition growth opportunities. All of the
business development groups 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
12
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
13
assessment of fines or penalties
and/or
decertification or delicensure 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 Home and Community Based
Services (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 childrens services
are largely governed by individual state regulations which vary
both in terms and regulatory content. Failure to comply with any
states 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 new 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.
14
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 governments 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 health care enforcement but remains a
fairly new federal initiative. Thus, the ultimate impact remains
unclear and 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. OIG advisory
opinions, though limited in their application to Medicaid
programs, are reviewed and monitored regularly. 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 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.
15
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 General
Counsel, 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 June 29, 2006, NMH MergerSub, Inc., a wholly owned
subsidiary of NMH Investment, merged with and into the Company,
and the Company was the surviving corporation (the
Merger). Vestar, certain affiliates of Vestar,
members of management and certain directors own NMH Investment,
and therefore indirectly own the Company. In connection with the
Merger, we entered into new senior secured credit facilities
consisting of a $335.0 million seven-year senior secured
term loan facility, a $125.0 million six-year senior
secured revolving credit facility, and a $20.0 million
seven-year senior secured synthetic letter of credit facility.
We also issued $180.0 million of notes, which are
guaranteed by our subsidiaries, except for our non-profit
subsidiaries. For additional information on this transaction,
see note 10 to our consolidated financial statements
included elsewhere in this report.
On July 5, 2007, NMH Holdings, Inc. (NMH
Holdings), our indirect parent company, issued
$175.0 million aggregate principal amount of senior
floating rate toggle notes (the NMH Holdings notes).
These notes are unsecured and are not guaranteed by the Company
or any of its affiliates. NMH Holdings used the proceeds from
this offering to pay a dividend to its parent NMH Investment,
which was used by NMH Investment to pay a return of capital with
respect to its preferred units and to pay fees and expenses
related to the offering. Interest is accruing as paid in kind,
or PIK, and will be payable in cash beginning September 2012.
Our
Sponsor
Vestar Capital Partners is a leading private equity firm
specializing in management buyouts and growth capital
investments. Vestars 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 firms founding in 1988, Vestar has completed 67
investments in the North America and Europe in companies with a
total value of approximately $30 billion. These companies
have varied in size and geography and span a broad range of
industries including healthcare, an area in which Vestars
principals have had meaningful experience. Vestar currently
manages funds totaling approximately $7 billion and has
offices in New York, Denver, Boston, Paris, Milan and Munich.
See Certain Relationships and Related 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.
Reductions
or changes in Medicaid funding or changes in budgetary
priorities by the state and local governments that pay for our
services could have a material adverse effect on our revenue and
profitability.
We derive the vast majority of our revenue from contracts with
state and local governments. These governmental payors fund a
significant portion of their payments to us through Medicaid, a
joint federal and state health insurance program through which
state expenditures are matched by federal funds typically
ranging from 50% to approximately 76% of total costs, a number
based largely on a states per capita income. Our revenue,
therefore, is determined by the level of federal, state and
local governmental spending for the
16
services we provide. For the period from October 1, 2008
thru June 30, 2011, under the American Recovery and
Reinvestment Act of 2009, the federal government had temporarily
increased its share of the costs. As a result, it is providing
state governments with more than $100 billion in federal
Medicaid funding during this period to help address state budget
gaps caused by a steep decline in tax collections and
significantly increased Medicaid enrollment, among other
factors, during the recent recessionary period. Budgetary
pressures, particularly during the recent recessionary period as
well as other economic, industry, political and other factors,
could cause the federal and state governments to limit spending,
which could significantly reduce our revenue, referrals, margins
and profitability and adversely affect our growth strategy.
Governmental agencies generally condition their contracts with
us upon a sufficient budgetary appropriation. If a government
agency does not receive an appropriation sufficient to cover its
contractual obligations with us, it may terminate a contract or
defer or reduce our reimbursement. Furthermore, the termination
of enhanced federal Medicaid funding, scheduled for July 1,
2011, is expected to occur well before state revenues are
projected to return to pre-recessionary levels and is expected
to significantly increase the budgetary challenges confronting
state governments for fiscal year 2012, which begins
July 1, 2011 in most states. In addition, there is risk
that previously appropriated funds could be reduced through
subsequent legislation. The Patient Protection and Affordable
Care Act of 2010 mandates certain uses for Medicaid funds, which
could have the effect of diverting those funds from the services
we provide. Many states in which we operate have been
experiencing unprecedented budgetary deficits and constraints
and have implemented or are considering initiating service
reductions, rate freezes
and/or rate
reductions, including states such as Minnesota, California,
Indiana and Arizona. Similarly, programmatic changes such as
conversions to managed care with related contract demands
regarding billing and services, unbundling of services,
governmental efforts to increase consumer autonomy and reduce
provider oversight, coverage and other changes under state
Medicaid plans, may cause unanticipated costs and risks to our
service delivery. The loss or reduction of or changes to
reimbursement under our contracts could have a material adverse
effect on our business, financial condition and operating
results.
Reductions
in reimbursement rates or failure to obtain increases in
reimbursement rates could adversely affect our revenue, cash
flows and profitability.
Our revenue and operating profitability depend on our ability to
maintain our existing reimbursement levels and to obtain
periodic increases in reimbursement rates to meet higher costs
and demand for more services. Twelve percent of our revenue is
derived from contracts based on a cost reimbursement model where
we are reimbursed for our services based on our costs plus an
agreed-upon
margin. If we are not entitled to, do not receive or cannot
negotiate increases in reimbursement rates, or are forced to
accept a reduction in our reimbursement rates at approximately
the same time as our costs of providing services increase,
including labor costs and rent, our margins and profitability
could be adversely affected. Changes in how federal and state
government agencies operate reimbursement programs can also
affect our operating results and financial condition. Some
states have, from time to time, revised their rate-setting or
methodologies in a manner that has resulted in rate decreases.
In some instances, changes in rate-setting methodologies have
resulted in third-party payors disallowing, in whole or in part,
our requests for reimbursement. Any reduction in or the failure
to maintain or increase our reimbursement rates could have a
material adverse effect on our business, financial condition and
results of operations. Changes in the manner in which state
agencies interpret program policies and procedures or review and
audit billings and costs could also adversely affect our
business, financial condition and operating results and our
ability to meet obligations under our indebtedness.
Our
level of indebtedness could adversely affect our ability to
raise additional capital to fund our operations, and limit our
ability to react to changes in the economy or our
industry.
We have a significant amount of indebtedness. As of
September 30, 2010, we had total indebtedness of
$506.2 million, no borrowings under our senior revolver and
$115.1 million of availability under our senior revolver.
The senior secured credit facilities also include a
$20.0 million synthetic letter of credit facility, all of
which has been fully utilized. The availability under our senior
revolver was reduced from $125.0 million as
$9.9 million of letters of credit in excess of
$20.0 million under our synthetic letters of credit
facility were outstanding under the senior credit agreement.
17
Our substantial degree of leverage could have important
consequences, including the following:
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it may limit our ability to obtain additional debt or equity
financing for working capital, capital expenditures, debt
service requirements, acquisitions 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 financial obligations;
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interest rates on our variable interest rate borrowings under
the senior secured credit facilities 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; and
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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.
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In addition to our indebtedness noted above, our indirect parent
company NMH Holdings had $220.3 million aggregate principal
amount of the NMH Holdings notes outstanding as of
September 30, 2010 (including the $13.2 million of
which was held by us). These notes are not guaranteed by the
Company. NMH Holdings is a holding company with no direct
operations. Its principal assets are the direct and indirect
equity interests it holds in its subsidiaries, including us, and
all of its operations are conducted through us and our
subsidiaries. As a result, absent other sources of liquidity,
NMH Holdings will be dependent upon dividends and other payments
from us to generate the funds necessary to meet its outstanding
debt service and other obligations, including its obligations on
the notes held by us. NMH Holdings has paid all of the interest
payments to date on the notes entirely in PIK Interest (defined
below) which increased the principal amount by
$59.2 million, including the PIK Interest issued to us. NMH
Holdings currently expects to elect to make interest payments
entirely by increasing the principal amount of the NMH Holdings
notes or issuing new NMH Holdings notes (PIK
Interest) through June 15, 2012. Beginning
September 15, 2012, interest payments must be made in cash,
including the accrued PIK Interest. NMH Holdings expects the
September 2012 payment to be in the range of $90.0 million
to $95.0 million depending on movements in interest rates.
Our senior credit agreement and the indenture governing our
senior subordinated notes limit our ability to pay dividends to
our parent companies. We do not currently expect to have the
ability under our debt agreements to make a dividend payment in
an amount sufficient to enable NMH Holdings to satisfy its
payment due in September 2012. NMH Holdings may pursue various
financing alternatives to fund this payment, any of which could
have a material impact on our liquidity and could also require
amendments to the agreements governing our outstanding debt
obligations or those of NMH Holdings. Additional financing may
not be available or, if available, may not be made on terms
favorable to us.
Subject to restrictions in the indentures governing our senior
subordinated notes and the NMH Holdings notes and the credit
agreement governing our senior secured credit facilities, 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. The NMH Holdings notes are structurally
subordinated to the senior subordinated notes and the senior
secured credit facilities.
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 fiscal 2010, our aggregate rental payments for
these leases, including taxes and operating expenses, was
$44.8 million. These obligations could further increase the
risks described above.
18
Current
credit and economic conditions could have a material adverse
effect on our cash flows, liquidity and financial
condition.
Due to the general tightening of the credit markets over the
last several years, our government payors or other
counterparties that owe us money could be delayed in obtaining,
or may not be able to obtain, necessary funding
and/or
financing to meet their cash-flow needs. Moreover, tax revenue
continues to be down in many jurisdictions due to the economic
recession and high rates of unemployment, and government payors
may not be able to pay us for our services until they collect
sufficient tax revenue. Delays in payment could have a material
adverse effect on our cash flows, liquidity and financial
condition. In addition, in the event that our payors or other
counterparties delay payments to us, our financial condition
could be further impaired if we are unable to borrow additional
funds under our senior credit agreement to finance our
operations.
Our
variable cost structure is directly related to our labor costs,
which may be adversely affected by labor shortages, a
deterioration in labor relations or increased unionization
activities.
Our variable cost structure and operating profitability are
directly related to our labor costs. Labor costs may be
adversely affected by a variety of factors, including a limited
supply of qualified personnel in any geographic area, local
competitive forces, the ineffective utilization of our labor
force, increases in minimum wages, health care costs and other
personnel costs, and adverse changes in client service models.
We 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 will impose new mandates on employers
beginning in January 2011. Given the composition of our
workforce, these mandates could be material to our costs, and we
are studying the potential impact of these mandates.
Although our employees are generally not unionized, we recently
acquired a business in New Jersey with forty-nine employees who
are represented by a labor union. Future unionization activities
could result in an increase of our labor and other costs. The
Employee Free Choice Act (EFCA) of 2009 (H.R.
1409) seeks to amend the National Labor Relations Act to
make it easier for workers to be represented by labor unions. If
the EFCA or a variation of this legislation becomes law, it
could result in increased unionization activities. We may not be
able to negotiate labor agreements on satisfactory terms with
any future labor unions. If employees covered by a collective
bargaining agreement were to engage in a strike, work stoppage
or other slowdown, we could experience a disruption of our
operations
and/or
higher ongoing labor costs, which could adversely affect our
business, financial condition and results of operations.
Covenants
in our debt agreements restrict our business in many
ways.
The credit agreement governing the senior secured credit
facilities, the indenture governing the senior subordinated
notes and the indenture governing the NMH Holdings 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.
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The 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 thereunder, together with accrued interest,
to be due and payable and could proceed against the collateral
securing that indebtedness.
The
nature of our operations could subject us to substantial claims,
litigation and governmental investigations.
We are in the health and human services business and, therefore,
we have been and continue to be subject to substantial claims
alleging that we, our employees or our Mentors failed to provide
proper care for a client. We are also subject to claims by our
clients, our employees, our Mentors or community members against
us for negligence, intentional misconduct or violation of
applicable laws. Included in our recent claims are claims
alleging personal injury, assault, battery, abuse, wrongful
death and other charges, and our claims for professional and
general liability have increased sharply in recent years.
Regulatory agencies may initiate administrative proceedings
alleging that our programs, employees or agents violate statutes
and regulations and seek to impose monetary penalties on us. We
could be required to incur significant costs to respond to
regulatory investigations or defend against civil lawsuits and,
if we do not prevail, we could be required to pay substantial
amounts of money in damages, settlement amounts or penalties
arising from these legal proceedings.
A litigation award excluded by, or in excess of, our third-party
insurance limits and self-insurance reserves could have a
material adverse impact on our operations and cash flow and
could adversely impact our ability to continue to purchase
appropriate liability insurance. Even if we are successful in
our defense, civil lawsuits or regulatory proceedings could also
irreparably damage our reputation.
We also are subject to potential lawsuits under the False Claims
Act and other federal and state whistleblower statutes designed
to combat fraud and abuse in the health care industry. These
lawsuits can involve significant monetary awards and bounties to
private plaintiffs who successfully bring these suits. If we are
found to have violated the False Claims Act, we could be
excluded from participation in Medicaid and other federal
healthcare programs. The Patient Protection and Affordable Care
Act provides a mandate for more vigorous and widespread
enforcement activity.
Finally, we are also subject to employee-related claims under
state and federal law, including claims for discrimination,
wrongful discharge or retaliation; claims for wage and hour
violations under the Fair Labor Standards Act or state wage and
hour laws; and novel intentional tort claims.
Our
financial results could be adversely affected if claims against
us are successful, to the extent we must make payments under our
self-insured retentions, or if such claims are not covered by
our applicable insurance or if the costs of our insurance
coverage increase.
We have been and continue to be subject to substantial claims
against our professional and general liability and automobile
liability insurance. Any claims, if successful, could result in
substantial damage awards which might require us to make
payments under our self-insured retentions. We have historically
self-insured amounts of up to $1.0 million per claim and up
to $2.0 million in the aggregate, but as of October 1,
2010, we are self-insured for $2.0 million per claim and
$8.0 million in the aggregate, and for $500,000 per claim
in excess of the aggregate. An award may exceed the limits of
any applicable insurance coverage, and awards for punitive
damages may be excluded from our insurance policies either
contractually or by operation of state law. In addition, our
insurance does not cover all potential liabilities including,
for example, those arising from 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
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state, by type and by other factors. The rising costs of
insurance premiums, as well as successful claims against us,
could have a material adverse effect on our financial position
and results of operations.
It is also possible that our liability and other insurance
coverage will not continue to be available at acceptable costs
or on favorable terms.
If payments for claims exceed actuarially determined estimates,
are not covered by insurance, or our insurers fail to meet their
obligations, our results of operations and financial position
could be adversely affected.
Because
a substantial portion of NMH Holdings and 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 substantial portion of our indebtedness, including borrowings
under the senior revolver and borrowings under the senior
secured term loan facility and the indebtedness of NMH Holdings
under the NMH Holdings notes, bears interest at rates that
fluctuate with changes in certain short-term prevailing interest
rates. If interest rates increase, our and NMH Holdings
debt service obligations on the variable rate indebtedness would
increase even though the amount borrowed remained the same.
As of September 30, 2010, we had $324.5 million of
floating rate debt outstanding. As of September 30, 2010,
NMH Holdings had $220.3 million of floating rate debt
outstanding, including the debt of its subsidiaries. A 1%
increase in the interest rate on our floating rate debt would
have increased cash interest expense of the floating rate debt
for fiscal 2010 by $3.2 million, and a 1% increase in the
interest rate on the NMH Holdings notes would increase NMH
Holdings interest expense on those notes for fiscal 2010
by $2.2 million. If interest rates increase dramatically,
NMH Holdings and the Company and its subsidiaries could be
unable to service their debt.
The
nature of services that we provide could subject us to
significant workers compensation related liability, some
of which may not be fully reserved for.
We use a combination of insurance and self-insurance plans to
provide for potential liability for workers compensation
claims. Because of our high ratio of employees per client, and
because of the inherent physical risk associated with the
interaction of employees with our clients, many of whom have
intensive care needs, the potential for incidents giving rise to
workers compensation liability is relatively high.
We estimate liabilities associated with workers
compensation risk and establish reserves each quarter based on
internal valuations, third-party actuarial advice, historical
loss development factors and other assumptions believed to be
reasonable under the circumstances. Our results of operations
have been adversely impacted and may be adversely impacted in
the future if actual occurrences and claims exceed our
assumptions and historical trends.
If any
of the state and local government agencies with which we have
contracts determines that we have not complied with our
contracts or have violated any applicable laws or regulations,
our revenue may decrease, we may be subject to fines or
penalties and we may be required to restructure our billing and
collection methods.
We derive the vast majority of our revenue from state and local
government agencies, and a substantial portion of this revenue
is state-funded with federal Medicaid matching dollars. If we
fail to comply with federal and state documentation, coding and
billing rules, we could be subject to criminal
and/or civil
penalties, loss of licenses and exclusion from the Medicaid
programs, which could harm us. In billing for our services to
third-party payors, we must follow complex documentation, coding
and billing rules. These rules are based on federal and state
laws, rules and regulations, various government pronouncements,
and on industry practice. Failure to follow these rules could
result in potential criminal or civil liability under the False
Claims Act, under which extensive financial penalties can be
imposed. It could further result in criminal liability under
various federal and state criminal statutes. We annually submit
a large volume of claims for
21
Medicaid and other payments and there can be no assurance that
there have not been errors. The rules are frequently vague and
confusing and we cannot assure that governmental investigators,
private insurers or private whistleblowers will not challenge
our practices. Such a challenge could result in a material
adverse effect on our business.
If any of the state and local government payors determine that
we have not complied with our contracts or have violated any
applicable laws or regulations, our revenue may decrease, we may
be subject to fines or penalties and we may be required to
restructure our billing and collection methods. We are routinely
subject to governmental reviews, audits and investigations to
verify our compliance with applicable laws and regulations. As a
result of these reviews, audits and investigations, these
governmental payors may be entitled to, in their discretion:
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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.
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As a result of past reviews and audits of our operations, we
have been and are subject to some of these actions from time to
time. While we do not currently believe that our existing audit
proceedings will have a material adverse effect on our financial
condition or significantly harm our reputation, we cannot assure
you that similar actions in the future will not do so. In
addition, such proceedings could have a material adverse impact
on our results of operations in a future reporting period.
In some states, we operate on a cost reimbursement model in
which revenue is recognized at the time costs are incurred. In
these states, payors audit our historical costs on a regular
basis, and if it is determined that our historical costs are
insufficient to justify our rates, our rates may be reduced, or
we may be required to return fees paid to us in prior periods.
In some cases we have experienced negative audit adjustments
which are based on subjective judgments of reasonableness,
necessity or allocation of costs in our services provided to
clients. These adjustments are generally required to be
negotiated as part of the overall audit resolution and may
result in paybacks to payors and adjustments of our rates. We
cannot assure you that our rates will be maintained, or that we
will be able to keep all payments made to us, until an audit of
the relevant period is complete. Moreover, if we are required to
restructure our billing and collection methods, these changes
could be disruptive to our operations and costly to implement.
Failure to comply with laws and regulations could have a
material adverse effect on our business.
If we
fail to establish and maintain relationships with state and
local government agencies, we may not be able to successfully
procure or retain government-sponsored contracts, which could
negatively impact our revenue.
To facilitate our ability to procure or retain
government-sponsored contracts, we rely in part on establishing
and maintaining relationships with officials of various
government agencies. These relationships enable us to maintain
and renew existing contracts and obtain new contracts and
referrals. The effectiveness of our relationships may be reduced
or eliminated with changes in the personnel holding various
government offices or staff positions. We also may lose key
personnel who have these relationships and such personnel are
generally not subject to non-compete or non-solicitation
covenants. Any failure to establish, maintain or manage
relationships with government and agency personnel may hinder
our ability to procure or retain government-sponsored contracts,
and could negatively impact our revenue.
22
Negative
publicity or changes in public perception of our services may
adversely affect our ability to obtain new contracts and renew
existing ones.
Our success in obtaining new contracts and renewals of our
existing contracts depend upon maintaining our reputation as a
quality service provider among governmental authorities,
advocacy groups, families of our clients and the public.
Negative publicity, changes in public perception, legal
proceedings and government investigations with respect to our
operations could damage our reputation and hinder our ability to
retain contracts and obtain new contracts, and could reduce
referrals, increase government scrutiny and compliance or
litigation costs, or generally discourage clients from using our
services. Any of these events could have a material adverse
effect on our business, financial condition and operating
results.
We
face substantial competition in attracting and retaining
experienced personnel, and we may be unable to maintain or grow
our business if we cannot attract and retain qualified
employees.
Our success depends to a significant degree on our ability to
attract and retain qualified and experienced human service and
other professionals who possess the skills and experience
necessary to deliver quality services to our clients and manage
our operations. We face competition for certain categories of
our employees, particularly service provider employees, based on
the wages, benefits and other working conditions we offer.
Contractual requirements and client needs determine the number,
education and experience levels of human service professionals
we hire. Our ability to attract and retain employees with the
requisite credentials, experience and skills depends on several
factors, including, but not limited to, our ability to offer
competitive wages, benefits and professional growth
opportunities. The inability to attract and retain experienced
personnel could have a material adverse effect on our business.
We may
not realize the anticipated benefits of any future acquisitions
and we may experience difficulties in integrating these
acquisitions.
As part of our growth strategy, we intend to make acquisitions.
Growing our business through acquisitions involves risks because
with any acquisition there is the possibility that:
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we may be unable to maintain and renew the contracts of the
acquired business;
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unforeseen difficulties may arise in integrating the acquired
operations, including information systems and accounting
controls;
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we may not achieve operating efficiencies, synergies, economies
of scale and cost reductions as expected;
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the business we acquire may not continue to generate income at
the same historical levels on which we based our acquisition
decision;
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management may be distracted from overseeing existing operations
by the need to integrate the acquired business;
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we may acquire or assume unexpected liabilities or there may be
other unanticipated costs;
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we may encounter unanticipated regulatory risk;
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we may experience problems entering new markets or service lines
in which we have limited or no experience;
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we may fail to retain and assimilate key employees of the
acquired business;
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we may finance the acquisition by incurring additional debt and
further increase our leverage ratios; and
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the culture of the acquired business may not match well with our
culture.
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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.
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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:
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the failure by our employees or Mentors to properly care for
clients;
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the failure to submit proper documentation to the applicable
government agency, including documentation supporting
reimbursements for costs;
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the failure by our programs to abide by the applicable
regulations relating to the provision of human services; or
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the failure of our facilities to comply with the applicable
building, health and safety codes and ordinances.
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From time to time, some of our licenses or certifications, or
those of our employees, are temporarily placed on probationary
status or suspended. If we lost our status as a licensed
provider of human services in any jurisdiction or any other
required certification, we would be unable to market our
services in that jurisdiction, and the contracts under which we
provide services in that jurisdiction would be subject to
termination. Moreover, such an event could constitute a
violation of provisions of contracts in other jurisdictions,
resulting in other contract, license or certification
terminations. Any of these events could have a material adverse
effect on our operations.
We are
subject to extensive governmental regulations, which require
significant compliance expenditures, and a failure to comply
with these regulations could adversely affect our
business.
We must comply with comprehensive government regulation of our
business, including statutes, regulations and policies governing
the licensing of our facilities, the maintenance and management
of our work place for our employees, the quality of our service,
the revenue we receive for our services, and reimbursement for
the cost of our services. Compliance with these laws,
regulations and policies is expensive, and if we fail to comply
with these laws, regulations and policies, we could lose
contracts and the related revenue, thereby harming our financial
results. State and federal regulatory agencies have broad
discretionary powers over the administration and enforcement of
laws and regulations that govern our operations. A material
violation of a law or regulation could subject us to fines and
penalties and in some circumstances could disqualify some or all
of the facilities and programs under our control from future
participation in Medicaid or other government programs. The
Health Insurance Portability and Accountability Act of 1996 (as
amended, HIPAA) and other federal and state data
privacy and security laws, which require the establishment of
privacy standards for health care information storage, retrieval
and dissemination as well as electronic transmission and
security standards, could result in potential penalties in
certain of our businesses if we fail to comply with these
privacy and security standards.
Expenses incurred under governmental agency contracts for any of
our services, as well as management contracts with providers of
record for such agencies, are subject to review by agencies
administering the contracts and services. Representatives of
those agencies visit our group homes to verify compliance with
state and local regulations governing our home operations. A
negative outcome from any of these examinations could increase
government scrutiny, increase compliance costs or hinder our
ability to obtain or retain contracts. Any of these events could
have a material adverse effect on our business, financial
condition and operating results.
The federal anti-kickback law and non-self referral statute, and
similar state statutes, prohibit kickbacks, rebates and any
other form of remuneration in return for referrals. Any
remuneration, direct or indirect, offered, paid, solicited, or
received, in return for referrals of patients or business for
which payment may be
24
made in whole or in part under Medicaid could be considered a
violation of law. The language of the anti-kickback law also
prohibits payments made to anyone to induce them to recommend
purchasing, leasing, or ordering any goods, facility, service,
or item for which payment may be made in whole or in part by
Medicaid. Criminal penalties under the anti-kickback law include
fines up to $25,000, imprisonment for up to 5 years, or
both. In addition, acts constituting a violation of the
anti-kickback law may also lead to civil penalties, such as
fines, assessments and exclusion from participation in the
Medicaid programs.
CMS employs Medicaid Integrity Contractors (MICs) to
perform post-payment audits of Medicaid claims and identify
overpayments. Throughout 2011, we expect MIC audits will
continue to expand. In addition to MICs, several other
contractors, including the state Medicaid agencies, have
increased their review activities.
Should we be found out of compliance with any of these laws,
regulations or programs, depending on the nature of the
findings, our business, our financial position and our results
of operations could be materially adversely impacted.
If a
federal or state agency asserts a different position or enacts
new laws or regulations regarding illegal payments under
Medicaid or other governmental programs, we may be subject to
civil and criminal penalties, experience a significant reduction
in our revenue or be excluded from participation in Medicaid or
other governmental programs.
Any change in interpretations or enforcement of existing or new
laws and regulations could subject our current business
practices to allegations of impropriety or illegality, or could
require us to make changes in our homes, equipment, personnel,
services, pricing or capital expenditure programs, which could
increase our operating expenses and have a material adverse
effect on our operations or reduce the demand for or
profitability of our services.
We
have identified material weaknesses in our internal control over
financial reporting in prior periods.
As reported in our Annual Report on
Form 10-K
for the fiscal year ended September 30, 2009, we identified
material weaknesses in our internal control over financial
reporting relating to our revenue and accounts receivable
balances as of September 30, 2009, and management concluded
that as of that date, our internal control over financial
reporting was not effective and, as a result, our disclosure
controls and procedures were not effective. We also reported
material weaknesses as of September 30, 2008, including a
material weakness in controls to verify the existence of our
fixed asset balances. As a result of this material weakness, we
identified errors during the quarter ended June 30, 2009
which resulted in an adjustment to reduce property and equipment
by $1.8 million. While we have taken action to remediate
our identified material weaknesses and continue to improve our
internal controls, the decentralized nature of our operations
and the manual nature of many of our controls increases our risk
of control deficiencies.
We did not experience similar material weaknesses in connection
with our audit of fiscal 2010. No evaluation can provide
complete assurance that our internal controls will detect or
uncover all failures of persons within our company to disclose
material information otherwise required to be reported. The
effectiveness of our controls and procedures could also be
limited by simple errors or faulty judgments. We may in the
future identify material weaknesses or significant deficiencies
in connection with the continuing implementation of our billing
and accounts receivable system and the consolidation of our cash
disbursement function at one centralized location. 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.
25
The
high level of competition in our industry could adversely affect
our contract and revenue base.
We compete with a wide variety of competitors, ranging from
small, local agencies to a few large, national organizations.
Competitive factors may favor other providers and reduce our
ability to obtain contracts, which would hinder our growth.
Not-for-profit
organizations are active in all states and range from small
agencies serving a limited area with specific programs to
multi-state organizations. Smaller local organizations may have
a better understanding of the local conditions and may be better
able to gain political and public acceptance.
Not-for-profit
providers may be affiliated with advocacy groups, health
organizations or religious organizations that have substantial
influence with legislators and government agencies. Increased
competition may result in pricing pressures, loss of or failure
to gain market share or loss of clients or payors, any of which
could harm our business.
We
rely on third parties to refer clients to our facilities and
programs.
We receive substantially all of our clients from third-party
referrals and are governed by the federal anti-kickback/non-self
referral statute. Our reputation and prior experience with
agency staff, care workers and others in positions to make
referrals to us are important for building and maintaining our
operations. Any event that harms our reputation or creates
negative experiences with such third parties could impact our
ability to receive referrals and grow our client base.
Home
and community-based human services may become less popular among
our targeted client populations and/or state and local
governments, which would adversely affect our results of
operations.
Our growth depends on the continuation of trends in our industry
toward providing services to individuals in smaller,
community-based settings and increasing the percentage of
individuals served by non-governmental providers. The
continuation of these trends and our future success are subject
to a variety of political, economic, social and legal pressures,
all of which are beyond our control. A reversal in the
downsizing and privatization trends could reduce the demand for
our services, which could adversely affect our revenue and
profitability.
Government
reimbursement procedures are time-consuming and complex, and
failure to comply with these procedures could adversely affect
our liquidity, cash flows and operating results.
The government reimbursement process is time-consuming and
complex, and there can be delays before we receive payment.
Government reimbursement, group home credentialing and Medicaid
recipient eligibility and service authorization procedures are
often complicated and burdensome, and delays can result from,
among other things, securing documentation and coordinating
necessary eligibility paperwork between agencies. These
reimbursement and procedural issues occasionally cause us to
have to resubmit claims several times before payment is
remitted. If there is a billing error, the process to resolve
the error may be time-consuming and costly. To the extent that
complexity associated with billing for our services causes
delays in our cash collections, we assume the financial risk of
increased carrying costs associated with the aging of our
accounts receivable as well as increased potential for
write-offs. We can provide no assurance that we will be able to
collect payment for claims at our current levels in future
periods. The risks associated with third-party payors and the
inability to monitor and manage accounts receivable successfully
could have a material adverse effect on our liquidity, cash
flows and operating results.
We
conduct a significant percentage of our operations in Minnesota
and, as a result, we are particularly susceptible to any
reduction in budget appropriations for our services or any other
adverse developments in that state.
For the fiscal year ended September 30, 2010, 16% of our
revenue was generated from contracts with government agencies in
the state of Minnesota. Accordingly, any reduction in
Minnesotas budgetary appropriations for our services,
whether as a result of fiscal constraints due to recession,
changes in policy or otherwise, could result in a reduction in
our fees and possibly the loss of contracts. A rate cut of 2.6%
took effect in Minnesota on July 1, 2009. We cannot assure
you that we will not receive further rate reductions this
26
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:
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the failure to maintain and renew our licenses;
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|
the failure to maintain important relationships with officials
of government agencies; and
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|
any negative publicity regarding our operations.
|
Any of these adverse developments occurring in Minnesota could
result in a reduction in revenue or a loss of contracts, which
could have a material adverse effect on our results of
operations, financial position and cash flows.
We
depend upon the continued services of certain members of our
senior management team, without whom our business operations
could be significantly disrupted.
Our success depends, in part, on the continued contributions of
our senior officers and other key employees. Our management team
has significant industry experience and would be difficult to
replace. If we lose or suffer an extended interruption in the
service of one or more of our key employees, our financial
condition and operating results could be adversely affected. The
market for qualified individuals is highly competitive and we
may not be able to attract and retain qualified personnel to
replace or succeed members of our senior management or other key
employees, should the need arise.
Our
success depends on our ability to manage growing and changing
operations and successfully optimize our cost
structure.
Since 1998, our business has grown significantly in size and
complexity. This growth has placed, and is expected to continue
to place, significant demands on our management, systems,
internal controls and financial and physical resources. Our
operations are highly decentralized, with many billing,
accounting and collection functions being performed at the local
level. This requires us to expend significant resources
implementing and monitoring compliance at the local level. In
addition, we expect that we will need to further develop our
financial and managerial controls and reporting systems to
accommodate future growth. This will require us to incur
expenses for hiring additional qualified personnel, retaining
professionals to assist in developing the appropriate control
systems and expanding our information technology infrastructure.
The nature of our business is such that qualified management
personnel can be difficult to find. We also are continuing to
take actions to optimize our cost structure, including most
recently centralizing certain functions and implementing a
review of our field administrative functions. To the extent
these optimization efforts and any related reductions in force
disrupt our operations, there could be an adverse effect on our
financial results. In addition, our cost structure optimization
efforts may not achieve the cost savings we expect within the
anticipated time frame, or at all. Our inability to manage
growth and implement cost structure optimization effectively
could have a material adverse effect on our results of
operations, financial position and cash flows.
Our
information systems are critical to our business and a failure
of those systems could materially harm us.
We depend on our ability to store, retrieve, process and manage
a significant amount of information, and to provide our
operations with efficient and effective accounting, census,
incident reporting and scheduling systems. Our information
systems require maintenance and upgrading to meet our needs,
which could significantly increase our administrative expenses.
Furthermore, any system failure that causes an interruption in
service or availability of our critical systems could adversely
affect operations or delay the collection of revenues. Even
though we have implemented network security measures, our
servers are vulnerable to computer viruses, break-ins and
similar disruptions from unauthorized tampering. The occurrence
of any of these events could result in interruptions, delays,
the loss or corruption of data, or cessations in the
availability of systems, all of which could have a material
adverse effect on our financial position and results of
operations and harm our business reputation.
27
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
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|
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 65.7% and 65.0% of the
total assets on our balance sheet as of September 30, 2010
and 2009, respectively. We may not realize the value of our
goodwill or other intangible assets and we expect to engage in
additional transactions that will result in our recognition of
additional goodwill or other intangible assets. We evaluate on a
regular basis whether events and circumstances have occurred
that indicate that all or a portion of the carrying amount of
goodwill or other intangible assets may no longer be
recoverable, and is therefore impaired. Under current accounting
rules, any determination that impairment has occurred would
require us to write-off the impaired portion of our goodwill or
the unamortized portion of our intangible assets, resulting in a
charge to our earnings. Such a write-off could have a material
adverse effect on our financial condition and results of
operations.
We may
be more susceptible to the effects of a public health
catastrophe than other businesses due to the vulnerable nature
of our client population.
Our primary clients are individuals with developmental
disabilities, brain injuries, or emotionally, behaviorally or
medically complex challenges, many of whom may be more
vulnerable than the general public in a public health
catastrophe. For example, in a flu pandemic, we could suffer
significant losses to our client population and, at a high cost,
be required to pay overtime or hire replacement staff and
Mentors for workers who drop out of the workforce. Accordingly,
certain public health catastrophes such as a flu pandemic could
have a material adverse effect on our financial condition and
results of operations.
We are
controlled by our principal equityholder, which has the power to
take unilateral action.
Vestar controls our business affairs and material policies.
Circumstances may occur in which the interests of Vestar could
be in conflict with the interests of our debt holders. In
addition, Vestar may have an interest in pursuing acquisitions,
divestitures or other transactions that, in their judgment,
could enhance their equity investment, even though such
transactions might involve risks to our debt holders. For
example, we may pursue various financing alternatives in order
to fund required cash payments on the NMH Holdings notes,
accrued interest for which will be due and payable in cash
beginning September 15, 2012. 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.
28
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Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
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, 2010, we provided services in
402 owned facilities and 933 leased facilities, as well as in
homes owned by our Mentors. We also own one office and lease 277
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.
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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 II. Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Part I. Item 1A. Risk
Factors for additional information.
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Item 4.
|
(Removed
and Reserved)
|
PART II
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|
Item 5.
|
Market
for Registrants 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, 2010.
Dividends
During fiscal 2009, we paid a dividend of $7.0 million to
NMH Holdings, LLC (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 in aggregate principal amount of the NMH
Holdings notes.
29
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.
Any future 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
examples.
Equity
Compensation Plan Information
The following table lists the number of securities of NMH
Investment available for issuance as of December 1, 2010
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.
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Number of Securities Remaining
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Available for Future Issuance
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Number of Securities to be
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Weighted-Average
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under Equity Compensation
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Issued Upon Exercise of
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Exercise Price of
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Plans (excluding Securities
|
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|
Outstanding Options
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|
Outstanding Options
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Reflected in Column(a))
|
Plan Category
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(a)
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(b)
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(c)
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Equity compensation plans approved by security holders
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N/A
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N/A
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Preferred Units: 9,202.66
A Units: 99,626.61
B Units: 6,426.44
C Units: 6,740.58
D Units: 16,756.43
E Units: -
|
Equity compensation plans not approved by security holders
|
|
N/A
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|
N/A
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|
N/A
|
TOTAL
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|
Preferred Units: 9,202.66
A Units: 99,626.61
B Units: 6,426.44
C Units: 6,740.58
D Units: 16,756.43
E Units: -
|
Unregistered
Sales of Equity Securities
No equity securities of the Company were sold during fiscal
2010; however, the Companys indirect parent, NMH
Investment, did sell equity securities during this period.
30
The following table sets forth the number of units of common
equity of NMH Investment issued during fiscal 2010 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.
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Dates
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Title of Securities
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Amount
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Purchasers
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Consideration
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January 12, 2010
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Class B Common Units
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2,887.50
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Certain employees
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$
|
144.38
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Class C Common Units
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3,030.00
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$
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90.90
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Class D Common Units
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3,210.00
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$
|
32.10
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|
January 17, 2010
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Class B Common Units
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1,925.00
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|
One employee
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$
|
96.25
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Class C Common Units
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|
2,020.00
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|
$
|
60.60
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Class D Common Units
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|
2,140.00
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|
$
|
21.40
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|
January 19, 2010
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Class B Common Units
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5,293.75
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Certain employees
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$
|
264.69
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Class C Common Units
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5,555.00
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$
|
166.65
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Class D Common Units
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|
5,885.00
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$
|
58.85
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|
September 24, 2010
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Class E Common Units
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3,187.00
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One director
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$
|
159.35
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Repurchases
of Equity Securities
No equity securities of the Company or NMH Investment were
repurchased during the fourth quarter of fiscal 2010. We did not
repurchase any of our common stock as part of an equity
repurchase program during the fourth quarter of fiscal 2010.
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Item 6.
|
Selected
Financial Data
|
We derived the selected historical consolidated financial data
as of and for the years ended September 30, 2008, 2009 and
2010 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 September 30, 2006 and for the periods from
October 1, 2005 through June 29, 2006 and from
June 30, 2006 through September 30, 2006 and as of and
for the year ended September 30, 2007 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.
31
The selected information below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
historical consolidated financial statements and notes included
elsewhere in this report.
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Predecessor(1)(4)
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Successor(4)
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Period from
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Period from
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October 1, 2005
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June 30
|
|
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|
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|
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|
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through
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through
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|
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June 29,
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September 30,
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Year Ended September 30,
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2006
|
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|
2006
|
|
|
2007
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|
2008
|
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|
2009
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|
2010
|
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(Dollars in thousands)
|
|
Statements of Operations Data:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
Net revenue
|
|
$
|
557,943
|
|
|
$
|
200,726
|
|
|
$
|
876,970
|
|
|
$
|
929,831
|
|
|
$
|
970,218
|
|
|
$
|
1,022,036
|
|
Cost of revenue (exclusive of depreciation expense shown
separately below)
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421,794
|
|
|
|
153,426
|
|
|
|
661,737
|
|
|
|
704,778
|
|
|
|
736,651
|
|
|
|
779,977
|
|
General and administrative expenses
|
|
|
75,596
|
|
|
|
28,825
|
|
|
|
117,426
|
|
|
|
130,023
|
|
|
|
132,843
|
|
|
|
140,815
|
|
Stock option settlement
|
|
|
26,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
17,003
|
|
|
|
11,455
|
|
|
|
50,787
|
|
|
|
50,548
|
|
|
|
56,800
|
|
|
|
57,633
|
|
Transaction costs
|
|
|
9,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
|
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|
Income from operations
|
|
|
7,534
|
|
|
|
7,020
|
|
|
|
47,020
|
|
|
|
44,482
|
|
|
|
43,924
|
|
|
|
43,611
|
|
Management fee to related party
|
|
|
(198
|
)
|
|
|
(227
|
)
|
|
|
(892
|
)
|
|
|
(1,349
|
)
|
|
|
(1,146
|
)
|
|
|
(1,208
|
)
|
Other income (expense), net
|
|
|
1,306
|
|
|
|
(37
|
)
|
|
|
(422
|
)
|
|
|
(797
|
)
|
|
|
(503
|
)
|
|
|
(341
|
)
|
Interest income
|
|
|
646
|
|
|
|
256
|
|
|
|
1,060
|
|
|
|
684
|
|
|
|
193
|
|
|
|
42
|
|
Interest income from related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,202
|
|
|
|
1,921
|
|
Interest expense
|
|
|
(52,311
|
)
|
|
|
(13,269
|
)
|
|
|
(50,687
|
)
|
|
|
(48,947
|
)
|
|
|
(48,254
|
)
|
|
|
(46,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(43,023
|
)
|
|
|
(6,257
|
)
|
|
|
(3,921
|
)
|
|
|
(5,927
|
)
|
|
|
(4,584
|
)
|
|
|
(2,668
|
)
|
Benefit for income taxes
|
|
|
(11,305
|
)
|
|
|
(2,360
|
)
|
|
|
(836
|
)
|
|
|
(133
|
)
|
|
|
(1,414
|
)
|
|
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(31,718
|
)
|
|
|
(3,897
|
)
|
|
|
(3,085
|
)
|
|
|
(5,794
|
)
|
|
|
(3,170
|
)
|
|
|
(2,067
|
)
|
(Loss) income from discontinued operations, net of tax
|
|
|
(68
|
)
|
|
|
233
|
|
|
|
593
|
|
|
|
(1,441
|
)
|
|
|
(2,286
|
)
|
|
|
(4,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,786
|
)
|
|
$
|
(3,664
|
)
|
|
$
|
(2,492
|
)
|
|
$
|
(7,235
|
)
|
|
$
|
(5,456
|
)
|
|
$
|
(6,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
$
|
26,511
|
|
|
$
|
29,373
|
|
|
$
|
38,908
|
|
|
$
|
23,650
|
|
|
$
|
26,448
|
|
Working capital(2)
|
|
|
|
|
|
|
55,423
|
|
|
|
57,297
|
|
|
|
55,878
|
|
|
|
47,836
|
|
|
|
34,904
|
|
Total assets
|
|
|
|
|
|
|
1,000,665
|
|
|
|
1,012,628
|
|
|
|
1,016,433
|
|
|
|
995,610
|
|
|
|
1,015,885
|
|
Long-term debt(3)
|
|
|
|
|
|
|
517,001
|
|
|
|
512,300
|
|
|
|
509,984
|
|
|
|
502,443
|
|
|
|
502,423
|
|
Shareholders equity
|
|
|
|
|
|
|
248,868
|
|
|
|
246,031
|
|
|
|
237,128
|
|
|
|
223,728
|
|
|
|
225,133
|
|
|
|
|
(1) |
|
On June 29, 2006, the Company changed ownership. The
previous ownership periods are deemed to be predecessor periods
pursuant to
Rule 3-05
of
Regulation S-X. |
|
(2) |
|
Working capital is calculated by subtracting current liabilities
from current assets. |
|
(3) |
|
Long-term debt includes obligations under capital leases. |
|
(4) |
|
All fiscal years presented reflect the classification of REM
Health, REM Maryland and REM Colorado as discontinued operations. |
|
|
Item 7.
|
Managements
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
32
results may differ materially from those suggested by our
forward-looking statements for various reasons, including those
discussed in the Risk factors and
Forward-looking statements sections of this
report.
Overview
We are a leading provider of home and community-based health and
human services to adults and children with intellectual
and/or
developmental disabilities (I/DD), acquired brain
injury (ABI) and other catastrophic injuries and
illnesses, and to youth with emotional, behavioral and/or
medically complex challenges, or at-risk youth
(ARY). Since our founding in 1980, we have grown to
provide services to approximately 23,600 clients in
36 states.
We design customized service plans to meet the unique needs of
our clients, which we deliver in home and community-based
settings. Most of our service plans involve residential support,
typically in small group homes, host home settings or
specialized community facilities, designed to improve our
clients quality of life and to promote client independence
and participation in community life. Other services offered
include supported living, day and transitional programs,
vocational services, case management, family-based services,
post-acute treatment and neurorehabilitation, neurobehavioral
rehabilitation and physical, occupational and speech therapies,
among others. Our customized service plans offer our clients, as
well as the payors for these services, an attractive,
cost-effective alternative to health and human services provided
in large, institutional settings.
We offer our services through a variety of models, including
(i) small group homes, most of which are residences for six
people or fewer, (ii) host homes, or the Mentor
model, in which a client lives in the home of a trained Mentor,
(iii) in-home settings, in which we support clients
independence with
24-hour
services in their own homes, (iv) small, specialized
community facilities which provide post-acute, specialized
rehabilitation and comprehensive care for individuals who have
suffered ABI, spinal 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 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
33
addition, caregivers currently caring for their relatives at
home are aging and may soon be unable to continue with these
responsibilities. Each of these factors affects the size of the
I/DD population in need of services. Similarly, growth for our
ARY services has been driven by favorable demographics. Demand
for our Post Acute Specialty Rehabilitation Services has also
grown as faster emergency response and improved medical
techniques have resulted in more people surviving a catastrophic
injury, as well as spinal cord and other catastrophic injuries.
SRS services are increasingly sought out as a
clinically-appropriate
and
less-expensive
alternative to institutional care and
step-down
for individuals who no longer require care in acute settings.
Political and economic trends can also affect our operations. In
particular, state budgetary pressures, especially within
Medicaid programs, may influence the overall level of payments
for our services, the number of clients and the preferred
settings for many of the services we provide. Since the
beginning of the current economic downturn, our government
payors in several states have responded to deteriorating revenue
collections by implementing provider rate reductions. In
addition, the volume of referrals to our programs has also been
constrained in many markets as payors have taken steps to reduce
spending. We cannot be certain whether there will be further
rate reductions in the coming months as state governments
address revenue shortfalls.
Historically, pressure from client advocacy groups for the
populations we serve has generally helped our business, as these
groups generally seek to pressure governments to fund
residential services that use our small group home or host home
models, rather than large, institutional models. In addition,
our ARY services have historically been positively affected by
the trend toward privatization of these services. Furthermore,
we believe that successful lobbying by these groups has
preserved I/DD and ARY services and, therefore, our revenue
base, from significant cutbacks as compared with certain other
human services, although we have suffered rate reductions in the
current recessionary environment. In addition, a number of
states have developed community-based waiver programs to support
long-term care services for survivors of a traumatic brain
injury. The majority of our specialty rehabilitation services
revenue, however, is derived from
non-public
payors, such as commercial insurers, managed care and other
private payors.
Expansion
We have grown our business through expansion of existing markets
and programs as well as through acquisitions.
Organic
Growth
We believe that our future growth will depend heavily on our
ability to expand existing service contracts and to win new
contracts. Our organic expansion activities consist of both new
program starts in existing markets and geographical expansion in
new markets. Our new programs in new and existing geographic
markets (which we refer to as new starts) typically
require us to fund operating losses for a period of
approximately 18 to 24 months. If a new start does not
become profitable during such period, we may terminate it.
During fiscal 2010, operating losses on new starts for programs
started within the previous 18 months were
$2.5 million.
Acquisitions
As of September 30, 2010, we have completed 26 acquisitions
since 2005, including several acquisitions of rights to
government contracts or fixed assets from small providers, which
we integrate with our existing operations. We have pursued
larger strategic acquisitions in markets with significant
opportunities. Acquisitions could have a material impact on our
consolidated financial statements.
During fiscal 2010, we acquired seven companies complimentary to
our business for total fair value consideration of
$52.1 million, including $3.0 million of contingent
consideration. The following acquisitions are included in the
Human Services segment during fiscal 2010:
Springbrook. On January 15, 2010, we
acquired the assets of Springbrook, Inc. and an affiliate
(together, Springbrook) for total fair value
consideration of $9.3 million, including $3.0 million
of contingent
34
consideration. Springbrook operates in Arizona and Oregon and
provides residential and mental health services to individuals
with developmental disabilities and behavioral issues.
Woodhill. On September 15, 2010, we
acquired the assets of Woodhill Homes, Inc.
(Woodhill) for total cash of $3.5 million.
Woodhill operates group homes serving
I/DD
residents in Minnesota.
In addition, we acquired the following acquisitions which are
included in the SRS segment.
Villages. We acquired the assets of two
California facilities (together, Villages), on
January 29, 2010 and on February 11, 2010, engaged in
neurorehabilitation services for total cash of $7.0 million.
NeuroRestorative. On February 22, 2010,
in a purchase of stock and assets, we acquired a provider of
neurobehavioral and supported living programs
(NeuroRestorative) for total cash of
$16.8 million. NeuroRestorative has operations in Arkansas,
Louisiana, Oklahoma and Texas and serves individuals who have
sustained a traumatic brain injury.
Anchor Inne. On June 30, 2010, we
acquired the assets of Anchor Inne, Inc. (Anchor
Inne) for total cash of $3.4 million. Anchor Inne has
operations in Pennsylvania and serves individuals who have
sustained a traumatic brain injury.
PLUS. On September 24, 2010, we acquired
the stock of Progressive Living Units Systems-New Jersey,
Inc. (PLUS) for total cash of
$12.1 million. PLUS has operations in New Jersey and
Pennsylvania and provides supported and independent living
services to individuals who have sustained a traumatic brain
injury.
For additional information on the acquisitions made during
fiscal 2010, see note 5 to our consolidated financial
statements included elsewhere in this report.
Divestitures
We regularly review and consider the divestiture of
underperforming or non-strategic businesses to improve our
operating results and better utilize our capital. We have made
divestitures from time to time and expect that we may make
additional divestitures in the future. Divestitures could have a
material impact on our consolidated financial statements.
During fiscal 2010, we closed our business operations in the
state of Colorado (REM Colorado) and recognized a
pre-tax loss of $3.0 million for fiscal 2010, which
included a $2.5 million impairment charge. Also during
fiscal 2010, we closed certain business operations in the state
of Maryland (REM Maryland) and recognized a pre-tax
loss of $5.1 million for fiscal 2010, which included a
$4.2 million impairment charge.
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 2010, 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.
35
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. General and administrative expenses
primarily include salaries and benefits for administrative
employees, or employees that are not directly providing
services, administrative occupancy and insurance costs as well
as professional expenses such as consulting and accounting
services. Depreciation and amortization includes depreciation
for fixed assets utilized in both facilities providing direct
care and administrative offices, and amortization related to
intangible assets.
Wages and benefits to our employees and per diem payments to our
Mentors constitute the most significant operating cost in each
of our operations. Most of our employee caregivers are paid on
an hourly basis, with hours of work generally tied to client
need. Our Mentors are paid on a per diem basis, but only if the
Mentor is currently caring for a client. Our labor costs are
generally influenced by levels of service and these costs can
vary in material respects across regions.
Occupancy costs represent a significant portion of our operating
costs. As of September 30, 2010, we owned 402 facilities
and one office, and we leased 933 facilities and 277 offices. We
incur no facility costs for services provided in the home of a
Mentor.
Expenses incurred in connection with liability insurance and
third-party claims for professional and general liability
totaled 0.5%, 0.6% and 0.4% of our net revenue for fiscal 2010,
2009 and 2008, respectively. We have incurred professional and
general liability claims and insurance expense for professional
and general liability of $5.6 million, $5.5 million
and $3.5 million for fiscal 2010, 2009 and 2008,
respectively. Claims paid by us and our insurers for
professional and general liability have increased sharply in
recent years. We have historically self-insured amounts of up to
$1.0 million per claim and up to $2.0 million in the
aggregate but as of October 1, 2010, we pay substantially
higher premiums for our professional and general liability
policies, and our self-insured retentions substantially exceed
the amounts we had previously insured through our captive
insurance company. As of October 1, 2010, we have
self-insured retentions for $2.0 million per claim and
$8.0 million in the aggregate, and for $500 thousand per
claim in excess of the aggregate.
During fiscal 2010, our wholly-owned subsidiary captive
insurance company provided coverage for our self-insured portion
of professional and general liability claims and our employment
practices liability. The accounts of the captive insurance
company are fully consolidated with those of the other
operations of the Company in the accompanying consolidated
financial statements. Effective September 30, 2010, the
captive insurance subsidiary was dissolved and we are no longer
self-insured through the captive subsidiary on the effective
date.
Our ability to maintain our margin in the future is dependent
upon obtaining increases in rates
and/or
controlling our expenses. In fiscal 2008, 2009 and 2010, we
invested in infrastructure initiatives and business process
improvements, which had a negative impact on our margin. As we
continue to invest in infrastructure initiatives and business
process improvements our margin may continue to be negatively
impacted.
36
Results
of Operations
The following table sets forth income (loss) from operations as
a percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Acute Specialty
|
|
|
|
|
|
|
|
For the Year Ended September 30,
|
|
Human Services
|
|
|
Rehabilitation Services
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
885,095
|
|
|
$
|
136,941
|
|
|
$
|
|
|
|
$
|
1,022,036
|
|
Income (loss) from operations
|
|
|
79,748
|
|
|
|
15,356
|
|
|
|
(51,493
|
)
|
|
|
43,611
|
|
Operating margin
|
|
|
9.0
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
4.3
|
%
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
873,723
|
|
|
$
|
96,495
|
|
|
$
|
|
|
|
$
|
970,218
|
|
Income (loss) from operations
|
|
|
73,661
|
|
|
|
12,805
|
|
|
|
(42,542
|
)
|
|
|
43,924
|
|
Operating margin
|
|
|
8.4
|
%
|
|
|
13.3
|
%
|
|
|
|
|
|
|
4.5
|
%
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
843,875
|
|
|
$
|
85,956
|
|
|
$
|
|
|
|
$
|
929,831
|
|
Income (loss) from operations
|
|
|
74,935
|
|
|
|
12,536
|
|
|
|
(42,989
|
)
|
|
|
44,482
|
|
Operating margin
|
|
|
8.9
|
%
|
|
|
14.6
|
%
|
|
|
|
|
|
|
4.8
|
%
|
Fiscal
Year Ended September 30, 2010 Compared to Fiscal Year Ended
September 30, 2009
Consolidated
Consolidated revenue for fiscal 2010 increased by
$51.8 million, or 5.3%, compared to revenue for fiscal
2009. Revenue increased $48.0 million related to
acquisitions that closed during fiscal 2009 and fiscal 2010 and
$10.9 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
$43.9 million for fiscal 2009 to $43.6 million for
fiscal 2010 and operating margin decreased from 4.5% of revenue
to 4.3% of revenue for the same period. The operating margin was
negatively impacted by rate reductions in several states,
including Minnesota (2.6%, partially offset by a rate increase),
our largest state, Arizona (10%) and North Carolina (multiple
rate cuts with aggregate annual impact of 4.2% of our revenues
in 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, 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, 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.
37
Interest expense for fiscal 2010 decreased $1.6 million to
$46.7 million 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 5.5% in fiscal 2010, in part resulting
from the expiration of our interest rate swaps.
Loss from discontinued operations, net of tax increased
$2.5 million from fiscal 2009. Discontinued operations for
all periods presented include the operations of REM Health, REM
Maryland and REM Colorado, all of which are included in the
Human Services segment. Loss from discontinued operations for
fiscal 2010 included an additional $4.1 million, net of
tax, related to the impairment charges recorded to close our
business operations in REM Colorado and REM Maryland. Loss from
discontinued operations for fiscal 2009 included an additional
$0.8 million, net of tax, related to the loss on disposal
of REM Utah.
Human
Services
Human Services revenue for fiscal 2010 increased by
$11.4 million, or 1.3%, compared to the fiscal 2009.
Revenue increased $20.7 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. Revenue from
existing programs decreased $2.2 million 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 $73.7 million, or
8.4% of revenue, during fiscal 2009 to $79.7 million, or
9.0% of revenue, during fiscal 2010. The increase was primarily
due to our ongoing cost-containment efforts as well as a
$2.3 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 $8.9 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.
38
Fiscal
Year Ended September 30, 2009 Compared to Fiscal Year Ended
September 30, 2008
Consolidated
Consolidated revenue for fiscal 2009 increased by
$40.4 million, or 4.3%, compared to revenue for fiscal
2008. The increase in revenue was related to organic growth of
$20.4 million, including growth related to new programs
that began operations during fiscal 2008 and 2009. Revenue
increased $22.0 million as a result of acquisitions that
closed during fiscal 2008 and 2009. Revenue growth was partially
offset by a reduction in revenue of $2.0 million from
businesses we divested during the same period.
Consolidated income from operations decreased from
$44.5 million for fiscal 2008 to $43.9 million for
fiscal 2009 while operating margins decreased from 4.8% for
fiscal 2008 to 4.5% for fiscal 2009. Operating margin was
negatively impacted by an increase in labor costs, primarily due
to a $5.4 million increase in workers compensation
insurance costs, an increase in depreciation and amortization
expense of $6.3 million and an increased investment in
growth initiatives. The decrease in our operating margin was
partially offset by our on-going cost containment efforts,
including a decrease in our overtime costs of $1.7 million.
During fiscal 2009, we recorded a $1.8 million increase to
depreciation expense which resulted from disposals of furniture
and fixtures and client home furnishings that we believe relate
to a period or periods prior to 2009. We also reduced the
estimated useful life on furniture and fixtures and client home
furnishings which resulted in additional depreciation expense of
$1.6 million. In addition, depreciation expense increased
$1.7 million from fiscal 2008 due to the depreciation on
the new billing system.
Loss from discontinued operations, net of tax increased from
$1.4 million for fiscal 2008 to $2.3 million for
fiscal 2009. Discontinued operations for all periods presented
include the operations of REM Health, REM Maryland and REM
Colorado, all of which are included in the Human Services
segment. Loss from discontinued operations for fiscal 2009
included an additional $0.8 million of net loss related to
the loss on disposal of REM Utah. Loss from discontinued
operations for fiscal 2008 included an additional
$1.3 million of net loss related to the sale of our
business operations in the state of Oklahoma and the sale of
Integrity Home Health Care.
Human
Services
Human Services revenue for fiscal 2009 increased by
$29.8 million, or 3.5% compared to fiscal 2008. The
increase was due to organic growth of $11.8 million, which
included growth related to new programs that began operations
during fiscal 2008 and 2009. In addition, acquisitions
contributed additional revenue growth of $20.0 million.
Human Services revenue growth was partially offset by a
reduction in revenue of $2.0 million from businesses we
divested during the same period.
Income from operations decreased from $74.9 million, or
8.9% of revenue, during fiscal 2008 to $73.7 million, or
8.4% of revenue, during fiscal 2009. Operating margin was
negatively impacted by an increase in labor costs, primarily due
to a $4.9 million increase in workers compensation
insurance costs, as well as an increase in depreciation and
amortization expense. The decrease in our operating margin was
partially offset by our on-going cost containment efforts,
including a decrease in our overtime costs of $1.7 million.
During fiscal 2009, depreciation and amortization expense
increased $3.8 million, the majority of which related to
the charges recorded for the disposals of furniture and fixtures
and client home furnishings that we believe relate to a period
or periods prior to 2009 and for the reduction in the estimated
useful life on furniture and fixtures and client home
furnishings.
Post
Acute Specialty Rehabilitation Services
Post Acute Specialty Rehabilitation Services revenue for fiscal
2009 increased by $10.6 million, or 12.3%, compared to
fiscal 2008. This increase was primarily due to organic growth
of $8.6 million, which included growth related to new programs
that began operations during fiscal 2008 and 2009. In addition,
acquisitions contributed additional revenue growth of
$2.0 million.
39
Income from operations increased from $12.5 million for
fiscal 2008 to $12.8 million for fiscal 2009, while
operating margin decreased from 14.6% to 13.3% for the same
period. Our margin decreased due to increased investment in
growth initiatives.
Corporate
Corporate represents corporate general and administrative
expenses. Total corporate expense decreased by $0.4 million
from fiscal 2008 to $42.5 million for fiscal 2009.
Corporate expense decreased as a result of the
$1.05 million of reimbursement received from ESB Holdings,
LLC during fiscal 2009. 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. In addition, fiscal 2009
corporate expense included a decrease of $0.9 million of
stock based compensation expense. Offsetting the decrease in
corporate expense was an increase in depreciation expense of
$1.7 million from fiscal 2008 primarily due to depreciation
on the new billing system.
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 credit
facilities.
Operating
activities
Cash flows provided by operating activities for fiscal 2010 were
$71.6 million compared to $58.4 million and
$55.1 million for fiscal 2009 and 2008, respectively. The
increase from fiscal 2008 to fiscal 2009 and from fiscal 2009 to
fiscal 2010 was primarily due to the change in working capital.
Our days sales outstanding remained unchanged at 46 days at
September 30, 2008 and 2009 and increased approximately one
day to 47 days at September 30, 2010.
Investing
activities
Net cash used in investing activities, primarily consisting of
cash paid for acquisitions and purchases of property and
equipment, was $64.8 million for fiscal 2010 compared to
$61.8 million and $40.5 million for fiscal 2009 and
2008, respectively.
Cash paid for acquisitions was $49.3 million,
$33.6 million and $14.9 million for fiscal 2010, 2009
and 2008, respectively. Fiscal 2010 included cash paid for seven
acquisitions, including, Springbrook, Villages,
NeuroRestorative, Anchor Inne, Woodhill and PLUS. Fiscal 2009
included cash paid for four acquisitions, as well as an earn-out
payment of $12.0 million for CareMeridian, which we
acquired in fiscal 2006. In fiscal 2008, we acquired
Transitional Services, Inc. for $9.3 million and paid an
earn-out payment of $5.5 million for CareMeridian.
Cash paid for property and equipment for fiscal 2010 was
$20.9 million, or 2.0% of revenue, compared to $27.4, or
2.8% of revenue for fiscal 2009 and $26.1 million, or 2.8%
of revenue for fiscal 2008. 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. Fiscal 2008 cash paid for property and
equipment included $2.8 million related to the
implementation of a new billing system.
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.
40
In fiscal 2008 and fiscal 2009, restricted cash included cash
related to certain insurance coverage provided by our captive
insurance subsidiary. In connection with the dissolution of the
captive insurance subsidiary effective September 30, 2010,
we released $5.5 million of restricted cash into operating
cash.
Financing
activities
Net cash used in financing activities was $3.9 million for
fiscal 2010 compared to $11.9 million and $5.0 million
for fiscal 2009 and 2008, respectively. Our financing activities
for both fiscal 2010 and 2009 included the repayment of long
term debt of $3.7 million compared to the repayment of long
term debt of $4.0 million for fiscal 2008. Fiscal 2009 also
included two dividend payments to NMH Holdings LLC
(Parent) for $8.0 million.
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.
Also 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.
We may seek to purchase a portion of our outstanding debt or the
debt of NMH Holdings from time to time. The amount of debt that
may be purchased, if any, would be decided at the discretion of
our Board of Directors and management and will depend on market
conditions, prices, contractual restrictions, our liquidity and
other factors.
As mentioned above, our principal sources of funds are cash
flows from operating activities and available borrowings under
the $125.0 million senior revolver. As of
September 30, 2010, we did not have any borrowings under
our senior revolver which expires on June 29, 2012. The
availability on the senior revolver was reduced by
$9.9 million to $115.1 million as letters of credit in
excess of $20.0 million under our synthetic letters of
credit facility were outstanding. We believe that these funds
will provide sufficient liquidity and capital resources to meet
our near-term and future financial obligations for the next
twelve months, including scheduled principal and interest
payments as well as to provide funds for working capital,
capital expenditures and other needs. No assurance can be given,
however, that this will be the case.
As of September 30, 2010, our indirect parent company, NMH
Holdings, had $220.3 million aggregate principal amount of
the NMH Holdings notes outstanding (including the
$13.2 million of which was held by us). These notes are not
guaranteed by the Company. NMH Holdings is a holding company
with no direct operations. Its principal assets are the direct
and indirect equity interests it holds in its subsidiaries,
including us, and all of its operations are conducted through us
and our subsidiaries. As a result, absent other sources of
liquidity, NMH Holdings will be dependent upon dividends and
other payments from us to generate the funds necessary to meet
its outstanding debt service and other obligations, including
its obligations on the notes held by us. NMH Holdings has paid
all of the interest payments to date on the notes entirely in
PIK Interest (defined below) which has increased the principal
amount by $59.2 million since the date of issuance,
including the PIK Interest issued to us. NMH Holdings currently
expects to elect to make interest payments entirely by
increasing the NMH Holdings notes or issuing new notes
(PIK Interest) through June 15, 2012. Beginning
September 15, 2012, interest payments must be made in cash,
including the accrued PIK Interest. NMH Holdings expects the
September 2012 payment to be in the range of $90.0 million
to $95.0 million depending on interest rates.
Our senior credit agreement and the indenture governing our
senior subordinated notes limit our ability to pay dividends to
our parent companies. We do not currently expect to have the
ability under our debt agreements to make a dividend payment in
an amount sufficient to enable NMH Holdings to satisfy its
payment that comes due in September 2012. In order to fund this
payment, NMH Holdings may pursue
41
various financing alternatives, including modifying the terms of
our existing indebtedness or the indebtedness of NMH Holdings,
raising new capital through debt or equity financing, retiring
or purchasing our outstanding debt or the debt of NMH Holdings
through exchanges for newly issued debt or equity securities or
a combination of these alternatives. Any financings, repurchases
or exchanges would be approved by the Board of Directors and
will depend on market conditions, prices, contractual
restrictions, our liquidity and other factors. Such financings,
repurchases or exchanges could have a material impact on our
liquidity and could also require amendments to the agreements
governing our outstanding debt obligations or those of NMH
Holdings. Additional financing may not be available or, if
available, may not be made on terms favorable to us.
Covenants
The senior credit agreement and the indentures governing the
senior subordinated notes and the NMH Holdings notes contain
negative covenants, including limitations on our ability to
incur additional debt, sell material assets, retire, redeem or
otherwise reacquire capital stock, acquire the capital stock or
assets of another business and pay dividends. In addition, in
the case of the senior credit agreement, we are required to
maintain a consolidated leverage ratio of no more than 5.00 to
1.00 as of September 30, 2010 and a consolidated interest
coverage ratio of no less than 2.00 to 1.00 for the four
consecutive fiscal quarters ended September 30, 2010. 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. 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. Beginning with the quarter
ending December 31, 2010, we will be required to maintain a
consolidated leverage ratio of no more than 4.50 to 1.00 and a
consolidated interest coverage ratio of no less than 2.25 to
1.00 for the four consecutive fiscal quarters ending
December 31, 2010.
As of September 30, 2010, our consolidated leverage ratio
was 4.09 to 1.00, as calculated in accordance with the senior
credit agreement and our consolidated interest coverage ratio
was 2.75 to 1.00, as calculated in accordance with the senior
credit agreement. As of September 30, 2010, total debt, net
of cash and cash equivalents, was $486.1 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, 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.
42
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, 2010:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(6,867
|
)
|
Loss from discontinued operations, net of tax
|
|
|
4,800
|
|
Benefit for income taxes
|
|
|
(601
|
)
|
Interest income
|
|
|
(42
|
)
|
Interest income from related party
|
|
|
(1,921
|
)
|
Interest expense
|
|
|
46,693
|
|
Depreciation and amortization
|
|
|
57,633
|
|
Management fee of related party
|
|
|
1,208
|
|
Claims made insurance liability
|
|
|
1,573
|
|
Terminated transaction costs
|
|
|
1,428
|
|
Change in fair value of contingent consideration
|
|
|
1,424
|
|
Acquisition costs
|
|
|
1,101
|
|
Stock-based compensation
|
|
|
677
|
|
Loss on disposal of assets
|
|
|
563
|
|
Predecessor company claims
|
|
|
947
|
|
Severance expense
|
|
|
255
|
|
Acquired EBITDA from acquisitions
|
|
|
7,166
|
|
Permitted start up losses
|
|
|
2,534
|
|
Other
|
|
|
321
|
|
|
|
|
|
|
Consolidated adjusted EBITDA per the senior credit agreement
|
|
$
|
118,892
|
|
|
|
|
|
|
Set forth below is a calculation of consolidated interest
expense, as calculated under the credit agreement, for the most
recently completed four fiscal quarters ended September 30,
2010:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Interest rate swap agreements
|
|
$
|
13,910
|
|
Unused line of credit
|
|
|
591
|
|
Senior term B loan
|
|
|
7,706
|
|
Letters of credit
|
|
|
640
|
|
Senior subordinated notes
|
|
|
20,250
|
|
Term loan mortgage
|
|
|
185
|
|
Capital leases
|
|
|
9
|
|
Interest income
|
|
|
(42
|
)
|
|
|
|
|
|
Consolidated interest expense per the senior credit agreement
|
|
$
|
43,249
|
|
|
|
|
|
|
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.
43
Contractual
Commitments Summary
The following table summarizes our contractual obligations and
commitments as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations(1)
|
|
$
|
504,466
|
|
|
$
|
3,667
|
|
|
$
|
320,799
|
|
|
$
|
180,000
|
|
|
$
|
|
|
Operating lease obligations(2)
|
|
|
143,653
|
|
|
|
37,999
|
|
|
|
51,939
|
|
|
|
30,673
|
|
|
|
23,042
|
|
Capital lease obligations
|
|
|
1,716
|
|
|
|
92
|
|
|
|
141
|
|
|
|
154
|
|
|
|
1,329
|
|
Contingent consideration
|
|
|
6,353
|
|
|
|
6,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
|
29,899
|
|
|
|
29,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations and commitments(3)
|
|
$
|
686,087
|
|
|
|
78,010
|
|
|
|
372,879
|
|
|
|
210,827
|
|
|
|
24,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include interest on long-term debt or the
$219.1 million of senior floating rate toggle notes due
2014, net of discount, issued by NMH Holdings. Approximately
$13.2 million of the outstanding senior floating rate
toggle notes are held by us. |
|
(2) |
|
Includes the fixed rent payable under the leases and does not
include additional amounts, such as taxes, that may be payable
under the leases. |
|
(3) |
|
The table above does not include $4.9 million of
unrecognized tax benefits for uncertain tax positions and
$1.8 million of associated accrued interest and penalties.
Due to the high degree of uncertainty regarding the timing of
potential future cash flows, we are unable to reasonably
estimate the amount and period in which these liabilities might
be paid. |
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
U.S. generally accepted accounting principles
(GAAP). The preparation of financial statements in
conformity with GAAP requires the appropriate application of
certain accounting policies, many of which require us to make
estimates and assumptions about future events and their impact
on amounts reported in the financial statements and related
notes. Since future events and the impact of those events cannot
be determined with certainty, the actual results may differ from
our estimates. These differences could be material to the
financial statements.
We believe our application of accounting policies, and the
estimates inherently required therein, are reasonable. These
accounting policies and estimates are constantly reevaluated,
and adjustments are made when facts and circumstances dictate a
change.
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
44
payment trends. Revenue is recognized when evidence of an
arrangement exists, the service has been provided, the price is
fixed or determinable and collectability 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 collectability 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
collectability 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 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 units
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 assumption used to estimate
fair value include managements 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 statements of operations in the period of the change in
estimate.
45
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, LLC, 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 and Class E 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 Class B
vest over a four-year service period and Class E units vest
over a five-year service period. The Class C and
Class D units vest over a three-year period based on
service and on certain performance
and/or
investment return conditions being met or achieved. 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/performance 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 shareholders equity as 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
46
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 other comprehensive
income (loss) as a change to shareholders 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 applicable income
taxes, in 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 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.
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|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
The Company was previously a party to interest rate swap
agreements in order to reduce the interest rate exposure on the
term B loan but these agreements have now expired. The Company
is currently considering its options for managing its interest
rates.
As of September 30, 2010 we had $324.5 million of
variable rate debt outstanding. The variable rate debt
outstanding relates to the term B loan, which has an interest
rate based on LIBOR plus 2.00% or Prime plus 1.00%, the senior
revolver, which has an interest rate based on LIBOR plus 2.00%
or Prime plus 1.00%, subject to reduction depending on our
leverage ratio, and the term loan mortgage, which has an
interest rate based on Prime plus 1.50%. A 1% increase in the
interest rate on our floating rate debt would increase cash
interest expense of the floating rate debt for fiscal 2010 by
$3.2 million.
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Item 8.
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Financial
Statements and Supplementary Data
|
Our consolidated financial statements required by this Item are
on pages F-1 through F-36 of this report.
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Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
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Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and Procedures
47
We maintain disclosure controls and procedures to ensure that
information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the rules and forms of the SEC, and is accumulated and
communicated to management, including the Chief Executive
Officer, the President and the Chief Financial Officer, to allow
for timely decisions regarding required disclosure. There are
inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of
human error and the circumvention or overriding of the controls
and procedures. As of September 30, 2010, 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, 2010.
(b) Managements 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 Companys internal control over
financial reporting was effective as of September 30, 2010.
Managements evaluation did not include assessing the
internal controls of seven businesses that were acquired by us
in purchase business combination transactions during fiscal
2010. The combined financial statements of these companies are
included in our consolidated financial statements for the fiscal
year ended September 30, 2010, and represented 4.3% of our
total assets as of September 30, 2010 and 2.1% of our net
revenues for the fiscal year ended September 30, 2010.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of our financial statements will not be prevented
or detected on a timely basis. We previously reported material
weaknesses in our controls relating to our revenue and accounts
receivable balances as of September 30, 2009. To our
knowledge, these material weaknesses did not result in any
material misstatement of our financial statements. As of
September 30, 2010, we no longer have material weaknesses
related to our revenue and accounts receivable balances, as set
forth below.
Revenue
As reported in Item 9A(T) of our Annual Report on
Form 10-K
for the fiscal year ended September 30, 2009, as of that
fiscal year-end, we had ineffective controls over the accuracy
of revenue and accounts receivable balances. As of
September 30, 2010, we no longer have the following
material weaknesses.
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We previously reported insufficient segregation of duties within
our new billing and accounts receivable system and insufficient
controls to ensure appropriate access to our billing and
accounts receivable system and data. This control deficiency
increased the risk that erroneous or unauthorized revenue
transactions could occur and the risk that they would not be
detected on a timely basis if they did occur. As of
September 30, 2010, we have implemented processes and
controls to limit system access to appropriate personnel and
segregate incompatible duties.
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We previously reported insufficient controls over the accuracy
and validity of the billing rates used to calculate revenue
recorded in our consolidated financial statements as our new
billing and accounts receivable system was not able to generate
timely reports to identify changes to billing rates for periodic
review. This control deficiency increased the risk of errors in
the invoicing and recording of
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48
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billings to payors. As of September 30, 2010, we have
implemented appropriate reporting capability and we are now able
to verify that changes to billing rates entered into the new
system are valid and accurate.
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We previously reported insufficient controls to ensure that all
unauthorized sales are identified and reserved appropriately in
the consolidated financial statements. Generally, if we provide
services without a current, valid authorization from the payor
agency to provide those services, receivables associated with
the unauthorized services may need to be either reserved until
such authorization is received, or ultimately written off if
authorization is not granted. As of September 30, 2010, our
billing and accounts receivable system now captures and reports
more complete and accurate data related to authorizations,
improving our controls over identifying and reserving for
unauthorized sales.
|
(b) Changes in Internal Control over Financial Reporting
As discussed above, during the quarter ended September 30,
2010, we continued remediation of our new billing and accounts
receivable system in a majority of our operations. This billing
and accounts receivable system has affected, and will continue
to affect, the processes that impact our internal control over
financial reporting. As we further optimize and refine the
billing and accounts receivable process and related system, we
will review the related controls and may take additional steps
to ensure that they remain effective and are integrated
appropriately.
Except for the remediation of material weaknesses and the
continuing 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. Managements 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.
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Item 9B.
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Other
Information
|
Not applicable.
49
PART III
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Item 10.
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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 3, 2010:
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Name
|
|
Age
|
|
Position
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Gregory T. Torres
|
|
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61
|
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Chairman and Director
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Edward M. Murphy
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63
|
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Chief Executive Officer and Director
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Bruce F. Nardella
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53
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President and Chief Operating Officer
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Juliette E. Fay
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58
|
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Executive Vice President and Chief Development Officer
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Denis M. Holler
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56
|
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Executive Vice President, Chief Financial Officer and Treasurer
|
Hugh R. Jones, III*
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45
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Executive Vice President, Chief Administrative Officer and
Assistant Secretary
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Linda DeRenzo
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51
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Senior Vice President, General Counsel and Secretary
|
Kathleen P. Federico
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51
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Senior Vice President, Human Resources
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John J. Green
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51
|
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Senior Vice President of Finance Operations and Assistant
Treasurer
|
Robert A. Longo
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48
|
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Senior Vice President and Cambridge Operating Group President
|
David M. Petersen
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62
|
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Senior Vice President and Redwood Operating Group President
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Chris A. Durbin
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45
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Director
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James L. Elrod, Jr.
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56
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Director
|
Pamela F. Lenehan
|
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58
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Director
|
Kevin A. Mundt
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56
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Director
|
Daniel S. OConnell
|
|
|
56
|
|
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Director
|
Guy Sansone
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|
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46
|
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|
Director
|
|
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|
* |
|
Mr. Jones has tendered his resignation effective
December 31, 2010. |
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 Companys
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 4, 2009. Mr. Murphy founded
Alliance Health and Human Services in 1999 and served as the
organizations President and CEO until September 2004.
Prior to founding Alliance, he was a Senior Vice President at
50
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 on December 4, 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.
Juliette E. Fay has served as our Executive Vice
President and Chief Development Officer since January 2006,
managing national business development. Ms. Fay served as
the Senior Vice President of National Business Development and
Marketing from January 2002 to January 2006. Before joining
MENTOR in 1998, Ms. Fay was the President and CEO of
Charles River Health Management, a provider-based managed care
company; the director of marketing and business development at
the Massachusetts Health and Educational Facilities Authority;
chief of staff for the Massachusetts Department of Mental
Health; and the assistant commissioner for facility operations
at the Massachusetts Department of Youth Services.
Denis M. Holler was appointed Executive Vice President,
Chief Financial Officer and Treasurer in May 2007.
Mr. Holler was named Senior Vice President of Finance in
January 2002 and led the Companys 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.
Hugh R. (Tripp) Jones, III was named Executive Vice
President and Chief Administrative Officer in August 2008. Prior
to that he served as our Senior Vice President and Chief
Administrative Officer beginning in May 2004, and served as
Senior Vice President of Public Strategy from February 2003 to
May 2004. In his current role, Mr. Jones coordinates
various corporate and operating group administrative functions.
Before joining MENTOR, he co-founded in 1995 and led MassINC.
Mr. Jones is a former staff director of the Massachusetts
Legislatures Education Committee and chaired Governor Mitt
Romneys education transition team in 2002.
Linda DeRenzo has served as our Senior Vice President,
General Counsel and Secretary since March 2006. Ms. DeRenzo
serves as our chief legal officer and 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. 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.
John J. Green served as our Senior Vice President of
Field Finance from the May 2003 acquisition of REM until being
named Senior Vice President of Finance Operations in June 2007.
In this role, Mr. Green oversees field finance operations
across our operations, and manages the procurement services,
payroll services, real estate and leasing management services,
reimbursement, accounts receivable billing services group and
field financial reporting and analysis. Mr. Green was
previously Controller of REM, having joined REM in April 1986 as
Assistant Controller. He is a certified public accountant with
29 years of experience both in public accounting and the
health and human services industry.
51
Robert A. Longo served as our Senior Vice President and
President of our Western Division from May 2003 until being
named Cambridge Operating Group President in June 2007.
Mr. Longo joined MENTOR in 1993, and has previously held
the positions of childrens services program manager, state
director and vice president, all managing various operations.
Mr. Longo has served on the boards of numerous
organizations focused on mental health and human services,
including serving for three years on the board of the national
Foster Family-Based Treatment Association.
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.
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 Americas
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 Essent Healthcare, Inc. and 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 and financial 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 Bostons
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, and
Monotype Imaging Holdings Inc., where she is a member of the
audit committee and chair of the compensation 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 a Professional
Director Certification from the Corporate Directors Group, 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 McLennans financial consulting arm, Mercer Oliver
Wyman. Mr. Mundt is currently Chairman of the Board for
Solo Cup Company and a Director at Fiorucci 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.
Daniel S. OConnell joined our Board of Directors in
June 2006. Mr. OConnell is the Chief Executive
Officer and founder of Vestar Capital Partners, a private equity
investment firm founded in 1988. Mr. OConnell is
currently a director of St. John Knits International, Inc., Solo
Cup Company, Sunrise
52
Medical, Inc., and The Sun Products Corp., companies in which
Vestar or its affiliates have a significant equity interest. In
addition, Mr. OConnell is a Trustee Emeritus of Brown
University and is Vice Chairman of the Board of Cardinal
Spellman High School, Bronx, N.Y. Mr. OConnell was
selected as a director for his knowledge and experience in
strategy and finance.
Guy Sansone was elected to our Board of Directors on
December 4, 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 19 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.
Audit
Committee Financial Expert
The Board of Directors has determined that Ms. Lenehan, the
chairman of the Companys 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.
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|
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
Companys directors include representatives of Vestar
(Daniel OConnell, James Elrod Jr., Kevin Mundt and
Chris Durbin) and management (Gregory Torres and Edward Murphy),
as well as two outside directors (Pamela Lenehan and Guy
Sansone). Messrs. Elrod and Sansone serve as members of the
Companys Compensation Committee. Chris Durbin was elected
to the Board of Directors effective December 3, 2010, and
will begin serving on the Compensation Committee in the second
quarter of fiscal 2011.
In connection with the Merger on June 29, 2006, 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 Denis Holler, the Companys Executive Vice
President and Chief Financial Officer, Bruce Nardella, the
Companys President and Chief Operating Officer, Juliette
Fay, the Companys Executive Vice President and Chief
Development Officer, Hugh R. Jones III, the Companys
Executive Vice President and Chief Administrative Officer, and
David M. Petersen, a Senior Vice President and President of the
Redwood Operating Group. The compensation paid to the executive
officers reflects negotiations at the time of the Merger, with
adjustments for Messrs. Holler and Nardella upon their
53
promotions during fiscal 2007, for Mr. Jones upon his
promotion during fiscal 2008 and for Mr. Nardella upon his
promotion on December 4, 2009. As of September 30,
2010, the Companys executive officers have invested
approximately $4.2 million in the Preferred Units and
Class A Common Units of NMH Investment. (This number will
be reduced to approximately $3.7 million following
Mr. Jones resignation effective December 31,
2010, upon the repurchase of his equity.)
Following the Merger, in January 2007, certain members of the
Companys 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. The Companys executive officers
were awarded additional grants of Class B, Class C and
Class D Common Units in fiscal 2008, and Mr. Jones was
awarded an additional grant of Class B, Class C and
Class D Common Units following his promotion in fiscal
2008. Throughout this analysis, Messrs. Murphy, Holler,
Nardella, Jones and Petersen and Ms. Fay are referred to as
the named executive officers.
Compensation Policies and Practices. The
primary objectives of our executive compensation program are to:
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attract and retain top executive talent;
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achieve accountability for performance by linking annual cash
and long-term equity incentive awards to achievement of
measurable performance objectives; and
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align executives incentives with equity value creation.
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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 substantial portion of our
executives overall compensation based on our financial
performance, specifically growth in earnings before interest,
taxes, depreciation and amortization, or EBITDA (with certain
adjustments). We also have provided a significant portion of our
executive officers compensation through equity-based
awards. 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 that are
generally competitive with our industry, as well as an
opportunity for variable incentive compensation that comprises a
substantial portion of an executive officers annual
compensation in order to drive the Companys achievement of
performance goals.
The Companys executive compensation program is overseen by
the Compensation Committee (the Committee) of the
Companys 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 Investments equity
plan, and to review and approve the annual cash incentive plan
for all employees, including the executive officers.
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:
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base salary;
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annual cash bonus incentives;
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long-term incentive compensation in the form of equity-based
units;
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deferred compensation;
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severance and
change-in-control
benefits; and
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other benefits.
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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 growth
54
in EBITDA (with certain adjustments). Our equity component of
compensation, in the form of equity units in NMH Investment, is
designed to reward equity value creation. 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 and our decisions regarding how the 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 Committees charter charges the
Committee with reviewing and determining each executives
base salary on an annual basis, which it has done. In connection
with the promotions of Messrs. Holler and Nardella in
fiscal 2007, Mr. Hollers salary increased from
$220,000 to $275,000 and Mr. Nardellas salary
increased from $225,000 to $275,000, to reflect their increased
duties. In connection with Mr. Joness promotion in
fiscal 2008, his salary increased from $238,200 to $275,000,
commensurate with the salary of the Companys other
executive vice presidents. Mr. Nardellas salary
increased from $275,000 to $302,500 effective with his election
to president on December 4, 2009. The promotions and
increases were reviewed and approved by the Committee. Factors
considered in increasing these base salaries included the new
level and scope of responsibilities and a comparison with the
base pay of the Companys other executive officers. The
named executive officers base salaries were reviewed again
in December 2010 as required by the Committees 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 executives 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 2010
was structured to provide incentive compensation based upon the
Companys attainment of certain financial targets for the
applicable fiscal year, which were approved by the Compensation
Committee, and individual performance on quality. For fiscal
2010, the incentive compensation payout opportunity for
Messrs. Holler, Jones and Petersen and Ms. Fay was
25 percent of base salary at the threshold performance
level, 50 percent at target level and 75 percent at
the maximum level. Mr. Nardellas incentive
compensation payout opportunity was 37.5 percent,
75 percent and 112.5 percent at the threshold, target
and maximum levels, respectively. Mr. Murphys amended
and restated employment agreement entitles him to
50 percent, 100 percent and 150 percent at the
threshold, target and maximum levels, respectively.
The achievement of the payout targets is challenging. 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 based upon
pro-ration and interpolation. 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. In April
2010, the Committee approved the following financial targets for
fiscal 2010: adjusted EBITDA of $114 million, revenue of
$1.050 billion and free cash flows of $28.1 million.
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 Companys
overall business and not just its EBITDA. Free cash flows are
essential to repay debt and fund the Companys 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.
This year, the Company fell short of meeting its financial
goals, achieving 94.9% of the adjusted EBITDA goal and 98.0% of
the revenue goal. The Company achieved its goal for free cash
flows. As a result, the named executive officers were eligible
to receive 70.6% of the payout that was achievable had the
targets been met.
55
Equity-Based Compensation. Long-term incentive
compensation is provided in the form of non-voting equity units
in the Companys 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 and Class E Common Units of NMH Investment.
The purpose of the plan is to promote the Companys
long-term growth and profitability by aligning the interests of
the Companys management with the interests of the ultimate
parent of the Company and by encouraging retention. A pool of
units was set aside for all employees, including the named
executive officers, as part of the Merger and granted 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, and Mr. Jones received an
additional grant of Class B, C and D Common Units in
September 2008 in recognition of his promotion. No equity awards
were made to the named executive officers in fiscal 2010.
The Class B Common Units time vest over 48 months.
Assuming continued employment of the employee with the Company,
40 percent vest at the end of 37 months from the
applicable measurement date (as defined below), and the
remaining 60 percent vest monthly through the end of
48 months from the measurement date. Assuming continued
employment, the Class C and D Common Units time vest after
three years, although the value of the Class C and D Common
Units depends on the achievement of certain financial targets
for fiscal 2007, fiscal 2008 and fiscal 2009. Those financial
targets are Targeted Adjusted EBITDA, Targeted Organic Adjusted
EBITDA Growth Rate and Targeted Adjusted Net Debt (Maximum).
Each of the financial targets must be met in a specified fiscal
year for the holder to earn one-third of the class of units with
respect to that year. As set forth in the table below, the
targets with respect to the Class C Common Units were
achieved for fiscal 2007, 2008 and 2009, and the targets with
respect to the Class D Common Units were achieved for
fiscal 2007.
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Targeted
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Actual
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Organic
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Organic
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Was Each
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Adjusted
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Adjusted
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Targeted
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Actual
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of the
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Targeted
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Actual
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EBITDA
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EBITDA
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Adjusted
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Adjusted
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Financial
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Adjusted
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Adjusted
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Growth
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Growth
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Net Debt
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Net Debt
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Targets
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Vesting
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EBITDA
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EBITDA
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Rate
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Rate
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(Maximum)
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(Maximum)
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Met?
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Result
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(In millions)
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(In millions)
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(In millions)
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(In millions)
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Fiscal 2007
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C Common Units
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$
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92.2
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$
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106.1
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3.0
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%
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8.9
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%
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$
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495.9
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$
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491.8
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Yes
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1/3 C units
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D Common Units
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105.0
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106.1
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5.0
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8.9
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515.2
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491.8
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Yes
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1/3 D units
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Fiscal 2008
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C Common Units
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98.4
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108.8
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3.0
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3.4
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488.7
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474.9
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Yes
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1/3 C units
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D Common Units
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110.9
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108.8
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5.0
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3.4
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490.0
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474.9
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No
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Fiscal 2009
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C Common Units
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106.4
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111.8
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N/A
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−0.9
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483.7
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455.6
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Yes
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1/3 C units
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D Common Units
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114.4
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111.8
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5.0
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−0.9
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482.0
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455.6
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No
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As the targets for the D Common Units were not achieved for
fiscal 2008 and 2009, NMH Investment created additional targets
for the D Common Units for fiscal 2010 and 2011 in order to
provide an additional opportunity to earn the remaining
two-thirds of the D Common Units, as a further incentive for
management. If the targets are met in fiscal 2010 or 2011, the
remaining two-thirds of the D Common Units will be earned,
although they are still subject to time vesting. Those targets
are Targeted Pro Forma Adjusted EBITDA and Targeted Consolidated
Leverage Ratio (Maximum) and, under certain circumstances, the
occurrence of a qualified refinancing. The targets are derived
from definitions in our senior credit agreement. Pro Forma
Adjusted EBITDA is defined as the Consolidated EBITDA as defined
in our credit agreement, and Consolidated Leverage Ratio is the
ratio of net debt to Pro Forma Adjusted EBITDA for the year.
These targets were chosen to align managements performance
goals with the Companys debt covenants as its credit
agreement approaches maturity and the Company approaches a
potential refinancing. As set forth in the table below, only one
of the targets with respect to the D Common Units was achieved
for fiscal 2010, and therefore there was no vesting in fiscal
2010.
56
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Was Each
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Targeted
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Actual
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Targeted
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Actual
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of the
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Pro Forma
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Pro Forma
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Consolidated
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Consolidated
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Financial
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Adjusted
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Adjusted
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Leverage Ratio
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Leverage Ratio
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Targets
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Vesting
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EBITDA
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EBITDA
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(Maximum)
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(Maximum)
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Met?
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Result
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(In millions)
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(In millions)
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Fiscal 2010
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D units
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$
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125.4
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$
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118.9
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6.16 to 1.00
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5.98 to 1.00
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No
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These financial targets were chosen for the C and D Common
Units, including the supplemental targets for the D Common
Units, because profitability, organic growth of the business and
appropriate leverage are critical to the Companys
long-term profitability and equity value. 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. The specific levels of the financial
targets with respect to the C and D Common Units were negotiated
between management and Vestar and reflect their agreement about
how any increase in equity value would be divided among Vestar
and management upon a liquidity event. For fiscal 2009, given
the deterioration of the general economic environment and the
national recession, the Compensation Committee deemed it
appropriate to waive the Targeted Organic Adjusted EBITDA Growth
Rate with respect to the C Common Units, and NMH Investment, LLC
approved this recommendation.
In all cases, vesting depends upon continued employment. If an
executives employment is terminated, NMH Investment may
repurchase the executives units. The units will be
purchased for the initial purchase price, or cost,
fair market value or a combination of the two, depending on the
circumstances of departure and based on the relevant measurement
date, as set out in the table below. The relevant
measurement date for almost all of the units held by
the named executive officers is June 29, 2006, the date of
the Merger, except for the units issued in connection with
promotions. The measurement date for the units issued upon
Mr. Hollers and Mr. Nardellas promotions
is May 22, 2007, and the measurement date for the units
issued upon Mr. Joness promotion is August 1,
2008. The vesting period for the B Common Units was shortened
from 61 months to 48 months effective June 2010 to
align the documentation to the intended business understanding
of the vesting schedule at the time of the Vestar transaction in
June 2006.
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B
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B
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C and D
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C and D
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B, C and D
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Common Units
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Common Units
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Common Units
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Common Units
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Common Units
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Circumstances of departure
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Termination without cause, or resignation for good reason
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Resignation without good reason
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Termination without cause, or resignation for good reason
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Resignation without good reason
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Termination for cause
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1-12 months after relevant measurement date
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Cost
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Cost
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Fair market value
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Cost
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Cost
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13-36 months
after relevant measurement date
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Portion at fair market value increases ratably each month, from
20.00% to 72.57%
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Cost
|
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Fair market value
|
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Cost
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Cost
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37-47 months
after relevant measurement date
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Portion at fair market value increases ratably each month, from
74.86% to 97.72%
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Portion at fair market value increases ratably each month, from
40.00% to 94.55%
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Fair market value
|
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Fair market value
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Cost
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48 months or later after relevant measurement date
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Fair market value
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Fair market value
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Fair market value
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Fair market value
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Cost
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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. Murphys recommendations were based on each
executive officers 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%;
Messrs. Holler, Jones and Ms. Fay, 11%; and
Mr. Petersen,
57
9%. 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, and it restored
these allocations for the 2010 plan year. The balances accrue
interest at a rate set prior to the beginning of the plan year.
The interest rate for plan years 2010, 2009 and 2008 was 6%. The
plan is an unfunded, nonqualified deferred compensation
arrangement, which provides deferred compensation to senior
management. We may make discretionary contributions to the plan,
although we did not do so in fiscal 2010, 2009 or 2008. A
participants 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, death or at the Companys 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 percent of salary
and/or 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 participants contributions
and the Companys matching contributions to the 401(k)
plan, with the residual remaining in the Executive Deferral
Plan. Distributions are made upon a participants
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. 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 is terminated without
cause, or he or she resigns for good reason, depending upon the
timing of his or her departure, he or she would be entitled to
receive fair market value for his or her B, C and D units,
compared with the lower of fair market value or cost if he or
she terminated employment voluntarily, as described above under
Equity-Based Compensation. Under each executive
officers management unit subscription agreement, NMH
Investment has the right to repurchase the units at a blend of
cost and fair market value, depending on the circumstances of
the executive officers departure, including the date of
departure. 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 B units will vest immediately, and any unvested C and D
units may vest if certain investment return conditions are met.
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 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.
58
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
performance time horizons, 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,
James L. Elrod Jr. (Chairman)
Guy Sansone
Fiscal
2010 Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Plan
|
|
Compensation
|
|
All Other
|
|
|
|
|
Fiscal
|
|
Salary
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)(a)
|
|
($)(b)
|
|
($)(c)
|
|
($)(d)
|
|
($)(e)
|
|
($)
|
|
Edward M. Murphy
|
|
|
2010
|
|
|
|
350,000
|
|
|
|
0
|
|
|
|
247,146
|
|
|
|
2,885
|
|
|
|
42,195
|
|
|
|
642,226
|
|
Chief Executive Officer
|
|
|
2009
|
|
|
|
350,000
|
|
|
|
0
|
|
|
|
213,755
|
|
|
|
1,511
|
|
|
|
19,523
|
|
|
|
654,758
|
|
|
|
|
2008
|
|
|
|
350,000
|
|
|
|
129,318
|
|
|
|
205,719
|
|
|
|
466
|
|
|
|
53,615
|
|
|
|
733,424
|
|
Bruce F. Nardella
|
|
|
2010
|
|
|
|
297,634
|
|
|
|
0
|
|
|
|
160,203
|
|
|
|
6,549
|
|
|
|
33,668
|
|
|
|
498,054
|
|
President and
|
|
|
2009
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
83,975
|
|
|
|
788
|
|
|
|
13,956
|
|
|
|
440,005
|
|
Chief Operating Officer
|
|
|
2008
|
|
|
|
275,000
|
|
|
|
109,207
|
|
|
|
84,352
|
|
|
|
325
|
|
|
|
36,610
|
|
|
|
507,700
|
|
Denis M. Holler
|
|
|
2010
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
97,093
|
|
|
|
18,433
|
|
|
|
29,589
|
|
|
|
420,115
|
|
Executive Vice President and
|
|
|
2009
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
83,975
|
|
|
|
784
|
|
|
|
14,376
|
|
|
|
439,944
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
|
275,000
|
|
|
|
109,207
|
|
|
|
84,352
|
|
|
|
323
|
|
|
|
36,610
|
|
|
|
507,887
|
|
Juliette E. Fay
|
|
|
2010
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
97,093
|
|
|
|
6,827
|
|
|
|
29,589
|
|
|
|
408,509
|
|
Executive Vice President and
|
|
|
2009
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
83,975
|
|
|
|
2,248
|
|
|
|
14,496
|
|
|
|
438,306
|
|
Chief Development Officer
|
|
|
2008
|
|
|
|
275,000
|
|
|
|
109,207
|
|
|
|
84,352
|
|
|
|
400
|
|
|
|
37,150
|
|
|
|
505,306
|
|
Hugh R. Jones III(f)
|
|
|
2010
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
97,093
|
|
|
|
4,996
|
|
|
|
24,985
|
|
|
|
402,074
|
|
Executive Vice President and
|
|
|
2009
|
|
|
|
275,000
|
|
|
|
0
|
|
|
|
83,975
|
|
|
|
774
|
|
|
|
13,130
|
|
|
|
438,099
|
|
Chief Administrative Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David M. Petersen
|
|
|
2010
|
|
|
|
260,000
|
|
|
|
0
|
|
|
|
92,702
|
|
|
|
5,041
|
|
|
|
22,888
|
|
|
|
380,631
|
|
Senior Vice President and
|
|
|
2009
|
|
|
|
260,000
|
|
|
|
0
|
|
|
|
79,395
|
|
|
|
815
|
|
|
|
11,132
|
|
|
|
351,342
|
|
President, Redwood Operating Group
|
|
|
2008
|
|
|
|
260,000
|
|
|
|
81,051
|
|
|
|
79,751
|
|
|
|
359
|
|
|
|
29,398
|
|
|
|
450,559
|
|
|
|
|
(a) |
|
Includes individuals pre-tax contributions to health plans
and contributions to retirement plans. |
|
(b) |
|
Figures represent grant date fair value of equity awards under
the NMH Investment, LLC Amended and Restated 2006 Unit Plan in
accordance with Accounting Standards Codification Topic 718 (ASC
718, formerly FAS 123R). |
|
(c) |
|
Represents cash bonuses under our annual incentive compensation
plan. |
|
(d) |
|
Represents earnings in excess of the applicable federal
long-term rate under the Executive Deferred Compensation Plan
and the Executive Deferral Plan. |
|
(e) |
|
All other compensation represents Company contributions credited
to the Executive Deferred Compensation Plan and the Company
match on executive contributions to the 401(k) plan and
Executive Deferral |
59
|
|
|
|
|
Plan, which has been estimated for fiscal 2010 in advance of the
actual determination. The fiscal 2009 and 2008 amounts in this
column were estimated at the time and have not been restated, as
any differences were immaterial. Also included are Company paid
parking, tax
gross-ups
for Company paid parking, and imputed income on group term life
insurance premiums. For fiscal 2010, the components of All Other
Compensation were as follows: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Company
|
|
|
|
|
|
|
|
|
Contributions
|
|
Match on
|
|
|
|
|
|
|
|
|
to Executive
|
|
Contributions
|
|
|
|
|
|
|
|
|
Deferred
|
|
to 401(k) and
|
|
|
|
|
|
Group
|
|
|
Compensation
|
|
Executive
|
|
Company
|
|
|
|
Term Life
|
|
|
Plan $
|
|
Deferral Plan $
|
|
Paid Parking $
|
|
Gross-ups $
|
|
Insurance $
|
|
Edward M. Murphy
|
|
|
34,125
|
|
|
|
3,675
|
|
|
|
1,440
|
|
|
|
670
|
|
|
|
2,285
|
|
Bruce F. Nardella
|
|
|
27,225
|
|
|
|
3,675
|
|
|
|
1,440
|
|
|
|
670
|
|
|
|
658
|
|
Denis M. Holler
|
|
|
22,688
|
|
|
|
3,675
|
|
|
|
1,440
|
|
|
|
670
|
|
|
|
1,116
|
|
Juliette E. Fay
|
|
|
22,688
|
|
|
|
3,675
|
|
|
|
1,440
|
|
|
|
670
|
|
|
|
1,116
|
|
Hugh R. Jones III
|
|
|
22,688
|
|
|
|
0
|
|
|
|
1,183
|
|
|
|
724
|
|
|
|
390
|
|
David M. Petersen
|
|
|
17,550
|
|
|
|
3,675
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,663
|
|
|
|
|
(f) |
|
Mr. Jones has tendered his resignation effective
December 31, 2010. See Severance
Agreements, below. |
Grants of
Plan-Based Awards in Fiscal 2010
Estimated
Possible Payouts Under Non-Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Threshold(a) ($)
|
|
Target(a) ($)
|
|
Maximum(a) ($)
|
|
Edward M. Murphy
|
|
|
175,000
|
|
|
|
350,000
|
|
|
|
525,000
|
|
Bruce F. Nardella
|
|
|
113,437
|
|
|
|
226,875
|
|
|
|
340,312
|
|
Denis M. Holler
|
|
|
68,750
|
|
|
|
137,500
|
|
|
|
206,250
|
|
Juliette E. Fay
|
|
|
68,750
|
|
|
|
137,500
|
|
|
|
206,250
|
|
Hugh R. Jones III
|
|
|
68,750
|
|
|
|
137,500
|
|
|
|
206,250
|
|
David M. Petersen
|
|
|
65,000
|
|
|
|
130,000
|
|
|
|
195,000
|
|
|
|
|
(a) |
|
Amounts represent potential payouts relating to fiscal 2010
under the Executive Leadership Incentive Plan, based on base
salary as in effect at September 30, 2010. For a
description of the plan, see Compensation Discussion and
Analysis Annual Incentive Compensation. |
Estimated
Future Payouts Under Equity Incentive Plan
No grants of equity awards were made to the named executive
officers during fiscal 2010.
60
Outstanding
Equity Awards at Fiscal 2010 Year-End
Shares and stock options are not included in this table because
none were issued during the fiscal year and none were
outstanding at fiscal year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive Plan Awards
|
|
|
|
|
|
|
|
|
|
Payout Value
|
|
|
Number and Class
|
|
Payout Value
|
|
|
Number and Class
|
|
of Unearned
|
|
|
of Earned Units
|
|
of Earned Units
|
|
|
of Unearned Units
|
|
Units Not
|
Name
|
|
Not Vested (#)
|
|
Not Vested ($)(e)
|
|
|
Not Vested (#)(f)
|
|
Vested ($)(e)
|
|
Edward M. Murphy
|
|
664.13 B Common Units(a)
|
|
|
33.21
|
|
|
|
|
|
|
|
696.90 C Common Units(a)
|
|
|
20.91
|
|
|
|
|
|
|
|
8,698.65 D Common Units(a)
|
|
|
86.99
|
|
|
17,397.31 D Common Units(a)
|
|
173.97
|
|
|
6,737.50 B Common Units(b)
|
|
|
336.88
|
|
|
|
|
|
|
|
7,070.00 C Common Units(b)
|
|
|
212.10
|
|
|
|
|
|
|
|
2,496.67 D Common Units(b)
|
|
|
24.97
|
|
|
4,993.33 D Common Units(b)
|
|
49.93
|
Bruce F. Nardella
|
|
664.13 B Common Units(a)
|
|
|
33.21
|
|
|
|
|
|
|
|
696.90 C Common Units(a)
|
|
|
20.91
|
|
|
|
|
|
|
|
7,241.32 D Common Units(a)
|
|
|
72.41
|
|
|
14,482.63 D Common Units(a)
|
|
144.83
|
|
|
962.50 B Common Units(c)
|
|
|
48.13
|
|
|
|
|
|
|
|
1,010.00 C Common Units(c)
|
|
|
30.30
|
|
|
|
|
|
|
|
356.67 D Common Units(c)
|
|
|
3.57
|
|
|
713.33 D Common Units(c)
|
|
7.13
|
|
|
5,775.00 B Common Units(b)
|
|
|
288.75
|
|
|
|
|
|
|
|
6,060.00 C Common Units(b)
|
|
|
181.80
|
|
|
|
|
|
|
|
2,140.00 D Common Units(b)
|
|
|
21.40
|
|
|
4,280.00 D Common Units(b)
|
|
42.80
|
Denis M. Holler
|
|
664.13 B Common Units(a)
|
|
|
33.21
|
|
|
|
|
|
|
|
696.90 C Common Units(a)
|
|
|
20.91
|
|
|
|
|
|
|
|
7,241.32 D Common Units(a)
|
|
|
72.41
|
|
|
14,482.63 D Common Units(a)
|
|
144.83
|
|
|
481.25 B Common Units(c)
|
|
|
24.06
|
|
|
|
|
|
|
|
505.00 C Common Units(c)
|
|
|
15.15
|
|
|
|
|
|
|
|
178.33 D Common Units(c)
|
|
|
1.78
|
|
|
356.67 D Common Units(c)
|
|
3.57
|
|
|
6,256.25 B Common Units(b)
|
|
|
312.81
|
|
|
|
|
|
|
|
6,565.00 C Common Units(b)
|
|
|
196.95
|
|
|
|
|
|
|
|
2,318.33 D Common Units(b)
|
|
|
23.18
|
|
|
4,636.67 D Common Units(b)
|
|
46.37
|
Juliette E. Fay
|
|
664.13 B Common Units(a)
|
|
|
33.21
|
|
|
|
|
|
|
|
696.90 C Common Units(a)
|
|
|
20.91
|
|
|
|
|
|
|
|
7,241.32 D Common Units(a)
|
|
|
72.41
|
|
|
14,482.63 D Common Units(a)
|
|
144.83
|
|
|
6,256.25 B Common Units(b)
|
|
|
312.81
|
|
|
|
|
|
|
|
6,565.00 C Common Units(b)
|
|
|
196.95
|
|
|
|
|
|
|
|
2,318.33 D Common Units(b)
|
|
|
23.18
|
|
|
4,636.67 D Common Units(b)
|
|
46.37
|
Hugh R. Jones III
|
|
664.13 B Common Units(a)
|
|
|
33.21
|
|
|
|
|
|
|
|
696.90 C Common Units(a)
|
|
|
20.91
|
|
|
|
|
|
|
|
4,618.11 D Common Units(a)
|
|
|
46.18
|
|
|
9,236.22 D Common Units(a)
|
|
92.36
|
|
|
5,775.00 B Common Units(b)
|
|
|
288.75
|
|
|
|
|
|
|
|
6,060.00 C Common Units(b)
|
|
|
181.80
|
|
|
|
|
|
|
|
2,140.00 D Common Units(b)
|
|
|
21.40
|
|
|
4,280.00 D Common Units(b)
|
|
42.80
|
|
|
481.25 B Common Units(d)
|
|
|
24.06
|
|
|
|
|
|
|
|
505.00 C Common Units(d)
|
|
|
15.15
|
|
|
|
|
|
|
|
2,801.54 D Common Units(d)
|
|
|
28.02
|
|
|
5,603.08 D Common Units(d)
|
|
56.03
|
David M. Petersen
|
|
664.13 B Common Units(a)
|
|
|
33.21
|
|
|
|
|
|
|
|
696.90 C Common Units(a)
|
|
|
20.91
|
|
|
|
|
|
|
|
5,201.05 D Common Units(a)
|
|
|
52.01
|
|
|
10,402.09 D Common Units(a)
|
|
104.02
|
|
|
5,775.00 B Common Units(b)
|
|
|
288.75
|
|
|
|
|
|
|
|
6,060.00 C Common Units(b)
|
|
|
181.80
|
|
|
|
|
|
|
|
2,140,00 D Common Units(b)
|
|
|
21.40
|
|
|
4,280.00 D Common Units(b)
|
|
42.80
|
|
|
|
(a) |
|
Granted on August 22, 2008 in connection with compensatory
grants under the NMH Investment, LLC 2006 Unit Plan, as amended.
The vesting measurement date, as set forth in the relevant
subscription agreement, for these units is June 29, 2006.
The B Common Units vested four years after the measurement date,
on June 29, 2010, and the C and D Common Units vested after
three years, on June 29, 2009. Because payment of the value
of the B, C and D Common Units is deferred until termination of
a recipients employment with the Company or the occurrence
of a liquidity event, we have included all such awards |
61
|
|
|
|
|
under columns (i) and (j) for equity incentive plan
awards that have not vested. Vesting is explained in more detail
above, under Compensation Discussion and
Analysis Equity-Based Compensation. |
|
(b) |
|
Granted on January 12, 2007 in connection with the initial
compensatory grants under the NMH Investment, LLC 2006 Unit
Plan. The vesting measurement date, as set forth in the relevant
subscription agreement, for these units is June 29, 2006.
The B Common Units vested four years after the measurement date,
on June 29, 2010, and the C and D Common Units vested three
years after the measurement date, on June 29, 2009. Because
payment of the value of the B, C and D Common Units is deferred
until termination of a recipients employment with the
Company or the occurrence of a liquidity event, we have included
all such awards under columns (i) and (j) for equity
incentive plan awards that have not vested. Vesting is explained
in more detail above, under Compensation Discussion and
Analysis Equity-Based Compensation. |
|
(c) |
|
Granted on August 14, 2007 in recognition of the named
executive officers promotion. The vesting measurement
date, as set forth in the relevant subscription agreement, for
these units is May 22, 2007, the date of the promotions.
The B Common Units vest over 48 months and the C and D
Common Units vested after three years, on May 22, 2010.
Because payment of the value of the B, C and D Common Units is
deferred until termination of a recipients employment with
the Company or the occurrence of a liquidity event, we have
included all such awards under columns (i) and (j) for
equity incentive plan awards that have not vested. Vesting is
explained in more detail above, under Compensation
Discussion and Analysis Equity-Based
Compensation. |
|
(d) |
|
Granted on September 24, 2008 in recognition of the named
executive officers promotion. The vesting measurement
date, as set forth in the relevant subscription agreement, for
these units is August 1, 2008, the date of the promotion.
The B Common Units vest over 48 months and the C and D
Common Units vest after three years. Because payment of the
value of the B, C and D Common Units is deferred until
termination of a recipients employment with the Company or
the occurrence of a liquidity event, we have included all such
awards under columns (i) and (j) for equity incentive
plan awards that have not vested. Vesting is explained in more
detail above, under Compensation Discussion and
Analysis Equity-Based Compensation. |
|
(e) |
|
Payout value represents fair market value determined as of
fiscal year-end, which is $0.05 per B Common Unit, $0.03 per C
Common Unit and $0.01 per D Common Unit. For purposes of
calculating fair market value, we assumed hypothetical
transaction costs in a change in control of the Company. In the
event of a change in control, the unearned D Common Units could
be earned if certain investment return conditions are achieved
that relate to Vestar receiving a specified multiple of its
investment. |
62
Option
Exercises and Stock Vested
No options were issued, outstanding or exercised during fiscal
2010. For purposes of this disclosure item, certain of the units
were vested during fiscal 2010 such that if the named executive
officer terminated his or her employment voluntarily during
fiscal 2010 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
|
|
|
Common Units
|
|
Common Units
|
|
Common Units
|
|
|
Acquired on
|
|
Acquired on
|
|
Acquired on
|
Name
|
|
Vesting (#)(a)
|
|
Vesting (#)(a)
|
|
Vesting (#)(a)
|
|
Edward M. Murphy
|
|
|
1,353
|
|
|
|
0
|
|
|
|
0
|
|
Bruce F. Nardella
|
|
|
1,441
|
|
|
|
1,010
|
|
|
|
1,070
|
|
Denis M. Holler
|
|
|
1,397
|
|
|
|
505
|
|
|
|
535
|
|
Juliette E. Fay
|
|
|
1,265
|
|
|
|
0
|
|
|
|
0
|
|
Hugh R. Jones III
|
|
|
1,309
|
|
|
|
0
|
|
|
|
0
|
|
David M. Petersen
|
|
|
1,177
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
(a) |
|
In the event of a change in control, the unvested B Common Units
automatically vest, and the unearned D Common Units could be
earned if certain investment return conditions are achieved that
relate to Vestar receiving a specified multiple of its investment |
The value realized on vesting represents fair market value
determined as of fiscal year end. No value is reported in the
table, as no value was realized upon vesting, because the fair
market value of the units is equivalent to their original
purchase price. The named executive officers have not received
any payments with respect to their units, and the named
executive officers are not permitted to transfer the units for
value. Payment of the amounts realized on vesting is deferred
until such time as NMH Investment repurchases the units
following termination of a named executive officers
employment, or upon a sale of the Company or other liquidity
event. The amounts realized on vesting, if any, are subject to
forfeiture in the event a named executive officer is terminated
for cause, at which time NMH Investment may repurchase the units
at the lesser of fair market value and cost.
In addition, if an executive officer were terminated without
cause or resigned for good reason as of the last day of the
fiscal year, he or she would be entitled to receive fair market
value for a portion of his or her units. See Estimated
Change-in-Control/Severance
Payments below.
63
Pension
Benefits
The Company has no pension plans.
Fiscal
2010 Nonqualified Deferred Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Company
|
|
Aggregate
|
|
|
|
Aggregate
|
|
|
Contributions
|
|
Contributions
|
|
Earnings
|
|
Aggregate
|
|
Balance at
|
|
|
in Last
|
|
in Last
|
|
in Last
|
|
Withdrawals/
|
|
Last Fiscal
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
Fiscal Year
|
|
Distributions
|
|
Year End
|
Name
|
|
($)(a)(b)
|
|
($)(b)(c)
|
|
($)(b)(d)
|
|
($)(e)
|
|
($)(f)
|
|
Edward M. Murphy
|
|
|
10,500
|
|
|
|
35,921
|
|
|
|
14,301
|
|
|
|
10,100
|
|
|
|
244,660
|
|
Bruce F. Nardella
|
|
|
22,985
|
|
|
|
29,021
|
|
|
|
18,777
|
|
|
|
4,579
|
|
|
|
285,167
|
|
Denis M. Holler
|
|
|
15,500
|
|
|
|
24,483
|
|
|
|
42,372
|
|
|
|
|
|
|
|
571,780
|
|
Juliette E. Fay
|
|
|
35,897
|
|
|
|
24,483
|
|
|
|
19,837
|
|
|
|
|
|
|
|
306,186
|
|
Hugh R. Jones III
|
|
|
|
|
|
|
22,688
|
|
|
|
14,421
|
|
|
|
|
|
|
|
205,252
|
|
David M. Petersen
|
|
|
19,849
|
|
|
|
19,346
|
|
|
|
14,720
|
|
|
|
10,100
|
|
|
|
221,035
|
|
|
|
|
(a) |
|
Represents amounts contributed to the Executive Deferral Plan
during fiscal 2010. The Executive Deferral Plan is available to
highly compensated employees to supplement the 401(k) plan. For
details about the plan, see Compensation Discussion and
Analysis Deferred Compensation, above. |
|
(b) |
|
All of the amounts reported under Executive Contributions
in Last Fiscal Year and Company Contributions in
Last Fiscal Year are reported as compensation for fiscal
2010 in the Summary Compensation Table. Under Aggregate
Earnings in Last Fiscal Year, the following amounts are
reported as compensation in the Summary Compensation Table that
were in excess of the applicable federal long-term rate are as
follows: |
|
|
|
|
|
Edward M. Murphy
|
|
$
|
2,885
|
|
Bruce F. Nardella
|
|
|
6,549
|
|
Denis M. Holler
|
|
|
18,433
|
|
Juliette E. Fay
|
|
|
6,827
|
|
Hugh R. Jones III
|
|
|
4,996
|
|
David M. Petersen
|
|
|
5,041
|
|
|
|
|
(c) |
|
Represents Company match (up to 1.5% of base salary) on
executive contributions to the Executive Deferral Plan, plus
Company contributions to the Executive Deferred Compensation
Plan. The Executive Deferred Compensation Plan is an unfunded,
nonqualified deferred compensation arrangement to provide
deferred compensation to senior management. For details about
both these plans, see Deferred Compensation above. |
|
(d) |
|
Represents the 6% return credited to the participants
account in the Executive Deferred Compensation Plan for balances
in fiscal 2010, plus the executives respective returns for
amounts invested in the Executive Deferral Plan. |
|
(e) |
|
Represents amounts withdrawn from the Executive Deferral Plan
and deposited into the executives respective 401(k)
account in accordance with IRS rules. |
64
|
|
|
(f) |
|
Represents aggregate balances in Executive Deferral Plan and
Executive Deferred Compensation Plan for each executive as of
fiscal year-end. Of the amounts in this column, the following
amounts have been reported as compensation in the Summary
Compensation Table for fiscal 2010, fiscal 2009 and fiscal 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
|
2010
|
|
2009
|
|
2008
|
|
Edward M. Murphy
|
|
$
|
37,800
|
|
|
$
|
14,994
|
|
|
$
|
48,931
|
|
Bruce F. Nardella
|
|
|
30,900
|
|
|
|
11,181
|
|
|
|
33,681
|
|
Denis M. Holler
|
|
|
26,363
|
|
|
|
11,181
|
|
|
|
33,681
|
|
Juliette E. Fay
|
|
|
26,363
|
|
|
|
11,181
|
|
|
|
33,681
|
|
Hugh R. Jones III
|
|
|
22,688
|
|
|
|
11,181
|
|
|
|
N/A
|
|
David M. Petersen
|
|
|
21,225
|
|
|
|
9,469
|
|
|
|
26,831
|
|
Severance
Agreements
Mr. Murphy entered into an amended and restated employment
agreement with us at the time of the Merger. This agreement was
amended and restated during the first quarter of fiscal 2009 for
compliance with Section 409A under the Internal Revenue
Code. The initial term is three years, after which the agreement
will renew automatically each year for a one-year term, unless
terminated earlier by the parties. The employment agreement
provides for a base salary of $350,000 per year, subject to
review and adjustment from time to time, with an annual bonus
from the incentive compensation plan equal to no less than
Mr. Murphys base salary if the Company reaches
certain yearly determined performance objectives. Under the
terms of the agreement, if Mr. Murphy is terminated by the
Company without cause or Mr. Murphy resigns
with good reason, the Company is obligated to
continue to pay him his base salary and targeted incentive
compensation for two years following the date of such
termination, as well as a pro rata incentive compensation amount
for the year in which such termination occurs. The definition of
cause includes the commission of fraud or
embezzlement, an indictment or conviction for a felony or a
crime involving moral turpitude, willful misconduct, violation
of any material written policy of the Company, material neglect
of duties, failure to comply with reasonable Board directives
and material breach of any agreement with the Company or its
securityholders or affiliates. The definition of good
reason includes a material change in title, duties and
responsibilities, a reduction in Mr. Murphys annual
base salary or annual bonus opportunity (subject to certain
exclusions), a material breach by the Company of the amended and
restated employment agreement, and relocation of
Mr. Murphys principal place of work from its current
location to a location that is beyond a
50-mile
radius of such location.
The employment agreement contains provisions pursuant to which
Mr. Murphy has agreed not to disclose our confidential
information. Mr. Murphy has also agreed not to solicit our
employees or contractors, nor compete with us for a period of
two years after his employment with us has been terminated.
Messrs. Holler, Nardella, Jones and Petersen and
Ms. Fay entered severance agreements with us at the time of
the Merger. These agreements were amended and restated during
the first quarter of fiscal 2009 for compliance with
Section 409A under the Internal Revenue Code. Pursuant to
these agreements, in the event that the employment of any such
employees is terminated by the Company without cause
or the named executive officer resigns with good
reason, they will be entitled to (i) the payment of
an aggregate amount equal to their base salary for one year,
(ii) the payment of an amount equal to their annual cash
bonuses earned in the year prior to their severance and
(iii) continued coverage under our health, medical and
welfare benefit plans for a period of one year from the date of
termination. Cause and good reason are
defined as such terms are defined in Mr. Murphys
amended and restated employment agreement. The severance
agreements also contain provisions pursuant to which the
executive officer agrees not to disclose our confidential
information, solicit our employees or contractors or compete
with us for a period of one year after his or her employment
with us has been terminated.
In addition, Mr. Jones has tendered his resignation for
good reason effective December 31, 2010, and in
connection with his resignation, he entered into a letter
agreement with us, which amends certain terms of his
65
severance agreement. The letter agreement entitles him to
receive certain additional benefits: a bonus payment with
respect to fiscal 2010; an amount equal to that payment, in
accordance with the terms of the severance agreement; fully paid
health insurance for two years following his termination
(instead of one year as provided under the severance agreement);
and the retention of the Company-provided computer hardware and
software in his home office.
Estimated
Severance and
Change-in-Control
Payments
Mr. Murphys amended and restated employment agreement
and the severance agreements of the other named executive
officers provide for severance benefits in the event of
termination under certain circumstances. The following table
shows the amount of potential severance benefits for the named
executive officers pursuant to their employment or severance
arrangements, assuming the named executive officer was
terminated under circumstances qualifying for the benefits and
that termination occurred as of September 30, 2010, our
fiscal year-end. The table also shows the estimated present
value of continuing coverage for the benefits and the amount
that would be paid for the repurchase of the B, C and D Common
Units in NMH Investment, assuming a termination without cause.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of
|
|
Value of
|
|
|
|
|
|
|
|
|
Restricted B,
|
|
Continued
|
|
|
|
|
Salary
|
|
Bonus
|
|
C and D Common
|
|
Benefits
|
|
Total
|
Name
|
|
($)(a)
|
|
($)(b)
|
|
Units ($)(c)
|
|
($)(d)
|
|
($)
|
|
Edward M. Murphy
|
|
|
700,000
|
|
|
|
700,000
|
|
|
|
939
|
|
|
|
36,042
|
|
|
|
1,436,981
|
|
Bruce F. Nardella
|
|
|
302,500
|
|
|
|
83,975
|
|
|
|
895
|
|
|
|
25,494
|
|
|
|
412,864
|
|
Denis M. Holler
|
|
|
275,000
|
|
|
|
83,975
|
|
|
|
895
|
|
|
|
21,374
|
|
|
|
381,244
|
|
Juliette E. Fay
|
|
|
275,000
|
|
|
|
83,975
|
|
|
|
851
|
|
|
|
3,242
|
|
|
|
363,068
|
|
Hugh R. Jones III
|
|
|
275,000
|
|
|
|
83,975
|
|
|
|
851
|
|
|
|
23,215
|
|
|
|
383,041
|
|
David M. Petersen
|
|
|
260,000
|
|
|
|
79,385
|
|
|
|
745
|
|
|
|
17,432
|
|
|
|
357,562
|
|
|
|
|
(a) |
|
Under Mr. Murphys employment agreement, salary
continues for two years. For each of the other named executive
officers, salary continues for one year. These amounts would be
payable over time in accordance with the Companys regular
payroll practices. |
|
(b) |
|
Mr. Murphy would receive an amount equal to his target
annual bonus of 100 percent of base salary under the
incentive compensation plan for two years after termination.
Each of the other named executive officers would receive an
amount equal to the actual annual bonus for the prior fiscal
year. These amounts would be payable over time in accordance
with the Companys regular payroll practices. |
|
(c) |
|
Represents the amount the executive officer would receive for
the B, C and D Common Units, including the original purchase
price. The units may be called upon the executive officers
termination. Assuming a termination without cause on
September 30, 2010, the named executive officers would
receive fair market value and cost, respectively, for the
following numbers of B Common Units, fair market value for all
of the C Common Units and fair market value for all of the D
Common Units, where fair market value for unearned D Common
Units is equal to the initial purchase price, as shown below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of B
|
|
|
|
Number of C
|
|
Number of D
|
|
|
Common
|
|
Number of B
|
|
Common
|
|
Common
|
|
|
Units
|
|
Common
|
|
Units
|
|
Units
|
|
|
Purchased at
|
|
Units
|
|
Purchased at
|
|
Purchased at
|
|
|
Fair Market
|
|
Purchased
|
|
Fair Market
|
|
Fair Market
|
|
|
Value
|
|
at Cost
|
|
Value
|
|
Value
|
|
Edward M. Murphy
|
|
|
7,401.63
|
|
|
|
|
|
|
|
7,766.90
|
|
|
|
33,585.96
|
|
Bruce F. Nardella
|
|
|
7,247.63
|
|
|
|
154.00
|
|
|
|
7,766.90
|
|
|
|
29,213.95
|
|
Denis M. Holler
|
|
|
7,324.63
|
|
|
|
77.00
|
|
|
|
7,766.90
|
|
|
|
29,213.95
|
|
Juliette E. Fay
|
|
|
6,920.38
|
|
|
|
|
|
|
|
7,261.90
|
|
|
|
28,678.95
|
|
Hugh R. Jones III
|
|
|
6,678.41
|
|
|
|
241.97
|
|
|
|
7,261.90
|
|
|
|
28,678.95
|
|
David M. Petersen
|
|
|
6,439.13
|
|
|
|
|
|
|
|
6,756.90
|
|
|
|
22,023.14
|
|
66
|
|
|
|
|
For purposes of calculating fair market value, we assumed
hypothetical transaction costs assuming a change in control of
the Company. The purchase price may be paid in the form of a
promissory note at the discretion of NMH Investment. |
|
(d) |
|
Mr. Murphy would continue to participate in health and
welfare benefit plans at the Companys expense for two
years. All other named executive officers would participate in
the health and welfare benefit plans for one year. Amounts are
estimated based on the respective named executive officers
current benefit elections. |
Neither Mr. Murphys employment agreement nor the
named executive officers severance agreements contain
provisions for payments upon a change of control of the Company.
However, assuming a change of control occurred at
September 30, 2010, the Companys fiscal year-end,
under the governing documents, all of the B Common Units would
vest, all of the C Common Units would vest and one-third of the
Common D Units would vest. The payout based on estimated fair
market value of each named executive officers vested
B Common Units and vested and earned C and D Common Units
as of September 30, 2010, plus the initial purchase price
of the remaining unvested C Common Units and unvested and/or
unearned D Common Units, would be as set forth in the following
table. In the event of a change in control, the unearned D
Common Units could become earned if certain investment return
conditions are achieved that relate to Vestar receiving a
specified multiple of its investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B Common
|
|
C Common
|
|
D Common
|
|
|
Name
|
|
Units ($)
|
|
Units ($)
|
|
Units ($)
|
|
Total ($)
|
|
Edward M. Murphy
|
|
|
370.08
|
|
|
|
233.01
|
|
|
|
335.86
|
|
|
|
938.95
|
|
Bruce F. Nardella
|
|
|
370.08
|
|
|
|
233.01
|
|
|
|
292.14
|
|
|
|
895.23
|
|
Denis M. Holler
|
|
|
370.08
|
|
|
|
233.01
|
|
|
|
292.14
|
|
|
|
895.23
|
|
Juliette E. Fay
|
|
|
346.02
|
|
|
|
217.86
|
|
|
|
286.79
|
|
|
|
850.67
|
|
Hugh R. Jones III
|
|
|
346.02
|
|
|
|
217.86
|
|
|
|
286.79
|
|
|
|
850.67
|
|
David M. Petersen
|
|
|
321.96
|
|
|
|
202.71
|
|
|
|
220.23
|
|
|
|
744.90
|
|
Actual
Severance Payments
In connection with his resignation for good reason effective
December 31, 2010, Mr. Jones will receive the benefits
shown in the following table pursuant to his severance agreement
and his letter agreement. The table shows the estimated present
value of continuing coverage for the benefits and the amount
that will be paid for the repurchase of the B, C and D Common
Units in NMH Investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted B,
|
|
|
Continued
|
|
|
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
C and D Common
|
|
|
Benefits
|
|
|
|
|
|
Total
|
|
Name
|
|
($)(a)
|
|
|
($)(b)
|
|
|
Units ($)(c)
|
|
|
($)(d)
|
|
|
Other($)(e)
|
|
|
($)
|
|
|
Hugh R. Jones III
|
|
|
275,000
|
|
|
|
97,093
|
|
|
|
851
|
|
|
|
45,666
|
|
|
|
2,449
|
|
|
|
421,059
|
|
|
|
|
(a) |
|
Under Mr. Jones severance agreement, salary continues
for one year. This amount is payable over time in accordance
with the Companys regular payroll practices. |
|
(b) |
|
Mr. Jones will receive an amount equal to the actual annual
bonus for fiscal year 2010. This amount is payable over time in
accordance with the Companys regular payroll practices. |
|
(c) |
|
Represents the amount Mr. Jones will receive for the B, C
and D Common Units. Mr. Jones will receive fair market
value and cost, respectively, for the following numbers of B, C
and D Common Units as shown below. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
B Common Units
|
|
|
Number of
|
|
|
C Common Units
|
|
|
D Common Units
|
|
purchased at
|
|
|
B Common Units
|
|
|
purchased at
|
|
|
purchased at
|
|
fair market value
|
|
|
purchased at cost
|
|
|
fair market value
|
|
|
fair market value
|
|
|
|
6,678.41
|
|
|
|
241.97
|
|
|
|
7,261.90
|
|
|
|
28,678.95
|
|
67
|
|
|
(d) |
|
Under his letter agreement with the Company dated
November 16, 2010, Mr. Jones will continue to
participate in health and welfare benefit plans at the
Companys expense for two years. Amounts are estimated
based on Mr. Jones current benefit elections. |
|
(e) |
|
Under his letter agreement, Mr. Jones will retain the
Company-provided computer hardware and software in his home
office. |
Director
Compensation
We reimburse directors for any
out-of-pocket
expenses incurred by them in connection with services provided
in such capacity. We compensate our outside directors as set out
in the table below. Mr. Murphy receives no additional
compensation for his service as a director, apart from his
compensation as Chief Executive Officer. Messrs. Elrod,
OConnell and Mundt are employees of Vestar and do not
receive any additional compensation for their service as
directors of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
Fees Earned or
|
|
Equity
|
|
Deferred
|
|
|
|
|
|
|
Paid in Cash
|
|
Awards
|
|
Compensation
|
|
All Other
|
|
|
Name
|
|
($)
|
|
($)
|
|
Earnings ($)
|
|
Compensation ($)
|
|
Total ($)
|
|
Gregory T. Torres
|
|
|
100,000
|
(a)
|
|
|
|
|
|
|
594
|
(b)
|
|
|
370
|
(c)
|
|
|
100,964
|
|
Pamela F. Lenehan
|
|
|
28,000
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,000
|
|
Guy Sansone
|
|
|
16,000
|
(d)
|
|
|
6,342
|
(e)
|
|
|
|
|
|
|
|
|
|
|
22,342
|
|
|
|
|
(a) |
|
Mr. Torres is paid a salary of $100,000 per year in
accordance with his amended and restated employment agreement. |
|
(b) |
|
Represents earnings in excess of the applicable federal
long-term rate. Mr. Torres continues to accrue interest on
amounts credited to him in the Executive Deferred Compensation
Plan during his service as the Companys President and
Chief Executive Officer. |
|
(c) |
|
Represents imputed income on group term life insurance. |
|
(d) |
|
Ms. Lenehan and Mr. Sansone received a fee of $5,000
for each meeting of the Board of Directors attended in person
and a fee of $1,000 for each meeting attended by phone and each
committee meeting attended. |
|
(e) |
|
Represents grant date value of equity awards, in accordance with
Accounting Standards Codification Topic 718 (ASC 718, formerly
FAS 123R). Mr Sansone purchased 3,187.00 E Common Units for
$159.35 on September 24, 2010. |
|
|
|
(f) |
|
At September 30, 2010, the last day of our fiscal year,
Ms. Lenehan held 3,188.00 E Common Units and
Mr. Sansone held 3,187.00 E Common Units. |
Compensation
Committee Interlocks and Insider Participation
Mr. Elrod and Mr. Sansone are currently the members of
the Companys Compensation Committee, and neither of them
is or has been an officer or employee of the Company.
Mr. Elrod is a managing director of Vestar, which controls
the Company, and Mr. Sansone is a Managing Director at
Alvarez & Marsal, which is providing consulting
services to the Company. For a description of the transactions
between us and Vestar and Alvarez & Marsal,
respectively, see Item 13. Apart from these relationships,
no member of the Compensation Committee has any relationship
that would be required to be reported under Item 404 of
Regulation S-K.
No member of the Compensation Committee serves or served during
the fiscal year as a member of the board of directors or
compensation committee of a company that has one or more
executive officers serving as a member of the Companys
Board of Directors or Compensation Committee.
68
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
NMH Investment is our ultimate parent and indirectly owns 100%
of our equity securities. The following table sets forth
information with respect to the beneficial ownership of voting
equity interests of NMH Investment by (i) each person or
entity known to us to beneficially hold five percent or more of
equity interests of NMH Investment, (ii) each of our
directors, (iii) each of our named executive officers and
(iv) all of our executive officers and directors as a group.
Under SEC rules, a person is deemed to be a beneficial
owner of a security if that person has or shares voting
power or investment power, which includes the power to dispose
of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which
that person has a right to acquire beneficial ownership within
60 days. Securities that can be so acquired are deemed to
be outstanding for purposes of computing such persons
ownership percentage, but not for purposes of computing any
other persons percentage. Under these rules, more than one
person may be deemed to be a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner
of securities as to which such person has no economic interest.
Except as otherwise indicated in the footnotes below, each of
the beneficial owners has, to the Companys knowledge, sole
voting and investment power with respect to the indicated
Class A Common Units which is the only class of voting
equity interests in NMH Investment.
Beneficial ownership has been determined as of December 3,
2010 in accordance with the relevant rules and regulations
promulgated under the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Percent of
|
Name and Address of Beneficial Owner
|
|
Class A Units(1)(2)
|
|
Class A Units
|
|
Vestar Capital Partners V, L.P.(3)
|
|
|
6,918,627
|
|
|
|
92.6
|
%
|
Gregory T. Torres
|
|
|
25,000
|
|
|
|
*
|
|
Edward M. Murphy
|
|
|
130,000
|
|
|
|
1.7
|
%
|
Bruce F. Nardella
|
|
|
30,000
|
|
|
|
*
|
|
Denis M. Holler
|
|
|
40,169
|
|
|
|
*
|
|
Juliette E. Fay
|
|
|
41,750
|
|
|
|
*
|
|
Hugh R. Jones, III
|
|
|
40,000
|
|
|
|
*
|
|
David M. Petersen
|
|
|
31,200
|
|
|
|
*
|
|
Chris A. Durbin(4)
|
|
|
|
|
|
|
|
|
James L. Elrod, Jr.(4)
|
|
|
|
|
|
|
|
|
Pamela F. Lenehan
|
|
|
2,750
|
|
|
|
*
|
|
Kevin A. Mundt(4)
|
|
|
|
|
|
|
|
|
Daniel S. OConnell(4)
|
|
|
|
|
|
|
|
|
Guy Sansone
|
|
|
|
|
|
|
|
|
All directors and executive officers (17 persons)
|
|
|
421,837
|
|
|
|
5.6
|
%
|
|
|
|
* |
|
Less than 1.0%. |
|
(1) |
|
In addition, certain members of management own non-voting
Preferred Units, Class B Units, Class C Units and
Class D Units, Ms. Lenehan owns non-voting Preferred
Units and Class E Units, and Mr. Sansone owns
Class E Units which are not reflected in the table above.
See Certain Relationships and Related Party
Transactions Management Unit Subscription
Agreements and Director Unit
Subscription Agreement for additional information. |
|
(2) |
|
The Preferred Units and 30% of Class A Common Units held by
the management investors were vested with respect to
appreciation immediately upon issuance, assuming continued
employment with the Company, and the remaining 70% of
Class A Common Units vest over time. See Certain
Relationships and Related Party Transactions
Management Unit Subscription Agreements for additional
information. |
69
|
|
|
(3) |
|
Includes 6,915,196 Class A Common Units held by Vestar
Capital Partners V, L.P. (the Fund) and
3,431 Class A Common Units held by Vestar/NMH
Investors, LLC. In addition, the Fund owns
1,727,280 Preferred Units and Vestar/NMH Investors, LLC
owns 857 Preferred Units, representing approximately 96.9% of
the Preferred Units, of NMH Investment. Vestar
Associates V, L.P. is the general partner of the Fund,
having voting and investment power over membership interests
held or controlled by the Fund. Vestar Managers V, Ltd.
(VMV) is the general partner of Vestar
Associates V, L.P. Each of Vestar Associates V, L.P.
and VMV disclaims beneficial ownership of any membership
interests in NMH Investment beneficially owned by the Fund. The
address of Vestar Capital Partners V, L.P. is 245 Park
Avenue, 41st Floor, New York, NY 10167. |
|
(4) |
|
Mr. OConnell is the Chief Executive Officer of Vestar
and Messrs. Elrod, Mundt and Durbin are Managing Directors
of Vestar. Each of Messrs. OConnell, Elrod, Mundt and
Durbin disclaims beneficial ownership of any membership
interests in NMH Investment beneficially owned by the Fund,
except to the extent of his indirect pecuniary interest therein. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Limited
Liability Company Agreement
Under the Fourth Amended and Restated Limited Liability Company
Agreement (as amended, the Limited Liability Company
Agreement) of NMH Investment, by and among NMH Investment,
Vestar, an affiliate of Vestar, the management and director
investors and future parties to such agreement, the initial
management committee consists of members elected by a plurality
vote of the holders of NMH Investments Class A Common
Units consisting of the designees of Vestar as determined in
accordance with the Securityholders Agreement described below
and one additional person. The management committee currently
has eight members. Any member of the management committee may be
removed at any time by the holders of a majority of the total
voting power of the outstanding Class A Common Units. The
management committee currently consists of the same individuals
as our board of directors.
The management committee manages and controls the business and
affairs of NMH Investment and has the power to, among other
things, amend the Limited Liability Company Agreement, approve
any significant corporate transactions and appoint officers. It
can also delegate such authority by agreement or authorization.
The Limited Liability Company Agreement also contains agreements
among the parties with respect to the allocation of net income
and net loss and the distribution of assets.
Management
Unit Subscription Agreements
In connection with the Merger, NMH Investment entered into
several agreements with management investors and with the
Chairman, Mr. Torres, pursuant to which such investors
subscribed for and purchased Preferred Units and Class A
Common Units (which is the only class of voting equity interests
in NMH Investment). Kathleen Federico, our Senior Vice President
of Human Resources, also subscribed for and purchased Preferred
Units and Class A Common Units in January 2009, shortly
after she joined the Company. The Preferred Units and 30% of the
Class A Common Units were vested with respect to
appreciation upon issuance. On July 5, 2007, NMH Holdings
paid a dividend to its parent, NMH Investment, which was used by
NMH Investment to pay a return of capital with respect to its
Preferred Units.
In addition, NMH Investment has entered into agreements with
management investors, including all of the executive officers,
whereby such management investors purchased non-voting
Class B Units, Class C Units and Class D Units.
These units right to share in an increase in value of NMH
Investment will vest according to schedules that include various
time and performance targets, investment return conditions and
certain other events set forth in the management unit
subscription agreement and NMH Investments Limited
Liability Company Agreement. On June 4, 2010, NMH
Investment amended the terms of the equity units. As a result of
the amendment, the Class B Units vest over 48 months,
rather than 61 months, and two additional performance
targets were created for the Class D Units because we
failed to achieve the 2008 and 2009 targets for vesting of the D
Units.
70
The Class B Units vest over 48 months. Assuming
continued employment of the employee with the Company,
40 percent vest at the end of 37 months from the
relevant measurement date, and the remaining 60 percent
vest monthly over the remainder of the term. Assuming continued
employment, the Class C Units and Class D Units vest
after three years, subject to certain performance conditions
and/or
investment return conditions being met or achieved. For the
Class C Units, the performance conditions relate to the
Company achieving certain financial targets for the fiscal years
ended September 30, 2007, 2008 and 2009, all of which were
met. For the Class D Units, the performance conditions
relate to the Company achieving certain financial targets for
the same fiscal years, and two additional performance conditions
were created for the fiscal years ended September 30, 2010
and 2011 as described above. For both the Class C Units and
the Class D Units, the investment return conditions relate
to Vestar receiving a specified multiple on its investment upon
a liquidity event. In the aggregate, the Class B,
Class C and Class D units represent the right to
receive up to approximately an additional 9.3% of the increase
in value of the common equity interests in NMH Investment.
NMH Investment may be required to purchase all of a management
investors units in the event of such investors
disability, death or retirement. In addition, NMH Investment has
the right to purchase all or a portion of a management
investors units upon the termination of such
investors active employment with the Company or its
affiliates. The price at which the units will be purchased will
vary depending on a number of factors, including (i) the
circumstances of such termination of employment and whether the
management investor engages in certain proscribed competitive
activities following employment, (ii) the length of time
such units were held and (iii) the financial performance of
NMH Investment over a certain specified time period. However,
NMH Investment shall not be obligated to purchase any units at
any time to the extent that the purchase of such units, or a
payment to NMH Investment by one of its subsidiaries in order to
fund such purchase, would result in a violation of law, a
financing default or adverse accounting consequences, or if a
financing default exists which prohibits such purchase or
payment. In September 2009, NMH Investment and certain of the
management investors party thereto entered into an amendment to
the management unit subscription agreements to (1) give NMH
Investment up to seven months after termination of employment to
elect to repurchase the management investors units, and
(2) provide that, to the extent a management investor may
be entitled to fair market value for some or all of the units,
fair market value will be measured as of the date NMH Investment
elects to repurchase the units, rather than as of the date of
termination. From time to time, NMH Investment may enter into
additional management subscription agreements with the
management investors or additional members of management
pursuant to which it may issue additional units.
Director
Unit Subscription Agreements
In connection with her election to our board of directors in
December 2008, Pamela F. Lenehan entered into a Director Unit
Subscription Agreement with NMH Investment. Ms. Lenehan
subscribed for specified amounts of Preferred Units,
Class A Common Units and Class E Common Units of NMH
Investment for an aggregate of $125,159. These units were issued
to Ms. Lenehan on January 8, 2009. In connection with
his election to our board of directors on December 4, 2009,
Guy Sansone was offered the opportunity to subscribe for 3,187
Class E Common Units of NMH Investment for an aggregate of
$159.35. These units were issued to Mr. Sansone on
September 24, 2010.
Securityholders
Agreement
Pursuant to the Securityholders Agreement among NMH Investment,
Vestar, an affiliate of Vestar, the management and director
investors, Mr. Torres and any future parties to such
agreement as amended, (collectively, the
Securityholders), the units of NMH Investment
beneficially owned by the Securityholders are subject to certain
restrictions on transfer, as well as the other provisions
described below.
The Securityholders Agreement provides that the Securityholders
will vote all of their units to elect and continue in office a
management committee or board of directors of NMH Investment and
each of its subsidiaries composed of:
(a) up to seven designees of Vestar until the earlier of
(i) December 3, 2011 and (ii) the date on which one of the
designees of Vestar serving as of December 4, 2010 resigns
or is removed, at which time the number of designees of Vestar
will be up to six; and
71
(b) the Companys chief executive officer.
In addition, each Securityholder has agreed, subject to certain
limited exceptions, that he or she will vote all of his units as
directed by Vestar in connection with amendments to NMH
Investments organizational documents, mergers or other
business combinations, the disposition of all or substantially
all of NMH Investments property and assets,
reorganizations, recapitalizations or the liquidation,
dissolution or winding up of NMH Investment.
Prior to the earlier of (i) a sale of a majority of the
equity or voting interests of NMH Investment, NMH Holdings, LLC
or certain of their holding company subsidiaries, or in a sale
of all or substantially all of the assets of NMH Investment and
its subsidiaries, except for any transactions with a
wholly-owned subsidiary of Vestar or of NMH Investment and
(ii) the fifth anniversary of the date of purchase, the
investors will be prohibited from transferring units to a third
party, subject to certain exceptions.
The Securityholders Agreement provides (i) the management
with tag-along rights with respect to transfers of
securities beneficially owned by Vestar, its partners or their
transferees, and (ii) Vestar with take-along
rights with respect to securities owned by the investors in a
sale of a majority of the equity or voting interests of NMH
Investment, Parent or certain of their holding company
subsidiaries, or in a sale of all or substantially all of the
assets of NMH Investment and its subsidiaries. In addition,
Vestar has certain rights to require NMH Investment (or its
successors) to register securities held by it under the
Securities Act up to eight times, and Vestar and the other
Securityholders have certain rights to participate in publicly
registered offerings of NMH Investments common equity
initiated by NMH Investment or other third parties.
Management
Agreement
Vestar and the Company are parties to a management agreement
relating to certain advisory and consulting services rendered by
Vestar. In consideration of those services, the Company has
agreed to pay to Vestar an aggregate per annum management fee
equal to the greater of (i) $850,000 or (ii) an amount
per annum equal to 1.00% of the Companys consolidated
earnings before depreciation, amortization, interest and taxes
for each fiscal year before deduction of Vestars fee,
determined as set forth in the Companys senior credit
agreement. The Company also agreed to pay Vestar a transaction
fee equal to $7.5 million plus all
out-of-pocket
expenses incurred by Vestar prior to the completion of the
Merger for services rendered by Vestar in connection with the
consummation of the Merger. The Company also 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 at such time as Vestar and
its partners and their respective affiliates hold, directly or
indirectly in the aggregate, less than 20% of the voting power
of the Companys outstanding voting stock.
Indemnification
Agreements
The Company and NMH Holdings are parties to an indemnification
agreement with each of the Companys directors and
executive officers. Under the form of indemnification agreement,
directors and executive officers are indemnified against certain
expenses, judgments and other losses resulting from involvement
in legal proceedings arising from service as a director or
executive officer. NMH Holdings will advance expenses incurred
by directors or executive officers in defending against such
proceedings, and indemnification is generally not available for
proceedings brought by an indemnified person (other than to
enforce his or her rights under the indemnification agreement).
If an indemnified person elects or is required to pay all or any
portion of any judgment or settlement for which NMH Holdings is
jointly liable, NMH Holdings will contribute to the expenses,
judgments, fines and amounts paid in settlement incurred by the
indemnified person in proportion to the relative benefits
received by NMH Holdings (and its officers, directors and
employees other than the indemnified person) and the indemnified
person, as may, to the extent necessary to conform to law, be
further adjusted by reference to the relative fault of the
Company (and its officers, directors and employees other than
the indemnified person) and the indemnified person in connection
with the events that resulted in such losses, as well as any
other equitable considerations which the law may require to be
considered. The Company is a guarantor of NMH Holdings
obligations under this agreement.
72
Consulting
Agreement
The Company has engaged Alvarez & Marsal Healthcare
Industry Group to provide certain transaction advisory and other
services. Our 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
approximately $670,000 for advisory services in connection with
a transaction that was not completed, of which approximately
$400,000 was incurred in the fiscal year ended
September 30, 2010. We have also retained
Alvarez & Marsal for advisory services related to our
cost optimization and restructuring efforts in the current
fiscal year and will pay fees for this engagement based on
hourly rates, as well as a potential success fee which is
expected to be 20% of the total savings and will be based on the
savings actually realized. The engagement was approved by our
Audit Committee. Mr. Sansone is not a member of our Audit
Committee and was not personally involved in the engagement.
Policies
and Procedures for Related Party Transactions
As a debt-only issuer, our related party transactions with
executive officers and directors are generally reviewed by our
board of directors or Audit Committee, although we have not
historically had formal policies and procedures regarding the
review and approval of related party transactions.
Director
Independence
Our board is currently composed of eight directors: Gregory T.
Torres and Edward M. Murphy, who are employed by the Company;
Daniel S. OConnell, James L. Elrod, Jr., Kevin A.
Mundt and Chris A. Durbin, who are employed by Vestar; and
Pamela F. Lenehan and Guy Sansone. Of these directors, only
Ms. Lenehan and Mr. Sansone would likely qualify as
independent directors based on the definition of independent
director set forth in Rule 5605(a)(2) of the Nasdaq Stock
Market, LLC Listing Rules (the Nasdaq Listing
Rules). Under the Nasdaq Listing Rules, we would be
considered a controlled company because more than
50% of our voting power is held by a single person. Accordingly,
even if we were a listed company on Nasdaq, we would not be
required by Nasdaq Listing Rules to maintain a majority of
independent directors on our board, nor would we be required by
Nasdaq Listing Rules to maintain a compensation committee or
nominating committee comprised entirely of independent
directors. No members of management serve on either the audit or
compensation committees. Ms. Lenehan and Messrs. Durbin and
Mundt serve on our audit committee, and Mr. Elrod and
Mr. Sansone have served on our compensation committee.
Beginning in the second quarter of fiscal 2011, Mr. Durbin
will also serve on our compensation committee.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Aggregate fees for professional services rendered for us by
Deloitte & Touche LLP and Ernst & Young LLP for
the year ended September 30, 2010 and Ernst &
Young LLP for the year ended September 30, 2009, were:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Audit fees(1)
|
|
$
|
1,358
|
|
|
$
|
1,047
|
|
Audit related fees(2)
|
|
|
487
|
|
|
|
213
|
|
Tax fees(3)
|
|
|
45
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
1,890
|
|
|
$
|
1,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees primarily include professional services rendered for
the audits of our consolidated financial statements and for our
quarterly reviews, as well as, services related to other
statutory and regulatory filings. |
|
(2) |
|
Audit related fees primarily include due diligence services and
services related to financial reporting that are not required by
regulation. |
|
(3) |
|
Tax fees primarily include professional services rendered for
tax services during the fiscal year indicated. |
Preapproval
Policies and Procedures
The audit committee preapproves all services provided by
Deloitte & Touche LLP.
73
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a)(1) Financial Statements
The following consolidated financial statements on pages F-1
through F-36 are filed as part of this report.
|
|
|
|
|
Consolidated Balance Sheets as of September 30, 2010 and
2009;
|
|
|
|
Consolidated Statements of Operations for the years ended
September 30, 2010, 2009 and 2008;
|
|
|
|
Consolidated Statements of Shareholders Equity for the
years ended September 30, 2010, 2009 and 2008; and
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
September 30, 2010, 2009 and 2008.
|
(2) Financial Statement
Schedules: Financial statement schedules have
been omitted because they are not applicable or not required, or
because the required information is provided in our consolidated
financial statements or notes thereto.
(3) Exhibits: The Exhibit Index is
incorporated by reference herein.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Edward M. Murphy
|
|
|
|
Its:
|
Chief Executive Officer
|
Date: December 13, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below as of December 13, 2010
by the following persons on behalf of the registrant and in the
capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Edward
M. Murphy
Edward
M. Murphy
|
|
Chief Executive Officer
(principal executive officer) and Director
|
|
|
|
/s/ Bruce
F. Nardella
Bruce
F. Nardella
|
|
President and Chief Operating Officer
(principal executive officer)
|
|
|
|
/s/ Denis
M. Holler
Denis
M. Holler
|
|
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial officer and principal accounting officer)
|
|
|
|
/s/ Gregory
T. Torres
Gregory
T. Torres
|
|
Chairman and Director
|
|
|
|
/s/ James
L. Elrod, Jr.
James
L. Elrod, Jr.
|
|
Director
|
|
|
|
/s/ Pamela
F. Lenehan
Pamela
F. Lenehan
|
|
Director
|
|
|
|
/s/ Kevin
A. Mundt
Kevin
A. Mundt
|
|
Director
|
|
|
|
/s/ Daniel
S. OConnell
Daniel
S. OConnell
|
|
Director
|
|
|
|
/s/ Guy
Sansone
Guy
Sansone
|
|
Director
|
75
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
2
|
.1
|
|
Merger Agreement between National MENTOR Holdings, Inc., NMH
Holdings, LLC, and NMH MergerSub Inc., dated as of
March 22, 2006.
|
|
Incorporated by reference to Exhibit 2.1 of National Mentor
Holdings, Inc.
Form S-4
Registration Statement (Registration
No. 333-138362)
filed on November 1, 2006 (the S-4)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of National
Mentor Holdings, Inc.
|
|
Incorporated by reference to Exhibit 3.1 of National Mentor
Holdings, Inc.
Form 10-Q
for the quarterly period ended March 31, 2007 (the
March 2007 10-Q)
|
|
3
|
.2
|
|
By-Laws of National Mentor Holdings, Inc.
|
|
Incorporated by reference to Exhibit 3.2 of the March 2007
10-Q
|
|
4
|
.1
|
|
Indenture, dated as of June 29, 2006, by and among National
Mentor Holdings, Inc., the guarantors named therein, and U.S.
Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.1 of the
S-4
|
|
4
|
.2
|
|
Supplemental Indenture #1, dated as of January 11, 2007, by
and among National Mentor Holdings, Inc., Rockland Child
Development Services, Inc. and U.S. Bank National
Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.2 to National Mentor
Holdings, Inc. Amendment No. 1 to
Form S-4
Registration Statement (Registration No.
333-138362)
filed on January 12, 2007 (the
S-4/A)
|
|
4
|
.3
|
|
Supplemental Indenture #2, dated as of August 1, 2008, by
and among National Mentor Holdings, Inc., Transitional Services
Sub, LLC and U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.1 to National Mentor
Holdings, Inc.
Form 10-Q
for the quarterly period ended June 30, 2008 (the June
2008
10-Q)
|
|
4
|
.4
|
|
Supplemental Indenture #3, dated as of October 1, 2008, by
and among National Mentor Holdings, Inc., CareMeridian, LLC and
U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.1 to National Mentor
Holdings, Inc.
Form 10-K
for the fiscal year ended September 30, 2008 (the
2008
10-K)
|
|
4
|
.5
|
|
Supplemental Indenture #4, dated as of June 8, 2009, by and
among National Mentor Holdings, Inc., Institute for Family
Centered Services, Inc. and U.S. Bank National Association, as
trustee.
|
|
Incorporated by reference to Exhibit 4.1 to National Mentor
Holdings, Inc. Form 10-Q for the quarterly period ended June 30,
2009 (the June 2009
10-Q)
|
|
4
|
.6
|
|
Supplemental Indenture #5, dated as of July 13, 2009, by
and among National Mentor Holdings, Inc., Mentor ABI, LLC and
U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.2 to the June 2009
10-Q
|
|
4
|
.7
|
|
Supplemental Indenture #6, dated as of August 5, 2009, by
and among National Mentor Holdings, Inc., Lakeview Healthcare
Systems, Inc. and U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.3 to the June 2009
10-Q
|
|
4
|
.8
|
|
Supplemental Indenture #7, dated as of August 5, 2009, by
and among National Mentor Holdings, Inc., Lakeview Blue Ridge,
Inc. and U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.4 to the June 2009
10-Q
|
|
4
|
.9
|
|
Supplemental Indenture #8, dated as of August 5, 2009, by
and among National Mentor Holdings, Inc., Lakeview Ocean State,
Inc. and U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.5 to the June 2009
10-Q
|
76
|
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
4
|
.10
|
|
Supplemental Indenture #9, dated as of August 5, 2009, by
and among National Mentor Holdings, Inc., Lakeview Waterford,
Inc. and U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.6 to the June 2009
10-Q
|
|
4
|
.11
|
|
Supplemental Indenture #10, dated as of February 22, 2010,
by and among National Mentor Holdings, Inc., NeuroRestorative
Associates, Inc. and U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.1 to National Mentor
Holdings, Inc. Form
10-Q for the
quarterly period ended March 31, 2010 (the March 2010
10-Q)
|
|
4
|
.12
|
|
Supplemental Indenture #11, dated as of April 14, 2010, by
and among National Mentor Holdings, Inc., NeuroRestorative
Associates, Inc. and U.S. Bank National Association, as trustee.
|
|
Incorporated by reference to Exhibit 4.2 to the March 2010
10-Q
|
|
4
|
.13
|
|
Supplemental Indenture #12, dated as of September 27, 2010,
by and among National Mentor Holdings, Inc., Progressive Living
Units Systems-New Jersey, Inc. and U.S. Bank National
Association, as trustee.
|
|
Filed herewith
|
|
4
|
.14
|
|
Form of Senior Subordinated Note (attached as exhibit to
Exhibit 4.1).
|
|
Incorporated by reference to Exhibit 4.1 of the S-4
|
|
10
|
.1.1
|
|
Credit Agreement, dated June 29, 2006, among NMH Holdings,
LLC, National MENTOR Holdings, Inc., the several lenders parties
thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.
|
|
Incorporated by reference to Exhibit 10.1 of the
S-4
|
|
10
|
.1.2
|
|
First Amendment, dated February 28, 2007, to Credit
Agreement, dated June 29, 2006.
|
|
Incorporated by reference to Exhibit 10.1.2 of the March 2007
10-Q
|
|
10
|
.2
|
|
Term Loan Agreement, dated May 20, 2005, among National
MENTOR Holdings, Inc., National MENTOR, Inc., REM Arrowhead,
Inc., REM Connecticut Community Services, Inc., REM Indiana,
Inc., REM North Dakota, Inc., REM Wisconsin I, Inc., REM
Wisconsin II, Inc., REM Wisconsin III, Inc., and certain other
Borrowers, and BANK OF AMERICA, N.A.
|
|
Incorporated by reference to Exhibit 10.2 of the
S-4
|
|
10
|
.3
|
|
Amendment No. 1 to Term Loan Agreement and Joinder
Agreement, dated June 29, 2006, among NMH Holdings, LLC,
National Mentor Holdings, Inc., National Mentor, Inc., REM
Arrowhead, Inc., REM Connecticut Community Services, Inc., REM
Indiana, Inc., REM North Dakota, Inc., REM Wisconsin, Inc., REM
Wisconsin II, Inc., REM Wisconsin III, Inc. and Bank of America,
N.A.
|
|
Incorporated by reference to Exhibit 10.3 of the
S-4
|
|
10
|
.4*
|
|
Amended and Restated Employment Agreement dated
December 30, 2008, between National Mentor Holdings, Inc.
and Edward Murphy.
|
|
Incorporated by reference to Exhibit 10.3 of the National
Mentor Holdings, Inc.
Form 10-Q
for the quarterly period ended December 31, 2008 (the
December 2008
10-Q)
|
77
|
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
10
|
.5*
|
|
Amended and Restated Employment Agreement, dated June 29,
2006, between National MENTOR Holdings, Inc. and Gregory Torres.
|
|
Incorporated by reference to Exhibit 10.5 of the
S-4
|
|
10
|
.6*
|
|
First Amendment to Amended and Restated Employment Agreement
dated December 31, 2008 between National Mentor Holdings,
Inc. and Gregory Torres.
|
|
Incorporated by reference to Exhibit 10.2 to December 2008
Form 10-Q
|
|
10
|
.7*
|
|
Form of Amended and Restated Severance and Noncompetition
Agreement.
|
|
Incorporated by reference to Exhibit 10.1 of the December 2008
10-Q
|
|
10
|
.8
|
|
Management Services Agreement, dated as of June 29, 2006,
between National Mentor Holdings, Inc., National Mentor, Inc.,
NMH Investment, LLC, NMH Holdings, LLC and Vestar Capital
Partners.
|
|
Incorporated by reference to Exhibit 10.11 of the
S-4
|
|
10
|
.9*
|
|
National Mentor Holdings, LLC Executive Deferred Compensation
Plan, Amendment and Restatement Adopted as of December 30,
2008 and Effective as of January 1, 2009.
|
|
Incorporated by reference to Exhibit 10.9 to National Mentor
Holdings, Inc. Form
10-K for the
fiscal year ended September 30, 2009 (the 2009
10-K)
|
|
10
|
.10*
|
|
National Mentor Holdings, LLC Executive Deferred Compensation
Plan, Second Amendment and Restatement Adopted June 17,
2009 and Effective as of January 1, 2009.
|
|
Incorporated by reference to Exhibit 10.10 to the 2009
10-K
|
|
10
|
.11*
|
|
National Mentor Holdings, LLC Executive Deferred Compensation
Plan, Third Amendment and Restatement Adopted Effective as of
December 4, 2009.
|
|
Incorporated by reference to Exhibit 10.11 to the 2009
10-K
|
|
10
|
.12*
|
|
National Mentor Holdings, LLC Executive Deferral Plan, Amendment
and Restatement Adopted December 30, 2008 and Effective as
of January 1, 2009.
|
|
Incorporated by reference to Exhibit 10.12 to the 2009
10-K
|
|
10
|
.13*
|
|
National Mentor Holdings, LLC Executive Deferral Plan, Second
Amendment and Restatement Adopted June 17, 2009 and
Effective as of January 1, 2009.
|
|
Incorporated by reference to Exhibit 10.13 to the 2009
10-K
|
|
10
|
.14*
|
|
The MENTOR Network Executive Leadership Incentive Plan.
|
|
Incorporated by reference to Exhibit 10.14 of the
S-4
|
|
10
|
.15*
|
|
The MENTOR Network Incentive Compensation Plan effective
October 1, 2007.
|
|
Incorporated by reference to Exhibit 10.16 to the 2009
10-K
|
|
10
|
.16*
|
|
The MENTOR Network Incentive Compensation Plan effective
October 1, 2009.
|
|
Incorporated by reference to Exhibit 10.17 to the 2009
10-K
|
|
10
|
.17*
|
|
Form of Management Unit Subscription Agreement.
|
|
Incorporated by reference to Exhibit 10.15 of the
S-4/A
|
|
10
|
.18*
|
|
Form of Amendment to Management Unit Subscription Agreement.
|
|
Incorporated by reference to Exhibit 10.19 to the 2009
10-K
|
|
10
|
.19*
|
|
Form of Director Unit Subscription Agreement.
|
|
Incorporated by reference to Exhibit 10.13 of the 2008
10-K
|
|
10
|
.20*
|
|
Form of Amendment to Director Unit Subscription Agreement.
|
|
Incorporated by reference to Exhibit 10.21 to the 2009
10-K
|
|
10
|
.21*
|
|
NMH Investment, LLC Amended and Restated 2006 Unit Plan.
|
|
Incorporated by reference to Exhibit 10.17 of the
S-4/A
|
78
|
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
10
|
.22*
|
|
Amendment to NMH Investment, LLC Amended and Restated 2006 Unit
Plan.
|
|
Incorporated by reference to Exhibit 10.1 of the June 2008 Form
10-Q
|
|
10
|
.23*
|
|
Form of Indemnification Agreement.
|
|
Incorporated by reference to Exhibit 10.1 of National Mentor
Holdings, Inc.
Form 8-K
filed on December 10, 2008
|
|
10
|
.24*
|
|
Letter Agreement between National Mentor Holdings, Inc. and Hugh
R. Jones III dated November 16, 2010.
|
|
Incorporated by reference to Exhibit 10.1 of National Mentor
Holdings, Inc.
Form 8-K
filed on November 22, 2010
|
|
10
|
.25
|
|
Amendment No. 2 to Term Loan Agreement, dated
January 20, 2010, among NMH Holdings, LLC, National Mentor
Holdings, Inc., National Mentor, Inc., REM Arrowhead, Inc., REM
Connecticut Community Services, Inc., REM Indiana, Inc., REM
North Dakota, Inc., REM Wisconsin, Inc., REM Wisconsin II, Inc.,
REM Wisconsin III, Inc. and Bank of America, N.A.
|
|
Filed herewith
|
|
21
|
|
|
Subsidiaries.
|
|
Filed herewith
|
|
31
|
.1
|
|
Certification of principal executive officer.
|
|
Filed herewith
|
|
31
|
.2
|
|
Certification of principal executive officer.
|
|
Filed herewith
|
|
31
|
.3
|
|
Certification of principal financial officer.
|
|
Filed herewith
|
|
32
|
|
|
Certifications furnished pursuant to 18 U.S.C.
Section 1350.
|
|
Filed herewith
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
79
National
Mentor Holdings, Inc.
Audited
Consolidated Financial Statements
Contents
|
|
|
|
|
Audited Consolidated Financial Statements for the years ended
September 30, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Audit Committee of National Mentor
Holdings, Inc.
We have audited the accompanying consolidated balance sheet of
National Mentor Holdings, Inc. and subsidiaries (the
Company) as of September 30, 2010, and the
related consolidated statement of operations, shareholders
equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
National Mentor Holdings, Inc. and subsidiaries as of
September 30, 2010, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the
United States of America.
/s/ Deloitte &
Touche llp
Boston, Massachusetts
December 13, 2010
F-2
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Audit Committee of National Mentor
Holdings, Inc.
We have audited the accompanying consolidated balance sheet of
National Mentor Holdings, Inc. as of September 30, 2009,
and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the two
years in the period ended September 30, 2009. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of National Mentor Holdings, Inc. at
September 30, 2009, and the consolidated results of its
operations and its cash flows for each of the two years in the
period ended September 30, 2009, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial
statements, effective October 1, 2008, the Company adopted
Financial Accounting Standards Board (FASB) No. 157 Fair
Value Measurements (codified primarily in FASB ASC Topic 820
Fair Value Measurements and Disclosures).
Boston, Massachusetts
December 22, 2009, except for Note 6,
as to which the date is December 13, 2010
F-3
National
Mentor Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,448
|
|
|
$
|
23,650
|
|
Restricted cash
|
|
|
1,046
|
|
|
|
5,192
|
|
Accounts receivable, net of allowances of $7,225 and $5,896 at
September 30, 2010 and 2009, respectively
|
|
|
125,979
|
|
|
|
118,969
|
|
Deferred tax assets, net
|
|
|
13,571
|
|
|
|
13,897
|
|
Prepaid expenses and other current assets
|
|
|
14,701
|
|
|
|
16,868
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
181,745
|
|
|
|
178,576
|
|
Property and equipment, net
|
|
|
142,112
|
|
|
|
145,876
|
|
Intangible assets, net
|
|
|
437,757
|
|
|
|
440,202
|
|
Goodwill
|
|
|
229,757
|
|
|
|
206,699
|
|
Other assets
|
|
|
13,915
|
|
|
|
16,047
|
|
Investment in related party debt securities
|
|
|
10,599
|
|
|
|
8,210
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,015,885
|
|
|
$
|
995,610
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,503
|
|
|
$
|
19,819
|
|
Accrued payroll and related costs
|
|
|
68,272
|
|
|
|
58,388
|
|
Other accrued liabilities
|
|
|
48,307
|
|
|
|
45,000
|
|
Obligations under capital lease, current
|
|
|
92
|
|
|
|
118
|
|
Current portion of long-term debt
|
|
|
3,667
|
|
|
|
7,415
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
146,841
|
|
|
|
130,740
|
|
Other long-term liabilities
|
|
|
15,166
|
|
|
|
13,462
|
|
Deferred tax liabilities, net
|
|
|
126,322
|
|
|
|
125,237
|
|
Obligations under capital lease, less-current portion
|
|
|
1,624
|
|
|
|
1,680
|
|
Long-term debt, less current portion
|
|
|
500,799
|
|
|
|
500,763
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
Common stock, $.01 par value; 1,000 shares authorized
and 100 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
250,620
|
|
|
|
250,038
|
|
Accumulated other comprehensive income (loss)
|
|
|
575
|
|
|
|
(7,115
|
)
|
Accumulated deficit
|
|
|
(26,062
|
)
|
|
|
(19,195
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
225,133
|
|
|
|
223,728
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,015,885
|
|
|
$
|
995,610
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
National
Mentor Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Net revenue
|
|
$
|
1,022,036
|
|
|
$
|
970,218
|
|
|
$
|
929,831
|
|
Cost of revenue (exclusive of depreciation expense shown
separately below)
|
|
|
779,977
|
|
|
|
736,651
|
|
|
|
704,778
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
140,815
|
|
|
|
132,843
|
|
|
|
130,023
|
|
Depreciation and amortization
|
|
|
57,633
|
|
|
|
56,800
|
|
|
|
50,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
198,448
|
|
|
|
189,643
|
|
|
|
180,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
43,611
|
|
|
|
43,924
|
|
|
|
44,482
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee to related party
|
|
|
(1,208
|
)
|
|
|
(1,146
|
)
|
|
|
(1,349
|
)
|
Other expense, net
|
|
|
(341
|
)
|
|
|
(503
|
)
|
|
|
(797
|
)
|
Interest income
|
|
|
42
|
|
|
|
193
|
|
|
|
684
|
|
Interest income from related party
|
|
|
1,921
|
|
|
|
1,202
|
|
|
|
|
|
Interest expense
|
|
|
(46,693
|
)
|
|
|
(48,254
|
)
|
|
|
(48,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(2,668
|
)
|
|
|
(4,584
|
)
|
|
|
(5,927
|
)
|
Benefit for income taxes
|
|
|
(601
|
)
|
|
|
(1,414
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(2,067
|
)
|
|
|
(3,170
|
)
|
|
|
(5,794
|
)
|
Loss from discontinued operations, net of tax of $3,133, $1,407
and $834
|
|
|
(4,800
|
)
|
|
|
(2,286
|
)
|
|
|
(1,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,867
|
)
|
|
$
|
(5,456
|
)
|
|
$
|
(7,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
National
Mentor Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Accumulated Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Income (Loss)
|
|
|
|
(Amounts in thousands, except share and per share amounts)
|
|
|
Balance at September 30, 2007
|
|
|
100
|
|
|
|
|
|
|
|
254,618
|
|
|
|
(2,431
|
)
|
|
|
(6,156
|
)
|
|
|
246,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
2,215
|
|
|
|
|
|
|
|
|
|
|
|
2,215
|
|
|
|
|
|
Parent capital contribution
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Distribution to parent
|
|
|
|
|
|
|
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
(188
|
)
|
|
|
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348
|
)
|
|
|
(348
|
)
|
|
|
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,350
|
)
|
|
|
|
|
|
|
(3,350
|
)
|
|
|
(3,350
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,235
|
)
|
|
|
(7,235
|
)
|
|
|
(7,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
100
|
|
|
|
|
|
|
|
256,648
|
|
|
|
(5,781
|
)
|
|
|
(13,739
|
)
|
|
|
237,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,334
|
)
|
|
|
|
|
|
|
(1,334
|
)
|
|
|
(1,334
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
1,306
|
|
|
|
|
|
|
|
|
|
|
|
1,306
|
|
|
|
|
|
Parent capital contribution
|
|
|
|
|
|
|
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
452
|
|
|
|
|
|
Distribution to parent
|
|
|
|
|
|
|
|
|
|
|
(8,368
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,368
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,456
|
)
|
|
|
(5,456
|
)
|
|
|
(5,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
100
|
|
|
$
|
|
|
|
$
|
250,038
|
|
|
$
|
(7,115
|
)
|
|
$
|
(19,195
|
)
|
|
$
|
223,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,690
|
|
|
|
|
|
|
|
7,690
|
|
|
|
7,690
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
677
|
|
|
|
|
|
Distribution to parent
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,867
|
)
|
|
|
(6,867
|
)
|
|
|
(6,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
100
|
|
|
$
|
|
|
|
$
|
250,620
|
|
|
$
|
575
|
|
|
$
|
(26,062
|
)
|
|
$
|
225,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
National
Mentor Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,867
|
)
|
|
$
|
(5,456
|
)
|
|
$
|
(7,235
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable allowances
|
|
|
12,458
|
|
|
|
11,712
|
|
|
|
9,526
|
|
Depreciation and amortization of property and equipment
|
|
|
23,172
|
|
|
|
24,233
|
|
|
|
19,311
|
|
Amortization of other intangible assets
|
|
|
34,903
|
|
|
|
33,667
|
|
|
|
32,315
|
|
Amortization of deferred financing costs
|
|
|
3,190
|
|
|
|
3,266
|
|
|
|
3,388
|
|
Accretion of investment in related party debt securities
|
|
|
(963
|
)
|
|
|
(601
|
)
|
|
|
|
|
Stock based compensation
|
|
|
677
|
|
|
|
1,306
|
|
|
|
2,215
|
|
Deferred taxes
|
|
|
(13,876
|
)
|
|
|
415
|
|
|
|
(4,673
|
)
|
Loss on disposal of assets
|
|
|
563
|
|
|
|
945
|
|
|
|
746
|
|
Change in the fair value of contingent consideration
|
|
|
1,424
|
|
|
|
|
|
|
|
|
|
Non-cash impairment charge
|
|
|
6,549
|
|
|
|
3,012
|
|
|
|
2,195
|
|
Non-cash interest income from related party
|
|
|
(958
|
)
|
|
|
(601
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(16,004
|
)
|
|
|
(14,318
|
)
|
|
|
(6,406
|
)
|
Other assets
|
|
|
1,478
|
|
|
|
5,722
|
|
|
|
(5,508
|
)
|
Accounts payable
|
|
|
6,096
|
|
|
|
(1,257
|
)
|
|
|
(1,934
|
)
|
Accrued payroll and related costs
|
|
|
8,671
|
|
|
|
(2,040
|
)
|
|
|
3,661
|
|
Other accrued liabilities
|
|
|
9,351
|
|
|
|
(4,196
|
)
|
|
|
5,549
|
|
Other long-term liabilities
|
|
|
1,704
|
|
|
|
2,603
|
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
71,568
|
|
|
|
58,412
|
|
|
|
55,055
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash received
|
|
|
(49,337
|
)
|
|
|
(33,638
|
)
|
|
|
(14,895
|
)
|
Purchases of property and equipment
|
|
|
(20,873
|
)
|
|
|
(27,398
|
)
|
|
|
(26,105
|
)
|
Purchases of related party debt securities
|
|
|
|
|
|
|
(6,555
|
)
|
|
|
|
|
Changes in restricted cash
|
|
|
4,146
|
|
|
|
542
|
|
|
|
(1,462
|
)
|
Cash proceeds from sale of assets
|
|
|
595
|
|
|
|
1,226
|
|
|
|
1,636
|
|
Cash proceeds from sale of businesses
|
|
|
623
|
|
|
|
4,055
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(64,846
|
)
|
|
|
(61,768
|
)
|
|
|
(40,486
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(3,712
|
)
|
|
|
(3,736
|
)
|
|
|
(3,957
|
)
|
Repayments of capital lease obligations
|
|
|
(117
|
)
|
|
|
(208
|
)
|
|
|
(273
|
)
|
Dividend to parent
|
|
|
(95
|
)
|
|
|
(8,368
|
)
|
|
|
(188
|
)
|
Parent capital contribution
|
|
|
|
|
|
|
452
|
|
|
|
3
|
|
Payments of deferred financing costs
|
|
|
|
|
|
|
(42
|
)
|
|
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in provided by financing activities
|
|
|
(3,924
|
)
|
|
|
(11,902
|
)
|
|
|
(5,034
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,798
|
|
|
|
(15,258
|
)
|
|
|
9,535
|
|
Cash and cash equivalents at beginning of period
|
|
|
23,650
|
|
|
|
38,908
|
|
|
|
29,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
26,448
|
|
|
$
|
23,650
|
|
|
$
|
38,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
43,289
|
|
|
$
|
44,933
|
|
|
$
|
45,702
|
|
Cash paid for income taxes
|
|
$
|
1,482
|
|
|
$
|
832
|
|
|
$
|
153
|
|
Supplemental disclosure of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
1,617
|
|
|
$
|
|
|
|
$
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation incurred to acquire assets
|
|
$
|
37
|
|
|
$
|
|
|
|
$
|
1,805
|
|
See accompanying notes.
F-7
National
Mentor Holdings, Inc.
September 30,
2010
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 Companys founding in 1980, the Company has grown to
provide services to approximately 23,600 clients in
36 states.
The Company designs customized service plans to meet the unique
needs of its clients, which we deliver in home- and
community-based settings. Most of the Companys 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
Companys 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.
|
|
2.
|
Significant
Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles (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.
These accounting policies and estimates are constantly
reevaluated, and adjustments are made when facts and
circumstances dictate a change.
Cash
Equivalents
The Company considers short-term investments with maturity dates
of 90 days or less at the date of purchase to be cash
equivalents. Cash equivalents primarily consist of money market
funds and bank deposits. The carrying value of cash equivalents
approximates fair value.
Restricted
Cash
Restricted cash consists of funds provided from government
payors restricted for client use. Restricted cash in the prior
year also included cash related to certain insurance coverage
provided by the Companys captive insurance subsidiary
which was dissolved in fiscal 2010.
Financial
Instruments
Financial instruments include cash, accounts receivables and
accounts payable. The carrying value of these instruments
approximate their fair values.
F-8
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Concentrations
of Credit and Other Risks
Financial instruments that potentially subject the Company to
credit risk primarily consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited
with federally insured commercial banks in the United States.
The Company derives approximately 90% of its revenue from state
and local government payors. These entities fund a significant
portion of their payments to the Company through federal
matching funds, which pass through various state and local
government agencies.
The Company maintains its cash in bank deposit accounts, which,
at times, may exceed federally insured limits. Accounts are
currently guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $250 thousand. The Company
has not experienced any losses in such accounts.
The Company is also exposed to credit risk in the event of
non-performance by the counterparty on the available-for-sale
debt security.
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
the Company provides. 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.
The Company recognizes 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 the Companys 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, the Company receives payments under
cost-reimbursement contracts in excess of the allowable costs
required to support those payments. In such instances, the
Company estimates and records 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 the Company
operates or by the federal government.
Cost
of Revenue
The Company classifies expenses directly related to providing
services as cost of revenue, except for depreciation and
amortization related to cost of revenue, which are shown
separately in the consolidated statements of operations. Direct
costs and expenses principally include salaries and benefits for
service provider employees, per diem payments to independently
contracted host-home caregivers (Mentors),
residential occupancy expenses, which are primarily comprised of
rent and utilities related to facilities providing direct care,
certain client expenses such as food and medicine and
transportation costs for clients requiring services.
Property
and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. The Company provides for depreciation using
straight-line methods over the estimated useful lives of the
related assets. Estimated useful lives for buildings are
30 years. The useful lives of computer hardware and
software are three years, the useful lives for furniture and
equipment range from three to five years and the useful lives
for vehicles are five years. Leasehold improvements are
depreciated on a straight-line basis over the lesser of the
remaining lease term or seven years. Capital lease assets are
depreciated over the lesser of the lease term or the useful life
of the asset. Expenditures for maintenance and repairs are
charged to operating expenses as incurred.
F-9
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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, the Company considers 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 statements of
operations in the period of the change in estimate.
Goodwill
and Indefinite-lived Intangible Assets
The Company reviews 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. The Company
conducts its annual impairment test for both goodwill and
indefinite-life
intangible assets on July 1 of each year.
The Company is required to test goodwill on a reporting unit
basis, which is the same level as the Companys operating
segments. The Company performs 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
units 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 managements 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 the Companys 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 statements of operations in
the period of the change in estimate.
Impairment
of Long-Lived Assets
The Company reviews 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
The Company accounts 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
F-10
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 the Companys assessment of the
realizability of such amounts.
The Company also recognizes 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. The Company
recognizes 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.
Derivative
Financial Instruments
The Company reports 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 shareholders equity as 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.
The Company, from time to time, enters into interest rate swap
agreements to hedge against variability in cash flows resulting
from fluctuations in the benchmark interest rate, which is
LIBOR, on the Companys 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 statements
of operations. In addition, on a quarterly basis the mark to
market valuation is recorded as an adjustment to other
comprehensive income (loss) as a change to shareholders
equity, net of tax. The related amount receivable from or
payable to counterparties is included as an asset or liability,
respectively, in the Companys consolidated balance sheets.
Available-for-Sale
Securities
The Companys 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 applicable income
taxes, in accumulated other comprehensive income (loss).
Stock-Based
Compensation
NMH Investment, LLC (NMH Investment), the
Companys 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 and Class E Units pursuant to such plan.
The units are limited liability company interests and are
available for issuance to the Companys 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 the Companys financial
performance, the values of comparable companies and the lack of
marketability of the Companys equity. The Company 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 Class B units vest
over a four-year service period and Class E units vest over
a five-year service period. The Class C and Class D
F-11
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
units vest over a three-year period based on service and on
certain performance
and/or
investment return conditions being met or achieved. 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/performance periods of the awards.
Accruals
for Self-Insurance
The Company maintains employment practices liability,
professional and general liability, workers compensation,
automobile liability and health insurance with policies that
include self-insured retentions. 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 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 re-evaluated and increased or decreased based on
new information. Changes in estimates are charged or credited to
the statements of operations in a period subsequent to the
change in estimate.
Legal
Contingencies
The Company is regularly involved in litigation and regulatory
proceedings in the operation of its business. The Company
reserves for costs related to contingencies when a loss is
probable and the amount is reasonably estimable. While the
Company believes its provision for legal contingencies is
adequate, the outcome of its legal proceedings is difficult to
predict and we may settle legal claims or be subject to
judgments for amounts that differ from the Companys
estimates. In addition, legal contingencies could have a
material adverse impact on the Companys results of
operations in any given future reporting period.
Reclassifications
All fiscal years presented reflect the classification of REM
Healths, REM Marylands and REM Colorados
(defined below) financial results as discontinued operations.
|
|
3.
|
Recent
Accounting Pronouncements
|
Business Combinations On October 1,
2009, the Company implemented new accounting guidance relating
to business combinations, which expands the definition of a
business combination and changes the manner in which the Company
accounts for business combinations. Significant changes include
the recognition of certain acquired contingent assets and
liabilities at fair value, the expensing of acquisition-related
restructuring actions and transaction costs, the recognition of
contingent purchase price consideration at fair value on the
acquisition date and the recognition of post-acquisition changes
in deferred tax asset valuation allowances and acquired income
tax uncertainties in income tax expense or benefit. As a result
of adopting this guidance, the Company recorded an additional
$1.4 million to the contingent consideration obligation in
fiscal 2010 and expensed $1.1 million in acquisition costs.
Presentation of Insurance Claims and Related Insurance
Recoveries In August 2010, the Financial
Accounting Standards Board (FASB) issued Accounting
Standards Update No
2010-24,
Health Care Entities (Topic 954), Presentation of Insurance
Claims and Related Insurance Recoveries (ASU
2010-24),
which clarifies that companies should not net insurance
recoveries against a related claim liability. Additionally, the
amount of the claim liability should be determined without
consideration of insurance recoveries. The adoption of ASU
2010-24 is
effective for the Company beginning October 1, 2011. With
its adoption, the Companys accounting for insurance
recoveries and related claim liability will change on a
prospective basis on the date of adoption.
F-12
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
4.
|
Comprehensive
Income (Loss)
|
The components of comprehensive income (loss) and related tax
effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net loss
|
|
$
|
(6,867
|
)
|
|
$
|
(5,456
|
)
|
|
$
|
(7,235
|
)
|
Changes in unrealized gains (losses) on derivatives, net of
taxes of $5,030, $(1,105) and $(2,274)
|
|
|
7,408
|
|
|
|
(1,628
|
)
|
|
|
(3,350
|
)
|
Changes in unrealized gain on
available-for-sale
debt securities, net of taxes of $191, $200 and $0
|
|
|
282
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
823
|
|
|
$
|
(6,790
|
)
|
|
$
|
(10,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The operating results of the businesses acquired during fiscal
2010, 2009 and 2008 were included in the consolidated statements
of operations from the date of acquisition. The Company
accounted for the acquisitions under the purchase method of
accounting and, as a result, the purchase price was allocated to
the assets acquired and liabilities assumed based upon their
respective fair values. The excess of the purchase price over
the estimated fair value of net tangible assets was allocated to
specifically identified intangible assets, with the residual
being allocated to goodwill.
Fiscal
2010 Acquisitions
During fiscal 2010, the Company acquired seven companies
complimentary to its business for total fair value consideration
of $52.1 million, including $3.0 million of contingent
consideration:
Springbrook On January 15, 2010, the Company
acquired the assets of Springbrook, Inc. and an affiliate
(together, Springbrook) for total fair value
consideration of $9.3 million, subject to increase based on
an earn-out. Springbrook operates in Arizona and Oregon and
provides residential and mental health services to individuals
with developmental disabilities and behavioral issues. The
earn-out provided that an additional $3.5 million in cash
could be paid based upon the purchased entitys achieving
certain earnings targets (the earn-out). The fair
value of the earn-out on the date of acquisition was
$1.6 million which was initially accrued for as contingent
consideration. During fiscal 2010, the Company recorded an
additional $1.4 million to the contingent consideration
obligation as a result of adjustments to the forecasted
financial performance of Springbrook. The increase in contingent
consideration is included in general and administrative expenses
in the consolidated statements of operations.
As a result of the Springbrook acquisition, the Company recorded
$1.4 million of goodwill in the Human Services segment,
which is expected to be deductible for tax purposes. The
acquired intangible assets also included $5.2 million of
agency contracts with a weighted average useful life of eleven
years, $0.7 million of licenses and permits with a weighted
average useful life of ten years and $0.1 million of
non-compete/non-solicit with a weighted average useful life of
five years.
Villages The Company acquired the assets of two
California facilities (together, Villages), on
January 29, 2010 and on February 11, 2010, engaged in
neurorehabilitation services for total cash of
$7.0 million. As a result of these acquisitions, the
Company recorded $3.2 million of goodwill in the Post Acute
Specialty Rehabilitation Services segment, which is expected to
be deductible for tax purposes. The acquired intangible assets
included $3.5 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.
F-13
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
NeuroRestorative On February 22, 2010, in a purchase
of stock and assets, the Company acquired a provider of
neurobehavioral and supported living programs
(NeuroRestorative) for total cash of
$16.8 million. NeuroRestorative has operations in Arkansas,
Louisiana, Oklahoma and Texas and serves individuals who have
sustained a traumatic brain injury. As a result of the
NeuroRestorative acquisition, the Company recorded
$6.5 million of goodwill in the Post Acute Specialty
Rehabilitation Services segment, none of which is expected to be
deductible for tax purposes. The acquired intangible assets
included $11.4 million of agency contracts with a weighted
average useful life of eleven years, $1.4 million of
licenses and permits with a weighted average useful life of ten
years, $0.4 million of trade name with a weighted average
useful life of eleven years and $0.3 million of
non-compete/non-solicit arrangements with a weighted average
useful life of five years.
Anchor Inne On June 30, 2010, the Company acquired
the assets of Anchor Inne, Inc. (Anchor Inne) for
total cash of $3.4 million. Anchor Inne has operations in
Pennsylvania and serves individuals who have sustained a
traumatic brain injury. As a result of the Anchor Inne
acquisition, the Company recorded $1.3 million of goodwill
in the Post-Acute Specialty Rehabilitation Services segment,
which is expected to be deductible for tax purposes. The
acquired intangible assets included $1.9 million of agency
contracts with a weighted average useful life of eleven years
and $0.2 million of licenses and permits with a weighted
average useful life of ten years.
Woodhill Homes On September 15, 2010, the Company
acquired the assets of Woodhill Homes, Inc.
(Woodhill) for total cash of $3.5 million.
Woodhill operates group homes serving
I/DD
residents in Minnesota. As a result of the Woodhill acquisition,
the Company recorded $1.3 million of goodwill in the Human
Services segment, which is expected to be deductible for tax
purposes. The acquired intangible assets included
$2.0 million of agency contracts with a weighted average
useful life of eleven years and $0.1 million of
licenses and permits with a weighted average useful life of ten
years.
PLUS On September 24, 2010, the Company acquired the
stock of Progressive Living Units Systems-New Jersey, Inc
(PLUS) for total cash of $12.1 million.
PLUS has operations in New Jersey and Pennsylvania and provides
supported and independent living services to individuals who
have sustained a traumatic brain injury. As a result of the PLUS
acquisition, the Company recorded $5.3 million of goodwill
in the Post-Acute Specialty Rehabilitation Services segment,
none of which is expected to be deductible for tax purposes. The
acquired intangible assets included $7.6 million of agency
contracts with a weighted average useful life of ten years and
$2.7 million of licenses and permits with a weighted
average useful life of ten years.
F-14
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes the recognized amounts of
identifiable assets acquired and liabilities assumed at the date
of the acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Springbrook
|
|
|
Villages
|
|
|
Neuro
|
|
|
Anchor Inne
|
|
|
Woodhill
|
|
|
PLUS
|
|
|
TOTAL
|
|
|
Recognized amounts of identifiable assets acquired and
liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
258
|
|
|
|
|
|
|
|
2,480
|
|
|
|
|
|
|
|
|
|
|
|
653
|
|
|
|
3,391
|
|
Other assets, current and long term
|
|
|
32
|
|
|
|
|
|
|
|
762
|
|
|
|
12
|
|
|
|
|
|
|
|
105
|
|
|
|
911
|
|
Identifiable intangible assets
|
|
|
5,974
|
|
|
|
3,827
|
|
|
|
13,492
|
|
|
|
2,072
|
|
|
|
2,133
|
|
|
|
10,253
|
|
|
|
37,751
|
|
Property and equipment
|
|
|
171
|
|
|
|
20
|
|
|
|
293
|
|
|
|
55
|
|
|
|
43
|
|
|
|
402
|
|
|
|
984
|
|
Accounts payable and accrued expenses
|
|
|
(1,624
|
)
|
|
|
|
|
|
|
(1,038
|
)
|
|
|
|
|
|
|
|
|
|
|
(451
|
)
|
|
|
(3,113
|
)
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
(5,746
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,146
|
)
|
|
|
(9,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable net assets
|
|
|
4,811
|
|
|
|
3,847
|
|
|
|
10,243
|
|
|
|
2,139
|
|
|
|
2,176
|
|
|
|
6,816
|
|
|
|
30,032
|
|
Goodwill
|
|
|
1,449
|
|
|
|
3,195
|
|
|
|
6,537
|
|
|
|
1,299
|
|
|
|
1,324
|
|
|
|
5,267
|
|
|
|
19,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,260
|
|
|
$
|
7,042
|
|
|
$
|
16,780
|
|
|
$
|
3,438
|
|
|
$
|
3,500
|
|
|
$
|
12,083
|
|
|
$
|
49,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2009 Acquisitions
During fiscal 2009, the Company acquired four companies for
total cash of $22.9 million, as described below:
Institute for Family Centered Services, Inc. On
June 1, 2009, the Company acquired the stock of Institute
for Family Centered Services, Inc. (IFCS) for total
cash of $11.5 million. In addition, during fiscal 2010, the
Company accrued an additional $3.3 million of expected
earn-out. IFCS provides home and community-based mental health
services to children and adults utilizing a Family Centered
Treatment model (FCT Model) which focuses treatment
on the individual within his or her immediate family
environment. IFCS operates in Florida, Maryland, North Carolina
and Virginia. As a result of the IFCS acquisition and the
accrued earn-out, the Company recorded $4.4 million of
aggregate goodwill in the Human Services segment, none of which
is expected to be deductible for tax purposes. The acquired
intangible assets included $6.7 million of agency contracts
with a weighted average life of eleven years, $0.2 million
of licenses and permits with a weighted average life of ten
years, $0.4 million of a trade name with a weighted average
useful life of eight years and $0.9 million of intellectual
property with a weighed average useful life of seven years.
Lakeview Healthcare Systems, Inc On August 1, 2009,
the Company acquired the stock of Lakeview Healthcare Systems,
Inc. (Lakeview) for total cash of
$10.4 million. Lakeview operates in New Hampshire,
Maine, Rhode Island, Virginia and Wisconsin and is a provider of
neurobehavioral and supported living programs serving
individuals who have sustained a traumatic brain injury. As a
result of the Lakeview acquisition, the Company recorded
$5.6 million of goodwill in the Post Acute Specialty
Rehabilitation Services segment, none of which is expected to be
deductible for tax purposes. The acquired intangible assets
included $6.5 million of agency contracts with a weighed
average useful life of twelve years, $0.8 million of
licenses and permits with a weighed average useful life of ten
years and $0.2 million of non-compete/non-solicit with a
weighed average useful life of five years.
In addition to IFCS and Lakeview, the Company acquired two
companies engaged in behavioral health and human services for
total consideration of $1.1 million. As a result of these
acquisitions, the Company recorded $0.4 million of goodwill
and $0.6 million of intangible assets.
F-15
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes the recognized amounts of
identifiable assets acquired and liabilities assumed for IFCS
and Lakeview at the date of the acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFCS
|
|
|
Lakeview
|
|
|
TOTAL
|
|
|
|
(In thousands)
|
|
|
Recognized amounts of identifiable assets acquired and
liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,508
|
|
|
|
588
|
|
|
|
3,096
|
|
Other assets, current and long term
|
|
|
239
|
|
|
|
722
|
|
|
|
961
|
|
Identifiable intangible assets
|
|
|
8,187
|
|
|
|
7,543
|
|
|
|
15,730
|
|
Property and equipment
|
|
|
810
|
|
|
|
246
|
|
|
|
1,056
|
|
Accounts payable and accrued expenses
|
|
|
(4,708
|
)
|
|
|
(589
|
)
|
|
|
(5,297
|
)
|
Deferred tax liabilities
|
|
|
|
|
|
|
(3,724
|
)
|
|
|
(3,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable net assets
|
|
|
7,036
|
|
|
|
4,786
|
|
|
|
11,822
|
|
Goodwill
|
|
|
4,444
|
|
|
|
5,582
|
|
|
|
10,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,480
|
|
|
$
|
10,368
|
|
|
$
|
21,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008 Acquisitions
Transitional Services, Inc. On July 31, 2008, the
Company acquired Transitional Services, Inc. (TSI)
for total cash of $9.3 million. TSI provides residential
services to individuals with intellectual
and/or
developmental disabilities in central and southern Indiana. As a
result of the TSI acquisition, the Company recorded
$2.0 million of goodwill in the Human Services segment, all
of which is expected to be deductible for tax purposes. The
acquired intangible assets included $6.5 million of agency
contracts with a weighted average life of nine years,
$0.2 million of licenses and permits with a weighted
average useful life of ten years and $0.2 million of trade
name with a weighted average life of seven years.
The following table summarizes the recognized amounts of
identifiable assets acquired and liabilities assumed at the date
of the acquisition:
|
|
|
|
|
|
|
TSI
|
|
|
|
(In thousands)
|
|
|
Recognized amounts of identifiable assets acquired and
liabilities assumed
|
|
|
|
|
Accounts receivable
|
|
|
940
|
|
Other assets, current and long term
|
|
|
21
|
|
Identifiable intangible assets
|
|
|
6,902
|
|
Property and equipment
|
|
|
62
|
|
Accounts payable and accrued expenses
|
|
|
(635
|
)
|
|
|
|
|
|
Total identifiable net assets
|
|
|
7,290
|
|
Goodwill
|
|
|
1,963
|
|
|
|
|
|
|
|
|
$
|
9,253
|
|
|
|
|
|
|
Pro
forma Results of Operations
The unaudited pro forma results of operations provided below for
fiscal 2010 is presented as though the acquisitions had occurred
at the beginning of the period presented. The pro forma
information presented below
F-16
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
does not intend to indicate what the Companys results of
operations would have been if the acquisitions had in fact
occurred at the beginning of the earliest period presented nor
does it intend to be a projection of the impact on future
results or trends. The Company has determined that the
presentation of the results of operations for each of these
acquisitions, from the date of acquisition, is impracticable due
to the integration of the operations upon acquisition.
|
|
|
|
|
|
|
Year Ended
|
|
|
September 30, 2010
|
|
|
(In thousands)
|
|
Net revenue
|
|
$
|
1,048,117
|
|
Income from operations
|
|
$
|
47,771
|
|
|
|
6.
|
Discontinued
Operations
|
REM
Colorado
During fiscal 2010, the Company closed its business operations
in the state of Colorado (REM Colorado) and
recognized a pre-tax loss of $3.0 million for fiscal 2010.
REM Colorado was included in the Human Services Segment and the
results of operations are presented as discontinued operations
in the consolidated statements of operations and the prior
periods have been reclassified. Loss from discontinued
operations for fiscal 2010 included a $2.5 million
impairment charge.
REM
Maryland
Also during fiscal 2010, the Company closed certain business
operations in the state of Maryland (REM Maryland)
and recognized a pre-tax loss of $5.1 million for fiscal
2010. REM Maryland was included in the Human Services Segment
and the results of operations are presented as discontinued
operations in the consolidated statements of operations and the
prior periods have been reclassified. Loss from discontinued
operations for fiscal 2010 included a $4.2 million
impairment charge. At September 30, 2010, there was
$1.8 million of property and equipment held for sale which
is immaterial to the Company and, as a result, is not reported
separately as assets held for sale in the Companys
financial statements.
REM
Health
During fiscal 2009, the Company sold REM Health, Inc., REM
Health of Wisconsin, Inc., and REM Health of Iowa, Inc.
(together, REM Health) and recognized a pre-tax loss
of $2.5 million. REM Health was included in the Human
Services segment and the results of operations were reported
separately as discontinued operations for all periods presented.
All assets and liabilities related to REM Health were disposed
of as of September 30, 2009.
The net revenue and loss before taxes for REM Colorado, REM
Maryland and REM Health included in discontinued operations are
summarized as follows at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Net revenue
|
|
$
|
3,859
|
|
|
$
|
25,062
|
|
|
$
|
33,098
|
|
Loss before taxes
|
|
|
(8,049
|
)
|
|
|
(2,649
|
)
|
|
|
(153
|
)
|
Other
During fiscal 2009, the Company sold its business operations in
the state of Utah (REM Utah) and recognized a
pre-tax loss from discontinued operations of $1.4 million.
REM Utah was included in the Human Services segment.
F-17
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
During fiscal 2008, the Company sold the business it had
operated under the name of Integrity Home Health Care
(Integrity) and its business operation in the state
of Oklahoma (Oklahoma Mentor) and recognized a
pre-tax loss from discontinued operations of $2.1 million.
Both Integrity and Oklahoma Mentor were included in the Human
Services segment.
REM Utahs, Integritys and Oklahoma Mentors
results of operations were immaterial both individually and in
the aggregate to the Company and, as a result, were not reported
separately as discontinued operations.
|
|
7.
|
Goodwill
and Intangible Assets
|
Goodwill
The changes in goodwill for the years ended September 30,
2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Acute
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
|
|
|
|
Human
|
|
|
Rehabilitation
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance as of September 30, 2008
|
|
$
|
161,775
|
|
|
$
|
37,617
|
|
|
$
|
199,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired through acquisitions
|
|
|
1,295
|
|
|
|
4,698
|
|
|
|
5,993
|
|
Goodwill written off related to disposal of businesses
|
|
|
(1,251
|
)
|
|
|
|
|
|
|
(1,251
|
)
|
Adjustments to goodwill, net
|
|
|
2,211
|
|
|
|
354
|
|
|
|
2,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
|
164,030
|
|
|
|
42,669
|
|
|
|
206,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired through acquisitions
|
|
|
2,788
|
|
|
|
16,283
|
|
|
|
19,071
|
|
Goodwill written off related to disposal of businesses
|
|
|
(435
|
)
|
|
|
|
|
|
|
(435
|
)
|
Adjustments to goodwill, net
|
|
|
3,502
|
|
|
|
920
|
|
|
|
4,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
$
|
169,885
|
|
|
$
|
59,872
|
|
|
$
|
229,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The adjustments to goodwill in fiscal 2010 primarily included an
adjustment of $3.3 million related to the earn-out payment
associated with the IFCS acquisition. The remaining adjustments
relate to the finalization of the purchase price for
acquisitions during the measurement period.
The Company tests goodwill and indefinite-life intangible assets
at least annually for possible impairment. Accordingly, the
Company completes the annual testing of impairment for goodwill
and indefinite-life intangible assets on July 1 of each fiscal
year. In addition to its annual test, the Company regularly
evaluates whether events or circumstances have occurred that may
indicate a potential impairment of these assets.
The process of testing goodwill for impairment involves the
determination of the fair value of the applicable reporting
units. The test consists of a two-step process. The first step
is the comparison of the fair value to the carrying value of the
reporting unit to determine if the carrying value exceeds the
fair value. The second step measures the amount of an impairment
loss, and is only performed if the carrying value exceeds the
fair value of the reporting unit. The Company performed its
annual impairment testing for its reporting units as of
July 1, 2010, its annual impairment date, and concluded
based on the first step of the process that there was no
goodwill impairment.
The Company has consistently employed the income approach to
estimate the current fair value when testing for impairment of
goodwill. A number of significant assumptions and estimates are
involved in the application of the income approach to forecast
operating cash flows, including revenue growth, tax rates,
capital spending, discount rate and working capital changes.
F-18
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Cash flow forecasts are based on business unit operating plans
and historical relationships. The income approach is sensitive
to changes in long-term terminal growth rates and the discount
rate. The long-term terminal growth rates are consistent with
the Companys historical long-term terminal growth rates,
as the current economic trends are not expected to affect the
long-term terminal growth rates of the Company.
In fiscal 2010, the long-term terminal growth rates for the
Companys reporting units ranged from 1.0% to 9.0%. The
range for the discount rates for the reporting units was 9.0% to
11.0%. Keeping all other variables constant, a 5% to 10% change
in any one of the input assumptions for the various reporting
units would still allow the Company to conclude, based on the
first step of the process, that there was no impairment of
goodwill.
The Company has consistently employed the Relief from Royalty
model to estimate the current fair value when testing for
impairment of
indefinite-life
intangible assets. The impairment test consists of a comparison
of the fair value of the
non-amortizing
intangible asset with its carrying amount. If the carrying
amount of a
indefinite-life
intangible asset exceeds its fair value, an impairment loss in
an amount equal to that excess is recognized.
In addition, the Company evaluates the remaining useful life of
its
indefinite-life
intangible assets at least annually to determine whether events
or circumstances continue to support an indefinite useful life.
If events or circumstances indicate that the useful lives of
indefinite-life
intangible assets are no longer indefinite, the assets will be
tested for impairment.
The Company performed its annual impairment testing as of
July 1, 2010, its annual impairment date, and concluded
that there was no impairment of
indefinite-life
intangible assets.
Intangible
Assets
Intangible assets consist of the following as of
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Average
|
|
Carrying
|
|
|
Accumulated
|
|
|
Intangible
|
|
Description
|
|
Remaining Life
|
|
Value
|
|
|
Amortization
|
|
|
Assets, Net
|
|
|
|
(In thousands)
|
|
|
Agency contracts
|
|
12 years
|
|
$
|
465,679
|
|
|
$
|
113,418
|
|
|
$
|
352,261
|
|
Non-compete/non-solicit
|
|
3 years
|
|
|
1,044
|
|
|
|
403
|
|
|
|
641
|
|
Relationship with contracted caregivers
|
|
5 years
|
|
|
12,804
|
|
|
|
5,977
|
|
|
|
6,827
|
|
Trade names
|
|
6 years
|
|
|
4,039
|
|
|
|
1,463
|
|
|
|
2,576
|
|
Trade names
|
|
Indefinite life
|
|
|
47,700
|
|
|
|
|
|
|
|
47,700
|
|
Licenses and permits
|
|
6 years
|
|
|
42,713
|
|
|
|
15,693
|
|
|
|
27,020
|
|
Intellectual property
|
|
6 years
|
|
|
904
|
|
|
|
172
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
574,883
|
|
|
$
|
137,126
|
|
|
$
|
437,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Intangible assets consist of the following as of
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Average
|
|
Carrying
|
|
|
Accumulated
|
|
|
Intangible
|
|
Description
|
|
Remaining Life
|
|
Value
|
|
|
Amortization
|
|
|
Assets, Net
|
|
|
|
(In thousands)
|
|
|
Agency contracts
|
|
13 years
|
|
$
|
439,793
|
|
|
$
|
86,067
|
|
|
$
|
353,726
|
|
Non-compete/non-solicit
|
|
4 years
|
|
|
618
|
|
|
|
227
|
|
|
|
391
|
|
Relationship with contracted caregivers
|
|
6 years
|
|
|
12,886
|
|
|
|
4,611
|
|
|
|
8,275
|
|
Trade names
|
|
7 years
|
|
|
3,637
|
|
|
|
1,058
|
|
|
|
2,579
|
|
Trade names
|
|
Indefinite life
|
|
|
47,700
|
|
|
|
|
|
|
|
47,700
|
|
Licenses and permits
|
|
7 years
|
|
|
38,994
|
|
|
|
12,324
|
|
|
|
26,670
|
|
Intellectual property
|
|
7 years
|
|
|
904
|
|
|
|
43
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
544,532
|
|
|
$
|
104,330
|
|
|
$
|
440,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for fiscal 2010, 2009 and 2008 was
$34.6 million, $33.0 million and $31.7 million,
respectively. The weighted average remaining life of amortizable
intangible assets is approximately eleven and twelve years for
fiscal 2010 and 2009, respectively.
The estimated remaining amortization expense related to
intangible assets with finite lives for each of the five
succeeding years and thereafter is as follows:
|
|
|
|
|
Year Ending
|
|
|
|
September 30,
|
|
(In thousands)
|
|
|
2011
|
|
$
|
36,906
|
|
2012
|
|
|
36,583
|
|
2013
|
|
|
36,497
|
|
2014
|
|
|
35,806
|
|
2015
|
|
|
33,976
|
|
Thereafter
|
|
|
210,289
|
|
|
|
|
|
|
|
|
$
|
390,057
|
|
|
|
|
|
|
During fiscal 2009, the Company determined that certain of its
agency contracts were impaired in the Human Services segment.
The Company has management agreements with subsidiaries of
Alliance Health and Human Services, Inc. (Alliance).
The Company terminated its agreements with Alliance in the
states of North Carolina, Texas and Indiana, and the Company
currently contracts directly with these state agencies. As a
result, the value associated with the Alliance contracts was
impaired as the relationship with Alliance no longer existed in
those states. During fiscal 2009, the Company recorded
additional amortization of $0.7 million related to these
contracts.
F-20
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
8.
|
Property
and Equipment, net
|
Property and equipment, net consists of the following at
September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Buildings and land
|
|
$
|
114,926
|
|
|
$
|
112,871
|
|
Vehicles
|
|
|
32,263
|
|
|
|
28,364
|
|
Furniture and fixtures
|
|
|
9,011
|
|
|
|
9,195
|
|
Computer hardware
|
|
|
19,827
|
|
|
|
18,930
|
|
Leasehold improvements
|
|
|
15,012
|
|
|
|
11,665
|
|
Office and telecommunication equipment
|
|
|
6,601
|
|
|
|
5,597
|
|
Construction in progress
|
|
|
178
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,818
|
|
|
|
186,644
|
|
Less accumulated depreciation and amortization
|
|
|
(55,706
|
)
|
|
|
(40,768
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
142,112
|
|
|
$
|
145,876
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for fiscal 2010, 2009 and 2008 was
$23.0 million, $23.8 million and $18.9 million,
respectively.
During fiscal 2009, the Company identified errors relating to
the amounts it recorded for furniture and fixtures and client
home furnishings arising from disposals in prior years. As a
result, an adjustment to reduce Property and equipment, net by
$1.8 million was recorded in the accompanying consolidated
balance sheet with a corresponding increase to depreciation
expense. The adjustment was from disposals of furniture and
fixtures and client home furnishings that the Company believed
related to a period or periods prior to 2009. Since the specific
period to which this adjustment related cannot be identified
with certainty, the adjustment was recorded in fiscal 2009.
In addition, during fiscal 2009, the Company reviewed the useful
lives assigned to its various categories of property and
equipment in accordance with its policy, and determined a
revision to the estimated useful lives of furniture and fixtures
and client home furnishings was appropriate. The Company reduced
the estimated useful life on furniture and fixtures from ten
years to five years and reduced the estimated useful life on
client home furnishings from five years to three years. This
reduction in estimated lives resulted in additional depreciation
expense for fiscal 2009 of $1.6 million.
The combined impact on net loss related to the additional
depreciation expense recorded for fiscal 2009 was
$2.1 million, net of tax, with the majority recorded under
the Human Services segment.
|
|
9.
|
Certain
Balance Sheet Accounts
|
Prepaid
Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the
following at September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Prepaid insurance
|
|
$
|
7,103
|
|
|
$
|
7,839
|
|
Other
|
|
|
7,598
|
|
|
|
9,029
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
14,701
|
|
|
$
|
16,868
|
|
|
|
|
|
|
|
|
|
|
F-21
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Other
Accrued Liabilities
Other accrued liabilities consist of the following at September
30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Accrued swap valuation liability
|
|
$
|
|
|
|
$
|
12,439
|
|
Due to third party payors
|
|
|
5,547
|
|
|
|
6,563
|
|
Accrued insurance
|
|
|
6,238
|
|
|
|
6,522
|
|
Income taxes payable
|
|
|
9,420
|
|
|
|
1,438
|
|
Contingent consideration
|
|
|
6,353
|
|
|
|
|
|
Other
|
|
|
20,749
|
|
|
|
18,038
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
48,307
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
The Companys long-term debt consists of the following at
September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Senior term B loan, principal and interest due in quarterly
installments through June 29, 2013
|
|
$
|
320,763
|
|
|
$
|
324,113
|
|
Senior revolver, due June 29, 2012; quarterly cash interest
payments at a variable interest rate
|
|
|
|
|
|
|
|
|
Senior subordinated notes, due July 1, 2014; semi-annual
cash interest payments due each January 1st and
July 1st (interest rate of 11.25)%
|
|
|
180,000
|
|
|
|
180,000
|
|
Term loan mortgage, principal and interest due in monthly
installments through June 29, 2012; variable interest rate
(4.75% at September 30, 2010 and September 30, 2009)
|
|
|
3,703
|
|
|
|
4,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504,466
|
|
|
|
508,178
|
|
Less current portion
|
|
|
3,667
|
|
|
|
7,415
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
500,799
|
|
|
$
|
500,763
|
|
|
|
|
|
|
|
|
|
|
Senior
secured credit facilities
The Companys senior secured credit facility consists of a
$335.0 million seven-year senior secured term B loan
facility (the term B loan), a $125.0 million
six-year senior secured revolving credit facility (the
senior revolver) and a $20.0 million six-year
senior secured synthetic letter of credit facility (together,
the senior secured credit facilities).
The senior secured credit facilities and the term loan mortgage
have priority in right of payment over all of the Companys
other long-term debt. The senior secured credit facilities are
guaranteed by the Companys subsidiaries and are secured by
substantially all of the Companys assets.
Total cash paid for interest on the Companys debt amounted
to $43.3 million, $44.9 million and $45.7 million
for fiscal 2010, 2009 and 2008, respectively.
Term B
loan
The $335.0 million term B loan amortizes one percent per
year, paid quarterly, for the first six years, with the
remaining balance due in the seventh year. The senior credit
agreement also includes a provision for
F-22
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
the prepayment of a portion of the outstanding term loan amounts
at any year-end equal to an amount ranging from 0-50% of a
calculated amount, depending on the Companys leverage
ratio, if the Company generates certain levels of cash flow. The
variable interest rate on the term B loan is equal to LIBOR plus
2.00% or Prime plus 1.00%, at the Companys option. At
September 30, 2010, the variable interest rate on the term
B loan was 2.29%.
The Company was previously a party to interest rate swap
agreements in order to reduce the interest rate exposure on the
term B loan, but these agreements have now expired. The fair
value of the swap agreements, representing the price that would
be paid to transfer the liability in an orderly transaction
between market participants, was $12.4 million at
September 30, 2009. The fair value was recorded in current
liabilities and was determined based on pricing models and
independent formulas using current assumptions that included
swap terms, interest rates and forward LIBOR curves.
The Company accounted for these interest rate swaps as cash flow
hedges. The effectiveness of the hedge relationships was
assessed on a quarterly basis during the term of the hedge by
comparing whether the critical terms of the hedge continue to
match the terms of the debt. Under this approach, the Company
exactly matched the terms of the interest rate swap to the terms
of the underlying debt and, therefore, assumed 100% hedge
effectiveness. The entire change in fair market value was
recorded in shareholders equity, net of tax, on the
consolidated balance sheets as accumulated other comprehensive
income (loss).
Senior
revolver and synthetic letter of credit facility
The Company had no borrowings and $115.1 million of
availability under the $125.0 million senior revolver as of
September 30, 2010. The Company had $29.9 million in
standby letters of credit outstanding as of September 30,
2010 related to the Companys workers compensation
insurance coverage. Of these letters of credit,
$20.0 million was issued under the Companys synthetic
letter of credit facility, and $9.9 million was issued
under the Companys $125.0 million senior revolver.
Letters of credit in excess of the $20.0 million synthetic
letter of credit facility reduce availability under the
Companys senior revolver. The interest rates for any
senior revolver borrowings are equal to either LIBOR plus 2.00%
or Prime plus 1.00%, at the Companys option, and subject
to reduction depending on the Companys leverage ratio.
Senior
subordinated notes
The Company issued $180.0 million of 11.25% senior
subordinated notes due 2014 (the senior subordinated
notes) in connection with the merger of NMH MergerSub,
Inc., a wholly-owned subsidiary of NMH Investment, LLC
(NMH Investment), with and into the Company, with
the Company as the surviving corporation, on June 29, 2006
(the Merger). The senior subordinated notes are
guaranteed by the Companys subsidiaries other than
non-profit subsidiaries.
Term
loan mortgage
In January 2010, the Company entered into an agreement to extend
the term of its mortgage facility through June 29, 2012,
the maturity date of the senior credit agreement. As a result of
this extension, the majority of the term loan mortgage balance
has been classified as long-term debt. The term loan mortgage is
secured by certain buildings and land of the Company.
Annual
maturities
Annual maturities of the Companys long-term debt for the
years ended September 30 are as follows.
F-23
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Amounts due at any year end may increase as a result of the
provision in the senior credit agreement that requires a
prepayment of a portion of the outstanding term loan amounts if
the Company generates certain levels of cash flow.
|
|
|
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
3,667
|
|
2012
|
|
|
6,736
|
|
2013
|
|
|
314,063
|
|
2014
|
|
|
180,000
|
|
|
|
|
|
|
Total
|
|
$
|
504,466
|
|
|
|
|
|
|
Covenants
The senior credit agreement and the indenture governing the
senior subordinated notes contain negative financial and
non-financial covenants, including limitations on the
Companys ability to incur additional debt, sell material
assets, retire, redeem or otherwise reacquire capital stock,
acquire the capital stock or assets of another business and pay
dividends.
The Company is restricted from paying dividends to
NMH Holdings, LLC (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 expenses.
Common
Stock
All of the outstanding shares of common stock are held by
Parent. The holders of the Companys common stock are
entitled to receive dividends when and as declared by the
Companys Board of Directors. In addition, the holders of
common stock are entitled to one vote per share.
Dividend
to Parent
NMH Holdings, Inc. (NMH Holdings) is a wholly owned
subsidiary of NMH Investment. Parent is a wholly owned
subsidiary of NMH Holdings and Parent is the sole stockholder of
the Company.
During fiscal 2009, the Company paid a $7.0 million
dividend to Parent, which used the proceeds of the dividend to
make a distribution to NMH Holdings. NMH Holdings used the
proceeds of the distribution to repurchase $13.9 million in
aggregate principal amount of the NMH Holdings senior floating
rate toggle notes due 2014 (the NMH Holdings notes).
Also, during fiscal 2009, the Company 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
the Company for certain expenses the Company had incurred on its
behalf in connection with exploring a strategic initiative.
|
|
12.
|
Employee
Savings and Retirement Plans
|
The Company has a multi-company plan (the Plan)
which covers all of its wholly owned subsidiaries. Under the
Plan, employees may contribute a portion of their earnings,
which are invested in mutual funds of their choice. After
January 1, the Company makes a matching contribution for
the previous calendar year on behalf of all participants
employed on the last day of the year. This matching contribution
vests immediately.
F-24
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
In addition, there is a profit sharing feature of the Plan,
whereby, at the discretion of management, an allocation may be
made to all of the eligible employees in one or more of its
subsidiaries. Profit sharing contributions vest ratably over
three years with forfeitures available to cover plan costs and
employer matches in future years. The Company made contributions
of $4.6 million, $3.8 million and $4.3 million,
for fiscal 2010, 2009 and 2008, respectively.
The Company has the following two deferred compensation plans:
The
National Mentor Holdings, LLC Executive Deferred Compensation
Plan
The National Mentor Holdings, LLC Executive Deferred
Compensation Plan is an unfunded, nonqualified deferred
compensation arrangement for senior management, in which the
Company contributes to the executives account a percentage
of the executives base compensation. This contribution is
made at the end of the year for service rendered during the
year. The Company contributed $0.3 million,
$0.1 million and $0.3 million for fiscal 2010, 2009
and 2008, respectively. The unfunded accrued liability was
$1.8 million and $1.5 million as of September 30,
2010 and 2009, respectively, and was included in other long-term
liabilities on the Companys consolidated balance sheets.
The
National Mentor Holdings, LLC Executive Deferral
Plan
The National Mentor Holdings, LLC Executive Deferral Plan,
available to highly compensated employees, is a plan in which
participants contribute a percentage of salary
and/or bonus
earned during the year. Employees contributed $0.8 million,
$0.9 million and $1.0 million for fiscal 2010, 2009
and 2008, respectively. The accrued liability related to this
plan was $3.6 million and $2.9 million as of
September 30, 2010 and 2009, respectively, and was included
in other long-term liabilities on the Companys
consolidated balance sheets.
In connection with the National Mentor Holdings, LLC Executive
Deferral Plan, the Company purchased Company Owned Life
Insurance (COLI) policies on certain plan
participants. The cash surrender value of the COLI policies is
designed to provide a source for funding the accrued liability.
The cash surrender value of the COLI policies was
$3.1 million and $2.5 million as of September 30,
2010 and 2009, respectively, and was included in other assets on
the Companys consolidated balance sheets.
|
|
13.
|
Related
Party Transactions
|
Management
Agreements
On June 29, 2006, the Company entered into a management
agreement with Vestar Capital Partners V, L.P.
(Vestar) relating to certain advisory and consulting
services for an annual management fee equal to the greater of
(i) $850 thousand or (ii) an amount equal to 1.0% of
the Companys consolidated earnings before interest, taxes,
depreciation, amortization and management fee for each fiscal
year determined as set forth in the new senior credit agreement.
As part of the management agreement, the Company agreed to
indemnify Vestar and its affiliates from and against all losses,
claims, damages and liabilities arising out of the performance
by Vestar of its services pursuant to the management agreement.
The management agreement will terminate upon such time that
Vestar and its partners and their respective affiliates hold,
directly or indirectly in the aggregate, less than 20% of the
voting power of the outstanding voting stock of the Company. For
fiscal 2010, 2009 and 2008, the Company expensed
$1.2 million, $1.1 million and $1.3 million,
respectively, of management fees and expenses under such
agreement.
F-25
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Consulting
Agreement
During fiscal 2010, the Company engaged Alvarez &
Marsal Healthcare Industry Group to provide certain transaction
advisory and other services. The Companys 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 $0.4 for fiscal 2010 and was
approved by the Companys Audit Committee. Mr. Sansone
is not a member of our Audit Committee and was not personally
involved in the engagement.
Lease
Agreements
The Company leases several offices, homes and other facilities
from its employees, or from relatives of employees, primarily in
the states of California, Nevada and Arkansas, which have
various expiration dates extending out as far as May 2016. In
connection with the acquisition of NeuroRestorative in the
second quarter of fiscal 2010, the Company entered into a lease
of a treatment facility in Arkansas with a former shareholder
and executive who is providing consulting services. The lease is
an operating lease with an initial ten-year term, and the total
expected minimum lease commitment is $7.0 million.
Related party lease expense was $3.9 million,
$2.6 million and $2.4 million for fiscal 2010, fiscal
2009 and fiscal 2008, respectively.
Investment
in Related Party Debt Securities
During fiscal 2009, the Company purchased $11.5 million in
aggregate principal amount of the NMH Holdings notes issued by
NMH Holdings, for $6.6 million. The security was and
continues to be classified as an
available-for-sale
debt security and recorded on the Companys consolidated
balance sheets as Investment in related party debt securities.
Cash interest on the NMH Holdings notes accrues at a rate per
annum, reset quarterly, equal to LIBOR plus 6.375%, and PIK
Interest (defined below) accrues at the cash interest rate plus
0.75%. NMH Holdings may elect to pay interest on the NMH
Holdings notes (a) entirely in cash, (b) entirely by
increasing the principal amount of the NMH Holdings notes or
issuing new notes (PIK Interest) or (c) 50% in
cash and 50% in PIK Interest.
NMH Holdings is a holding company with no direct operations. Its
principal assets are the direct and indirect equity interests it
holds in its subsidiaries, including the Company, and all of its
operations are conducted through the Company and the
Companys subsidiaries. As a result, NMH Holdings will be
dependent upon dividends and other payments from the Company to
generate the funds necessary to meet its outstanding debt
service and other obligations, including its obligations on the
notes held by the Company.
NMH Holdings has paid all of the interest payments to date on
the NMH Holdings notes entirely in PIK Interest which has
increased the principal amount by $59.2 million since they
were issued. The Company recorded interest income related to the
NMH Holdings notes of $1.9 million and $1.2 million
for fiscal 2010 and fiscal 2009, respectively. This interest
income is recorded under Interest income from related party in
the consolidated statements of operations and includes PIK
Interest as well as the accretion of the purchase discount on
the securities. Total PIK Interest included in the balance of
available-for-sale
debt security totaled $1.5 million as of September 30,
2010.
As of September 30, 2010, the Companys investment in
related-party debt securities had a carrying value of
$9.6 million, and an approximate fair value of
$10.6 million which is reflected on the Companys
consolidated balance sheets as Investment in related party debt
securities. As a result, the Company has recorded
$1.0 million of unrealized holding gain in accumulated
other comprehensive income (loss), $0.5 million of which
was recorded during fiscal 2010. The debt security is scheduled
to mature on June 15, 2014, but actual maturities may
differ from the contractual or expected maturities since
borrowers have the right to prepay obligations with or without
prepayment penalties.
F-26
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The Company evaluates
available-for-sale
securities for
other-than-temporary
impairment at least quarterly. If the fair value of a security
is less than its cost, an
other-than-temporary
impairment is required to be recognized if either of the
following criteria is met: (1) if the Company intends to
sell the security; or (2) if it is more likely than not
that the Company will be required to sell the security before
recovery of its amortized cost basis less any current period
credit loss. There were no securities impaired on an other than
temporary basis at September 30, 2010.
Dividend
to Parent
The holders of the Companys common stock are entitled to
receive dividends when and as declared by the Companys
Board of Directors. During fiscal 2009, the Company paid a
$7.0 million dividend to Parent, which used the proceeds of
the dividend to make a distribution to NMH Holdings. NMH
Holdings used the proceeds of the distribution to repurchase
$13.9 million in aggregate principal amount of the NMH
Holdings notes.
During fiscal 2009, the Company 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
the Company for certain expenses the Company had incurred on its
behalf in connection with exploring a strategic initiative.
|
|
14.
|
Fair
Value Measurements
|
The Company measures and reports its financial assets and
liabilities on the basis of fair value. The Company began
measuring its non-financial assets and liabilities at fair value
effective the first quarter of fiscal 2010. 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
managements 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.
F-27
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Assets and liabilities recorded at fair value at
September 30, 2010 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
Significant Other
|
|
Significant
|
|
|
|
|
Market Prices
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
(In thousands):
|
|
Cash equivalents
|
|
$
|
15,500
|
|
|
$
|
15,500
|
|
|
$
|
|
|
|
$
|
|
|
Investment in related party debt securities
|
|
$
|
10,599
|
|
|
$
|
|
|
|
$
|
10,599
|
|
|
$
|
|
|
Contingent consideration
|
|
$
|
(3,041
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(3,041
|
)
|
Assets and liabilities recorded at fair value on a recurring
basis at September 30, 2009 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
Significant Other
|
|
Significant
|
|
|
|
|
Market Prices
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
(In thousands):
|
|
Cash equivalents
|
|
$
|
17,000
|
|
|
$
|
17,000
|
|
|
$
|
|
|
|
$
|
|
|
Interest rate swap agreements
|
|
$
|
(12,439
|
)
|
|
$
|
|
|
|
$
|
(12,439
|
)
|
|
$
|
|
|
Investment in related party debt securities
|
|
$
|
8,210
|
|
|
$
|
|
|
|
$
|
8,210
|
|
|
$
|
|
|
Cash equivalents. Cash equivalents consist
primarily of money market funds and the carrying value of cash
equivalents approximates fair value.
Interest rate swap agreements. The fair value
of the swap agreements was recorded in current liabilities
(under Other accrued liabilities). 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.
Investment in related party debt
securities. The fair value of the investment in
related party debt securities was recorded in long-term assets
(under Investment in related party debt securities). The fair
value measurements consider observable market data that may
include, among other data, credit ratings, credit spreads,
future interest rates and risk free rates of return.
Contingent consideration. The fair value of
the earn-out associated with the fiscal 2010 acquisitions was
accrued for and classified as contingent consideration. The fair
value was determined based on unobservable inputs, namely
managements estimate of expected performance based on
current information.
The following table provides a reconciliation of the beginning
and ending balances for the liability measured at fair value
using significant unobservable inputs (Level 3). The fair
value of the Springbrook earn-out on January 15, 2010, the
date of acquisition, was $1.6 million. During fiscal 2010,
the Company recorded an additional $1.4 million to the
contingent consideration obligation.
|
|
|
|
|
|
|
Due to Seller
|
|
|
Balance at September 30, 2009
|
|
$
|
|
|
Balance at January 15, 2010
|
|
|
(1,617
|
)
|
Change in fair value of contingent consideration
|
|
|
(1,424
|
)
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
(3,041
|
)
|
|
|
|
|
|
F-28
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
At September 30, 2010, the carrying values of cash,
accounts receivable and accounts payable approximated fair
value. The carrying value and fair value of the Companys
debt instruments are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
September 30, 2009
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
(In thousands):
|
|
Senior subordinated notes
|
|
$
|
180,000
|
|
|
$
|
184,050
|
|
|
$
|
180,000
|
|
|
$
|
175,500
|
|
The Company estimated the fair value of the debt instruments
using market quotes and calculations based on current market
rates available.
Operating
leases
The Company leases office and client residential facilities,
vehicles and certain office equipment in several locations under
operating lease arrangements, which expire at various dates
through 2025. In addition to base rents presented below, the
majority of the leases require payments for additional expenses
such as taxes, maintenance and utilities. Certain of the leases
contain renewal options at the Companys option and some
have escalation clauses which are recognized as rent expense on
a straight line basis. Total rent expense for fiscal 2010, 2009
and 2008 was $44.8 million, $40.3 million and
$37.9 million, respectively.
In fiscal 1995, the Company entered into an initial five year
operating lease agreement for its corporate office with a total
expected minimum lease commitment of $2.4 million. The
lease has been extended and amended through eleven amendments,
and as of September 30, 2010, the Company had total
expected minimum lease commitments of approximately
$10.9 million over the lease term. The lease expires in
2017 and the Company has the option to extend the lease term.
Total rent expense related to this lease was $1.4 million,
$1.4 million and $1.1 million for fiscal 2010, 2009
and 2008, respectively.
Future minimum lease payments for noncancelable operating leases
for the years ending September 30 are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
37,999
|
|
2012
|
|
|
29,897
|
|
2013
|
|
|
22,042
|
|
2014
|
|
|
17,701
|
|
2015
|
|
|
12,972
|
|
Thereafter
|
|
|
23,042
|
|
|
|
|
|
|
|
|
$
|
143,653
|
|
|
|
|
|
|
Capital
leases
The Company leases certain facilities and vehicles under various
non-cancellable capital leases that expire at various dates
through fiscal 2025. Assets acquired under capital leases with
an original cost of $2.0 million and $2.1 million and
related accumulated amortization of $0.5 million and
$0.4 million are included in property and equipment, net
for fiscal 2010 and 2009, respectively. Amortization expense for
fiscal 2010, 2009 and 2008 was $0.2 million,
$0.3 million and $0.3 million, respectively.
F-29
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following is a schedule of the future minimum lease payments
under the capital leases together with the present value of net
minimum lease payments at September 30:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
92
|
|
2012
|
|
|
74
|
|
2013
|
|
|
67
|
|
2014
|
|
|
74
|
|
2015
|
|
|
80
|
|
Thereafter
|
|
|
1,329
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,716
|
|
|
|
|
|
|
Interest expense on capital leases during fiscal 2010, 2009 and
2008 was $0.2 million, $0.1 million and
$0.1 million, respectively.
|
|
16.
|
Accruals
for Self-Insurance and Other Commitments and
Contingencies
|
The Company maintains insurance for employment practices
liability, professional and general liability, workers
compensation liability, automobile liability and health
insurance liabilities that include self-insured retentions. The
Company intends to maintain such coverage in the future and is
of the opinion that its insurance coverage is adequate to cover
potential losses on asserted claims. Employment practices
liability is fully self-insured.
Until September 30, 2010, the Company insured professional
and general liability through its captive insurance subsidiary
amounts of up to $1.0 million per claim and up to
$2.0 million in the aggregate but as of October 1,
2010, the Company is self-insured for $2.0 million per
claim and $8.0 million in the aggregate, and for $500
thousand per claim in excess of the aggregate. In connection
with the Merger on June 29, 2006, subject to the
$1.0 million per claim and up to $2.0 million in the
aggregate retentions, the Company purchased additional insurance
for certain claims relating to pre-Merger periods. For
workers compensation, the Company has a $350 thousand per
claim retention with statutory limits. Automobile liability has
a $100 thousand per claim retention, with additional insurance
coverage above the retention. The Company purchases specific
stop loss insurance as protection against extraordinary claims
liability for health insurance claims. Stop loss insurance
covers claims that exceed $300 thousand on a per member basis.
During fiscal 2010, the Companys wholly-owned subsidiary
captive insurance company provided coverage for the
Companys self-insured portion of professional and general
liability claims and its employment practices liability. The
accounts of the captive insurance company are fully consolidated
with those of the other operations of the Company in the
accompanying consolidated financial statements. Effective
September 30, 2010, the captive insurance subsidiary was
dissolved and the Company is no longer self-insured through the
captive subsidiary on the effective date.
The Company is in the health and human services business and,
therefore, has been and continues to be subject to substantial
claims alleging that the Company, its employees or its
independently contracted host-home caregivers
(Mentors) failed to provide proper care for a
client. The Company is also subject to claims by its clients,
its employees, its Mentors or community members against the
Company for negligence, intentional misconduct or violation of
applicable laws. Included in the Companys recent claims
are claims alleging personal injury, assault, battery, abuse,
wrongful death and other charges. Regulatory agencies may
initiate administrative proceedings alleging that the
Companys 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
F-30
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 Companys
estimates.
The benefit for income taxes consists of the following at
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,917
|
|
|
$
|
2,282
|
|
|
$
|
730
|
|
State
|
|
|
2,676
|
|
|
|
1,525
|
|
|
|
1,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current taxes payable (benefit)
|
|
|
10,593
|
|
|
|
3,807
|
|
|
|
2,015
|
|
Net deferred tax benefit
|
|
|
(11,194
|
)
|
|
|
(5,221
|
)
|
|
|
(2,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(601
|
)
|
|
$
|
(1,414
|
)
|
|
$
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid income taxes during fiscal 2010, 2009 and 2008
of $1.5 million, $0.8 million and $0.2 million,
respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of the assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities at September
30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
847
|
|
|
$
|
711
|
|
Interest rate swap agreements
|
|
|
|
|
|
|
4,830
|
|
Accrued workers compensation
|
|
|
9,744
|
|
|
|
7,833
|
|
Net operating loss carryforwards
|
|
|
5,425
|
|
|
|
5,314
|
|
Allowance for bad debts
|
|
|
2,246
|
|
|
|
2,228
|
|
Other
|
|
|
2,608
|
|
|
|
2,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,870
|
|
|
|
23,303
|
|
Valuation allowance
|
|
|
(5,356
|
)
|
|
|
(5,160
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
15,514
|
|
|
|
18,143
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(13,212
|
)
|
|
|
(14,559
|
)
|
Amortization of goodwill and intangible assets
|
|
|
(112,950
|
)
|
|
|
(111,231
|
)
|
Other accrued liabilities
|
|
|
(2,103
|
)
|
|
|
(3,693
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(112,751
|
)
|
|
$
|
(111,340
|
)
|
|
|
|
|
|
|
|
|
|
The Company is required to record a valuation allowance to
reduce the deferred tax assets if, based on the weight of the
evidence, it is more likely than not that some portion or all of
the deferred tax assets will
F-31
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
not be realized. After consideration of all the evidence, both
positive and negative, management determined that a valuation
allowance at September 30, 2010 and 2009 of
$5.4 million and $5.2 million, respectively, was
necessary to reduce the deferred tax assets to the amount that
will more likely than not be realized. The valuation allowance
primarily related to certain state net operating loss
carryforwards.
For federal purposes, the Company did not have any net operating
loss carryforwards for fiscal 2010. For state purposes, the
Company had $107.2 million of net operating loss
carryforwards for fiscal 2010, which expire from 2011 through
2030 and $105.7 million of net operating loss carryforwards
for fiscal 2009, which expire from 2010 through 2029.
The following is a reconciliation between the statutory and
effective income tax rates at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Federal income tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
(11.6
|
)
|
|
|
(12.4
|
)
|
|
|
(14.4
|
)
|
Nondeductible comp
|
|
|
(30.1
|
)
|
|
|
(20.6
|
)
|
|
|
(14.3
|
)
|
Other nondeductible expenses
|
|
|
(8.7
|
)
|
|
|
(3.9
|
)
|
|
|
(6.6
|
)
|
Credits
|
|
|
60.7
|
|
|
|
30.5
|
|
|
|
(1.0
|
)
|
Unrecognized tax benefit
|
|
|
0.4
|
|
|
|
6.6
|
|
|
|
0
|
|
Other
|
|
|
(23.2
|
)
|
|
|
(4.4
|
)
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
22.5
|
%
|
|
|
30.8
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
As of September 30, 2010 and September 30, 2009, there
was $5.0 million in total unrecognized tax benefits, which
if recognized, would favorably impact the Companys
effective tax rate. The Company recognizes 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. As of September 30,
2010 and September 30, 2009, the Company had accrued a
total of $1.8 million and $1.4 million in interest and
penalties, respectively, recorded under other accrued
liabilities.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at October 1, 2007
|
|
$
|
5,054
|
|
Increase for tax positions related to prior years
|
|
|
311
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
5,365
|
|
Reduction due to lapse of statute of limitation
|
|
|
(400
|
)
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
4,965
|
|
Reduction due to lapse of statute of limitation
|
|
|
(47
|
)
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
4,918
|
|
|
|
|
|
|
The Company does not expect any significant changes to
unrecognized tax benefits within the next twelve months.
The Company files a federal consolidated return and files
various state income tax returns and, generally, the Company is
no longer subject to income tax examinations by the taxing
authorities for years prior to
F-32
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
September 30, 2003. The Company believes that it has
appropriate support for the income tax positions taken and to be
taken on the Companys income tax returns. In addition, the
Company believes its accruals for income tax liabilities are
adequate for all open years based on an assessment of many
factors including past experience and interpretations of the tax
laws as applied to the facts of each matter.
The Company has two reportable segments, Human Services and
Post-Acute Specialty Rehabilitation Services (SRS).
The Human Services segment delivers home and community-based
human services to adults and children with intellectual
and/or
developmental disabilities and to youth with emotional,
behavioral and/or medically complex challenges. Human Services
is organized in a reporting structure composed of two operating
segments which are aggregated into one reportable segment based
on similarity of the economic characteristics and services
provided.
The SRS segment delivers health care and community-based health
and human services to individuals who have suffered acquired
brain, spinal injuries and other catastrophic injuries and
illnesses. This segment is organized in a reporting structure
composed of two operating segments which are aggregated based on
similarity of economic characteristics and services provided.
Activities classified as Corporate in the table
below relate primarily to unallocated home office items.
The Company generally evaluates the performance of its operating
segments based on income from operations. The following is a
financial summary by reportable operating segment for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Acute
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
Human
|
|
|
Rehabilitation
|
|
|
|
|
|
|
|
For the Year Ended September 30,
|
|
Services
|
|
|
Services
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
(In thousands)
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
885,095
|
|
|
$
|
136,941
|
|
|
$
|
|
|
|
$
|
1,022,036
|
|
Income (loss) from operations
|
|
|
79,748
|
|
|
|
15,356
|
|
|
|
(51,493
|
)
|
|
|
43,611
|
|
Total assets
|
|
|
807,031
|
|
|
|
155,115
|
|
|
|
53,739
|
|
|
|
1,015,885
|
|
Depreciation and amortization
|
|
|
43,538
|
|
|
|
9,366
|
|
|
|
4,729
|
|
|
|
57,633
|
|
Purchases of property and equipment
|
|
|
11,886
|
|
|
|
7,007
|
|
|
|
1,980
|
|
|
|
20,873
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
873,723
|
|
|
$
|
96,495
|
|
|
$
|
|
|
|
$
|
970,218
|
|
Income (loss) from operations
|
|
|
73,661
|
|
|
|
12,805
|
|
|
|
(42,542
|
)
|
|
|
43,924
|
|
Total assets
|
|
|
831,723
|
|
|
|
104,745
|
|
|
|
59,142
|
|
|
|
995,610
|
|
Depreciation and amortization
|
|
|
45,872
|
|
|
|
6,627
|
|
|
|
4,301
|
|
|
|
56,800
|
|
Purchases of property and equipment
|
|
|
12,966
|
|
|
|
8,505
|
|
|
|
5,927
|
|
|
|
27,398
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
843,875
|
|
|
$
|
85,956
|
|
|
$
|
|
|
|
$
|
929,831
|
|
Income (loss) from operations
|
|
|
74,935
|
|
|
|
12,536
|
|
|
|
(42,989
|
)
|
|
|
44,482
|
|
Depreciation and amortization
|
|
|
42,082
|
|
|
|
5,910
|
|
|
|
2,556
|
|
|
|
50,548
|
|
Purchases of property and equipment
|
|
|
17,366
|
|
|
|
4,008
|
|
|
|
4,731
|
|
|
|
26,105
|
|
During fiscal 2010, 2009 and 2008, approximately 16% of the
Companys revenue was generated from contracts with
government agencies in the state of Minnesota, which is included
in the Human Services segment.
F-33
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
19.
|
Stock-Based
Compensation
|
Under its equity-based compensation plan adopted in 2006, NMH
Investment has issued units of limited liability company
interests consisting of Class B Units, Class C Units,
Class D Units and Class E Units. The units are limited
liability company interests and are available for issuance to
the Companys employees and members of the Board of
Directors for incentive purposes. As of September 30, 2010,
there were 192,500 Class B Units, 202,000 Class C
Units, 388,881 Class D Units and 6,375 Class E Units
authorized for issuance under the plan. These units derive their
value from the value of the Company.
On June 4, 2010, NMH Investment amended the terms of the
Class B and Class D Units. As a result of the
amendment, the vesting period of the Class B Units was
shortened from 61 months to 48 months. Assuming
continued employment of the employee with the Company,
40 percent of the Class B Units vest at the end of
37 months from the relevant measurement date, and the
remaining 60 percent vest ratably each month over the
remainder of the term. Assuming continued employment, the
Class C Units and Class D Units vest after three
years, subject to certain performance conditions
and/or
investment return conditions being met or achieved. For the
Class C Units, the performance conditions relate to the
Company achieving certain financial targets for the fiscal years
ended September 30, 2007, 2008 and 2009, all of which were
met. For the Class D Units, the performance conditions
relate to the Company achieving certain financial targets for
the same fiscal years, and the amendment created two additional
performance conditions for the fiscal years ended
September 30, 2010 and 2011 because the Company failed to
achieve the 2008 and 2009 targets. For both the Class C
Units and the Class D Units, the investment return
conditions relate to Vestar receiving a specified multiple on
its investment upon a liquidity event. The amendment resulted in
a modification charge of $0.3 million which was recognized
during fiscal 2010 and was included in general and
administrative expense in the accompanying consolidated
statements of operations.
If an employee holders employment is terminated, NMH
Investment may repurchase the holders Class B, C and
D units. If the termination occurs within 12 months after
the relevant measurement date, all of the B units will be
repurchased at the initial purchase price, or cost. If the
termination occurs during the following three-year period, the
proportion of the B units that may be purchased at fair market
value will be determined depending on the circumstances of the
holders departure and the date of termination. From month
13 to month 48, if the holder is terminated without cause, or
resigns for good reason, he or she is entitled to receive a
higher proportion of the purchase price at fair market value
than if he or she resigns voluntarily. This proportion increases
ratably each month. For the C and D units, the holder is
entitled to receive fair market value if he or she is terminated
without cause or resigns for good reason or, after the third
anniversary of the relevant measurement date, upon termination
for any reason except for cause. Before the third anniversary,
all the C and D units are callable at cost if the holder resigns
without good reason. In the event of a termination for cause at
any time, all of the units would be callable at cost. The
Class E Units vest over time given continued service of the
director as a member of the Board of Directors of the Company.
For purposes of determining the compensation expense associated
with these grants, management valued the business enterprise
using a variety of widely accepted valuation techniques which
considered a number of factors such as the financial performance
of the Company, the values of comparable companies and the lack
of marketability of the Companys equity. The Company then
used the option pricing method to determine the fair value of
the units granted.
The fair value of the units issued during fiscal 2010, 2009 and
2008 was calculated using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
FY2010
|
|
|
FY2009
|
|
|
FY2008
|
|
|
Risk-free interest rate
|
|
|
0.67
|
%
|
|
|
1.27
|
%
|
|
|
2.81
|
%
|
Expected term
|
|
|
1.7 years
|
|
|
|
3.5 years
|
|
|
|
3.5 years
|
|
Expected volatility
|
|
|
55.0
|
%
|
|
|
40.0
|
%
|
|
|
37.0
|
%
|
F-34
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
The estimated fair value of the units, less an assumed
forfeiture rate of 9.6%, was recognized in expense in the
Companys consolidated financial statements on a
straight-line basis over the requisite service periods of the
awards. The assumed forfeiture rate is based on an average of
the Companys historical forfeiture rates, which the
Company estimates is indicative of future forfeitures. For E
Units, the requisite service period is five years, for the
Class B Units, the requisite service period is four years
and for Class C and D Units, the requisite service period
is three years.
The Company recorded $0.7 million, $1.3 million and
$2.2 million of stock-based compensation expense for fiscal
2010, 2009 and 2008, respectively. Stock-based compensation
expense is included in general and administrative expense in the
accompanying consolidated statements of operations. The summary
of activity under the plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Units
|
|
|
Grant-Date
|
|
|
|
Outstanding
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Nonvested balance at September 30, 2009
|
|
|
178,114
|
|
|
$
|
6.70
|
|
Granted
|
|
|
41,218
|
|
|
|
2.86
|
|
Forfeited
|
|
|
(748
|
)
|
|
|
8.33
|
|
Vested
|
|
|
(115,519
|
)
|
|
|
6.91
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at September 30, 2010
|
|
|
103,065
|
|
|
$
|
3.87
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, there was $0.2 million of
total unrecognized compensation expense related to the units.
These costs are expected to be recognized over a weighted
average period of 3.4 years.
|
|
20.
|
Valuation
and Qualifying Accounts
|
The following table summarizes information about the allowances
for doubtful accounts and sales allowances for the years ended
September 30, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
Beginning
|
|
|
|
|
|
End
|
|
|
of Period
|
|
Provision
|
|
Write-Offs
|
|
of Period
|
|
|
(In thousands)
|
|
Year Ended September 30, 2010
|
|
$
|
5,896
|
|
|
$
|
12,458
|
|
|
$
|
(11,129
|
)
|
|
$
|
7,225
|
|
Year Ended September 30, 2009
|
|
|
5,057
|
|
|
|
11,712
|
|
|
|
(10,873
|
)
|
|
|
5,896
|
|
Year Ended September 30, 2008
|
|
|
5,091
|
|
|
|
9,526
|
|
|
|
(9,560
|
)
|
|
|
5,057
|
|
|
|
21.
|
Quarterly
Financial Data (unaudited)
|
The following table presents consolidated statement of
operations data for each of the eight quarters in the period
which began October 1, 2008 and ended September 30,
2010. This information is derived from the Companys
unaudited financial statements, which in the opinion of
management contain all adjustments necessary for a fair
presentation of such financial data. Operating results for these
periods are not necessarily
F-35
National
Mentor Holdings, Inc.
Notes to
Consolidated Financial
Statements (Continued)
indicative of the operating results for a full year. Historical
results are not necessarily indicative of the results to be
expected in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Quarters Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
Net revenue
|
|
$
|
238,646
|
|
|
$
|
238,405
|
|
|
$
|
244,679
|
|
|
$
|
248,488
|
|
|
$
|
250,209
|
|
|
$
|
251,170
|
|
|
$
|
259,706
|
|
|
$
|
260,951
|
|
(Loss) income from continuing operations, net of tax
|
|
|
(2,195
|
)
|
|
|
(738
|
)
|
|
|
1,235
|
|
|
|
(1,472
|
)
|
|
|
127
|
|
|
|
71
|
|
|
|
(800
|
)
|
|
|
(1,465
|
)
|
(Loss) income from discontinued operations, net of tax
|
|
|
(146
|
)
|
|
|
(442
|
)
|
|
|
(1,725
|
)
|
|
|
27
|
|
|
|
(168
|
)
|
|
|
(4,724
|
)
|
|
|
99
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,341
|
)
|
|
$
|
(1,180
|
)
|
|
$
|
(490
|
)
|
|
$
|
(1,445
|
)
|
|
$
|
(41
|
)
|
|
$
|
(4,653
|
)
|
|
$
|
(701
|
)
|
|
$
|
(1,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to year end, the Company acquired two companies
complimentary to its business. Aggregate consideration for these
acquisitions was $1.8 million.
F-36