UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-K





[X]
Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2009[   ]
Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from       to





Commission file number: 1-33323


PHC, INC.


(Exact Name of Registrant as Specified in Its Charter)





MASSACHUSETTS
04-2601571State or other Jurisdiction of
(I.R.S. Employer Identification No.)Incorporation or Organization)200 LAKE STREET, SUITE 102, PEABODY, MA
01960(Address of Principal Executive Offices)
(Zip Code)





Registrant's telephone number, including area code:  (978) 536-2777





Securities registered under Section 12(b) of the Act:


CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE





Securities registered under Section 12(g) of the Act:


NONE


(Title of Class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes ___   No  X





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 ___   No  X





Indicate by check mark whether the registrant: (1) 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  X   No  ___





Indicate by check mark whether the registrant has submitted electronically and posted on 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  __   No ___





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





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one)





Large Accelerated Filer  ___
Accelerated Filer ___Non-Accelerated Filer ___
Smaller reporting company X





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes ___   No _X_




As of December 31, 2008 the aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant was approximately $67.4 million.





As of September 19,2009, 19,231,493 shares of the registrant’s Class A Common Stock and 775,021 shares of the issuer's Class B Common Stock were outstanding.


1


DOCUMENTS INCORPORATED BY REFERENCE





Portions of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.

















2







Table of Contents





Index
PagePART IItem 1.       Description of Business
4Item 1A.    Risk Factors
18Item 1B.     Unresolved staff comments
21Item 2.       Description of Property
21Item 3.       Legal Proceedings
22Item 4.       Submission of Matters to a Vote of Security Holders
22Item 5.       Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
23Item 6.       Selected Financial Data
25Item 7.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
27Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
38Item 8.       Financial Statements and Supplementary Data
40Index to financial statements
F-1Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
73Item 9A(T).  Controls and Procedures
73Item 10.     Directors, Executive Officers and Corporate Governance
75Item 11.     Executive Compensation
78Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
87Item 13.     Certain Relationships and Related Transactions and Director Independence
89Item 14.     Principal Accountant Fees and Services
90Item 15.     Exhibits and Financial Statement Schedules
91Signatures
95











3


PART I





All references in this Annual Report on Form 10-K to “Pioneer,” “PHC,” “the Company,” “we,” “us,” or “our” mean, unless the context otherwise requires, PHC, Inc. and its consolidated subsidiaries.








Item 1.           DESCRIPTION OF BUSINESS





INTRODUCTION





Our Company is a national healthcare company, which, through wholly owned subsidiaries, provides psychiatric services to individuals who have behavioral health disorders including alcohol and drug dependency and to individuals in the gaming and transportation industries.  Our subsidiaries operate substance abuse treatment facilities
in Utah and Virginia, four outpatient psychiatric facilities in Michigan, four outpatient psychiatric facilities in Nevada, and two psychiatric hospitals, one in Michigan and one in Nevada and a residential treatment facility in Michigan.  We provide management, administrative and help line services through contracts with major railroads and a call center contract with Wayne County, Michigan.  The Company also operates a website, Wellplace.com, which provides education and training for the
behavioral health professional and internet support services to all of our subsidiaries.  Until the second quarter of this year, through another subsidiary, the Company conducted studies on the effects of various pharmaceuticals, including psychiatric pharmaceuticals, on a controlled population through contracts with the manufacturers of these pharmaceuticals. In February 2009 the Company sold the assets of its pharmaceutical research company to Premier Research International, LLC, (“Premier”),
a Delaware limited liability company.  The results of operations for the pharmaceutical operations through February 2009 are shown on the accompanying Statements of Operations as discontinued operations.  For additional information regarding this transaction see the Company’s report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2009.





Our Company provides behavioral health services through inpatient and outpatient facilities.  Our substance abuse facilities provide specialized treatment services to patients who typically have poor recovery prognoses and who are prone to relapse.  These services are offered in small specialty care facilities, which
permit us to provide our clients with efficient and customized treatment without the significant costs associated with the management and operation of general acute care hospitals.  We tailor these programs and services to "safety-sensitive" industries and concentrate our marketing efforts on the transportation, oil and gas exploration, heavy equipment, manufacturing, law enforcement, gaming and health services industries.  Our psychiatric facilities provide inpatient psychiatric care, intensive
outpatient treatment and partial hospitalization programs to children, adolescents and adults.  Our outpatient mental health clinics provide services to employees of major employers, as well as to managed care companies and Medicare and Medicaid clients.  The psychiatric services are offered in a larger, more traditional setting than PHC's substance abuse facilities, enabling PHC to take advantage of economies of scale to provide cost-effective treatment alternatives.





The Company treats employees who have been referred for treatment as a result of compliance with Subchapter D of the Anti-Drug Abuse Act of 1988 (commonly known as the Drug Free Workplace Act), which requires employers who are Federal contractors or Federal grant recipients to establish drug-free awareness programs which, among other things,
inform employees about available drug counseling, rehabilitation and employee assistance programs.  We also provide treatment under the Department of Transportation implemented regulations, which broaden the coverage and scope of alcohol and drug testing for employees in "safety sensitive" positions in the transportation industry.





The Company was incorporated in 1976 and is a Massachusetts corporation.  Our corporate offices are located at 200 Lake Street, Suite 102, Peabody, MA  01960 and our telephone number is (978) 536-2777.







4
 PSYCHIATRIC SERVICES INDUSTRY





Substance Abuse Facilities





Industry Background





The demand for substance abuse treatment services has increased rapidly over the last decade.  The Company believes that the increased demand is related to clinical advances in the treatment of substance abuse, greater societal willingness to acknowledge the underlying problems as treatable illnesses, improved health insurance
coverage for addictive disorders and chemical dependencies and governmental regulation which requires certain employers to provide information to employees about drug counseling and employee assistance programs.





To contain costs associated with behavioral health issues in the 1980s, many private payors instituted managed care programs for reimbursement, which included pre-admission certification, case management or utilization review and limits on financial coverage or length of stay. These cost containment measures have encouraged outpatient
care for behavioral problems, resulting in a shortening of the length of stay and revenue per day in inpatient chemical abuse facilities.  The Company believes that it has addressed these cost containment measures by specializing in treating relapse-prone patients with poor prognoses who have failed in other treatment settings.  These patients require longer lengths of stay and come from a wide geographic area. The Company continues to develop alternatives to inpatient care including residential
programs, partial day and evening programs in addition to onsite and offsite outpatient programs.





The Company believes that because of the apparent unmet need for certain clinical and medical services, and its continued expansion into various modalities of care for the chemically dependant, that its strategy has been successful despite national trends towards shorter inpatient stays and rigorous scrutiny by managed care organizations.





Company Operations





The Company has been able to secure insurance reimbursement for longer-term inpatient treatment as a result of its success with poor prognosis patients.  The Company's two substance abuse facilities work together to refer patients to the center that best meets the patient's clinical and medical needs.  Each facility
caters to a slightly different patient population including high-risk, relapse-prone chronic alcoholics, drug addicts and dual diagnosis patients (those suffering from both substance abuse and psychiatric disorders).  The programs are sensitive to the special behavioral health problems of children, women and Native Americans.  The Company concentrates on providing services to insurers, managed care networks and health maintenance organizations for both adults and adolescents.  The
Company's clinicians often work directly with managers of employee assistance programs to select the best treatment facility possible for their clients.





Each of the Company's facilities operates a case management program for each patient including a clinical and financial evaluation of a patient's circumstances to determine the most cost-effective modality of care from among detoxification, inpatient, residential, day care, specialized relapse treatment, outpatient treatment, and others.  In
addition to any care provided at one of the Company's facilities, the case management program for each patient includes aftercare.  Aftercare may be provided through the outpatient services provided by a facility.  Alternatively, the Company may arrange for outpatient aftercare, as well as family and mental health services, through its numerous affiliations with clinicians located across the country once the patient is discharged.





In general, the Company does not accept patients who do not have either insurance coverage or adequate financial resources to pay for treatment.  Each of the Company's substance abuse facilities does, however, provide treatment free of charge to a small number of patients each year who are unable to pay for treatment but who
meet certain clinical criteria and who are believed by the Company to have the requisite degree of motivation for treatment to be successful.  In addition, the Company provides follow-up treatment free of charge to relapse patients who satisfy certain criteria.  The number of patient days attributable to all patients who receive treatment free of charge in any given fiscal year is less than 5% of the total patient days.





5


The Company believes that it has benefited from an increased awareness of the need to make substance abuse treatment services accessible to the nation’s workforce.  For example, The Drug Free Workplace Act of 1988 requires employers who are Federal contractors or Federal grant recipients to establish drug free awareness
programs to inform employees about available drug counseling, rehabilitation and employee assistance programs and the consequences of drug abuse violations.  In response to the Drug Free Workplace Act, many companies, including many major national corporations and transportation companies, have adopted policies that provide for treatment options as an alternative to termination of employment.





Although the Company does not directly provide federally approved mandated drug testing, the Company treats employees who have been referred to the Company as a result of compliance with the Drug Free Workplace Act, particularly from companies that are part of the gaming industry as well as safety sensitive industries such as railroads,
airlines, trucking firms, oil and gas exploration companies, heavy equipment companies, manufacturing companies and health services.





HIGHLAND RIDGE -Highland Ridge is a 41-bed, freestanding alcohol and drug treatment hospital, which the Company has been operating since 1984.  The hospital increased its bed capacity to 41 from 32 in November 2003 and expanded medical
staff to include psychiatric care in its treatment plans.  Its focus remains substance abuse and it is the oldest facility dedicated to substance abuse in Utah.  Highland Ridge is accredited by The Joint Commission on Accreditation of Healthcare Organizations (“The Joint Commission”) and is licensed


by the Utah Department of Health.  Highland Ridge is recognized nationally for its excellence in treating substance abuse disorders





Highland Ridge was the first private for-profit hospital to address specifically the special needs of chemically dependent women in Salt Lake County.  In addition, Highland Ridge has contracted with Salt Lake County to provide medical detoxification services targeted to women.  The hospital also operates a specialized
continuing care support group to address the unique needs of women and minorities.





A pre-admission evaluation, which involves an evaluation of psychological, cognitive and situational factors, is completed for each prospective patient.  In addition, each prospective patient is given a physical examination upon admission.  Diagnostic tools, including those developed by the American Psychological Association,
the American Society of Addiction Medicine and the Substance Abuse Subtle Screening Inventory are used to develop an individualized treatment plan for each client.  The treatment regimen involves an interdisciplinary team which integrates the twelve-step principles of self-help organizations, medical detoxification, individual and group counseling, family therapy, psychological assessment, psychiatric support, stress management, dietary planning, vocational counseling and pastoral support.  Highland
Ridge also offers extensive aftercare assistance at programs strategically located in areas of client concentration throughout the United States.  Highland Ridge maintains a comprehensive array of professional affiliations to meet the needs of discharged patients and other individuals not admitted to the hospital for treatment.





Highland Ridge periodically conducts or participates in research projects.  Highland Ridge was the site of a research project conducted by the University of Utah Medical School.  The research explored the relationship between individual motivation and treatment outcomes.  The research was regulated and reviewed
by the Human Subjects Review Board of the University of Utah and was subject to federal standards that delineated the nature and scope of research involving human subjects.  Highland Ridge benefited from this research by expanding its professional relationships within the medical school community and by applying the findings of the research to improve the quality of services the Company delivers.





MOUNT REGIS -Mount Regis is a 25-bed, freestanding alcohol and drug treatment center located in Salem, Virginia, near Roanoke. The Company acquired the center in 1987.  It is the oldest of its kind in the Roanoke Valley.  Mount Regis is accredited
by The Joint Commission and licensed by the Department of Mental Health, Mental Retardation and Substance Abuse Services of the Commonwealth of Virginia. Mount Regis also operates Right Track, which is a residential program designed to provide individuals with the tools they need to make a smooth transition from inpatient treatment back into their everyday routine. In addition, Mount Regis operates Changes, an outpatient clinic, at its Salem, Virginia location.  The Changes clinic provides structured
intensive outpatient treatment for patients who have been discharged from Mount Regis and for patients who do not need the formal structure of a residential treatment program. The program is licensed by the Commonwealth of Virginia and approved for reimbursement by major insurance carriers.


6


Similar to Highland Ridge, the programs at Mount Regis Center are sensitive to the needs of women and minorities.  The majority of Mount Regis clients are from Virginia and surrounding states.  In addition, because of its relatively close proximity and accessibility to New York, Mount Regis has been able to attract
an increasing number of referrals from New York-based labor unions.  Mount Regis has also been able to attract a growing number of clients through the Internet.  Mount Regis has established programs that allow the Company to better treat dual diagnosis patients (those suffering from both substance abuse and psychiatric disorders), cocaine addiction and relapse-prone patients.  The multi-disciplinary case management, aftercare and family programs are key to the prevention of relapse.





General Psychiatric Facilities





Introduction





The Company believes that its proven ability to provide high quality, cost-effective care in the treatment of substance abuse has enabled it to grow in the related behavioral health field of psychiatric treatment.  The Company’s main advantage is its ability to provide an integrated delivery system of inpatient and outpatient
care.  As a result of integration, the Company is better able to manage and track patients.





The Company offers inpatient and partial hospitalization and psychiatric services and, until June 2009, also provided residential treatment to adjudicated juveniles through Harbor Oaks Hospital in New Baltimore, Michigan.  The Company also provides inpatient psychiatric services through Seven Hills Hospital located in Las Vegas,
Nevada and residential treatment to adjudicated juveniles through Detroit Behavioral Institute, Inc. located in Detroit Michigan.  In addition, the Company currently operates eight outpatient psychiatric facilities.




The Company’s philosophy at these facilities is to provide the most appropriate and efficacious care with the least restrictive modality of care possible.  An attending physician, a case manager and a clinical team work together to manage the care plan.  The integrated delivery system allows for better patient
tracking and follow-up and fewer repeat procedures and therapeutic or diagnostic errors.  Qualified, dedicated staff members take a full history on each new patient, and through test and evaluation procedures, they provide a thorough diagnostic write-up of the patient’s condition.  In addition, a physician does a complete physical examination for each new patient.  This information allows the caregivers to determine which treatment alternative is best suited for the patient
and to design an individualized recovery program for the patient.





HARBOR OAKS -The Company acquired Harbor Oaks Hospital, a 73-bed psychiatric hospital located in New Baltimore, Michigan, approximately 20 miles northeast of Detroit, in September 1994.  Harbor Oaks Hospital is licensed by the Michigan Department of Community
Health, Medicare certified and accredited by The Joint Commission.  Harbor Oaks provides inpatient psychiatric care, partial hospitalization and outpatient treatment to children, adolescents and adults.  Harbor Oaks Hospital has treated clients from Macomb, Oakland and St. Clair counties and has expanded its coverage area to include Wayne, Sanilac and Livingston counties.






7


Until May 2009, Harbor Oaks Hospital also operated a 26-bed residential unit serving adolescents with substance abuse problems and co-existing mental disorders, who were referred or required to undergo psychiatric treatment by a court or family service agency.  The patients in the program ranged from 13 to 18 years of age.  The
program provided patients with educational and recreational activities and adult life functioning skills as well as treatment.  Typically, a patient was admitted to the unit for an initial period of 30 days to six months.  A case review was done for any patient still in the program at six months, and regularly thereafter, to determine if additional treatment is required.  In May 2009 the Company closed this unit to utilize the space occupied by the program for a much needed specialty
unit for the treatment of chemical dependency.  This unit is expected to open in the second quarter of fiscal 2010.





In the fourth quarter of fiscal 2005, Harbor Oaks began operating an outpatient site near New Baltimore, Michigan.  Its close proximity to the hospital allows for a continuum of care for patients after discharge.





DETROIT BEHAVIORAL INSTITUTE –Detroit Behavioral Institute operates a 66-bed residential treatment facility licensed as Capstone Academy. It is located in midtown Detroit and serves adjudicated adolescents diagnosed as seriously emotionally disturbed (SED).
These adolescents are placed in Capstone Academy by court order.





Prior to January of 2009 this program was operated in a setting on the campus of the Detroit Medical Center, and was licensed for fifty residents (30 boys/20 girls). In early 2009, all residents were moved to the Capstone Academy. Pursuant to licensing guidelines and the review and approval of sound and therapeutic programming, the State
of Michigan Department of Human Services allowed us to increase the number of beds by 16. This became effective in June 2009.





In its present configuration, the facility includes twelve designated beds for a special program for girls requiring a more intensive and comprehensive treatment model, while the remaining fifty-four beds, which can be allocated for either boys or girls as referrals dictate, offer a more traditional treatment model.  In all programs
however, intensive treatment models address and treat residents as appropriate to their needs with individual, group and family counseling.





The residents in the programs range from 12 to 17 years of age, with a minimum IQ of 70.  Each program provides individual, group and family therapy sessions for medication orientation, anger management, impulse control, grief and loss, family interactions, coping skills, stress management, substance abuse,
discharge and aftercare planning (home visits and community reintegration), recreation therapy and sexual/physical abuse counseling as required.





As a part of the treatment model, each resident learns life skills (didactics) and receives education, in accordance with Michigan’s required educational curriculum, from state certified teachers, who are members of our staff.  Typically, a resident is placed for treatment for an initial period of 30 days to six months, case
dependent.





Periodic case review and psychiatric evaluations are conducted to evaluate progress or areas requiring improvement in accordance with goals and planning for discharge and eventual transition back to the community. The treatment teams that provide therapy and review each resident for progress include licensed counselors,
nursing staff, certified teachers, psychiatrists, youth specialists and other program personnel.





During the fiscal year ended June 2009, the Company was approved by the local school district, in accordance with state law to operate as a school under its auspices, for the education of program residents. Consequently, when residents transition back to the community they do so without losing school credits. Transcripts, testing scores
and related items are readily accepted by the new education environment. We have successfully fulfilled this obligation for three years, with improved success. This allows our programs to integrate the residents’ education with their individual treatment model and provide the best education possible without transporting the individuals to another site.




8


HARMONY HEALTHCARE -Harmony Healthcare, which consists of four psychiatric clinics in Nevada, provides outpatient psychiatric care to children, adolescents and adults in the local area.  Harmony also operates employee assistance programs for railroads,
health care companies and several large gaming companies including Boyd Gaming Corporation, the MGM Grand and the Venetian with a rapid response program to provide immediate assistance 24 hours a day and seven days a week.  Harmony also provides outpatient psychiatric care and inpatient psychiatric case management through capitated rate behavioral health carve-outs with Behavioral Health Options and PacifiCare Insurance.  The agreement with Behavioral Health Options is a significant contract
which began in January 2007 and caused a major expansion of Harmony to better serve the contract population.





NORTH POINT-PIONEER, INC. –North Point consists of three outpatient clinical offices strategically and geographically located to serve a large and populous region in Michigan.  The clinics provide outpatient psychiatric and substance abuse treatment
to children, adolescents and adults operating under the name Pioneer Counseling Center.  The three clinics are located in close proximity to the Harbor Oaks facility, which allows for more efficient integration of inpatient and outpatient services and provides for a larger coverage area and the ability to share personnel which results in cost savings.  In fiscal 2005, North Point was awarded a contract with Macomb County Office of Substance Abuse (MCOSA) to provide behavioral health outpatient
and intensive outpatient services for indigent and Medicaid clients residing in Macomb County.  The contract is renewable annually with an estimated value of $55,000 annually.





Call Center Operations





WELLPLACE, INC. - In 1994, the Company began to operate a crisis hotline service under contract with a major transportation client.  The hotline, Wellplace, shown as contract support services on the accompanying statement of operations, is a national,
24-hour telephone service, which supplements the services provided by the client's Employee Assistance Programs.  The services provided include information, crisis intervention, critical incidents coordination, employee counselor support, client monitoring, case management and health promotion. The hotline is staffed by counselors who refer callers to the appropriate professional resources for assistance with personal problems. Three major transportation companies subscribed to these services as of
June 30, 2009.  This operation is physically located in Highland Ridge hospital, but a staff dedicated to Wellplace provides the services from a separate designated area of the Hospital.    Wellplace also contracts with Wayne County Michigan to operate its call center.  This call center is located in mid-town Detroit on the campus of the Detroit Medical Center and provides 24-hour crisis, eligibility and enrollment services for the Detroit-Wayne County Community Mental
Health Agency which oversees 56,000 lives or consumers for mental health services in Wayne County Michigan.  Until December 2008, Wellplace also operated a smaller contract to provide services for transportation and identification reimbursement for consumers.  During fiscal 2006, Wellplace signed an agreement with a major government contractor to operate a smoking cessation quit line with Internet access.  Wellplace provided services under the agreement until September 2008.  Wellplace’s
primary focus is now on growing its operations to take advantage of current opportunities and capitalize on the economies of scale in providing similar services to other companies and government units.





Research Operations





PIVOTAL RESEARCH CENTERS, INC. – In February 2009, the Company sold the assets of its research division to Premier Research International, LLC, (“Premier”), a Delaware limited liability company.  The results of operations for the pharmaceutical
operations through February 2009 are shown on the accompanying Statements of Operations as discontinued operations.  For additional information regarding this transaction see the Company’s report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2009.





9


Internet Operations





BEHAVIORAL HEALTH ONLINE, INC.– Behavioral Health Online designs, develops and maintains the Company’s web site, Wellplace.com in addition to providing Internet support services and maintaining the web sites of all of the other subsidiaries of the Company.  The
Company’s web sites provide behavioral health professionals with the educational tools required to keep them abreast of behavioral health breakthroughs and keep individuals informed of current issues in behavioral health.







10




Operating Statistics





The following table reflects selected financial and statistical information for all services.




Year Ended June 30,
(unaudited)





2009


2008


2007


2006


2005InpatientNet patient service revenues

$
23,634,602


$
22,327,159


$
21,508,417


$
18,775,198


$
18,469,578Net revenues per patient day (1)

$
438


$
383


$
395


$
382


$
436Average occupancy rate (2)


69.7
%


85.0
%


83.0
%


77.7
%


78.8
%Total number of licensed beds at the end of the period


260



244



180



180



160Source of Revenues:Private (3)


54.9
%


48.2
%


50.2
%


54.3
%


61.8
%Government (4)


45.1
%


51.8
%


49.8
%


45.7
%


38.2
%Partial Hospitalization and OutpatientNet Revenues:Individual

$
5,800,090


$
6,603,002


$
6,518,115


$
6,734,627


$
5,557,298Contract

$
13,165,271


$
11,925,916


$
7,995,997


$
2,351,876


$
2,060,212Sources of revenues:Private


99.1
%


99.1
%


98.6
%


98.0
%


97.2
%Government


0.9
%


0.9
%


1.4
%


2.0
%


2.8
%Other  Services:Contract Services (Wellplace)(5)

$
3,811,056


$
4,541,260


$
4,540,634


$
4,351,576


$
3,466,832





(1)
Net revenues per patient day equals net patient service revenues divided by total patient days excluding bed days provided by the Seven Hills subsidiary under the Harmony capitated contract.(2)
Average occupancy rates were obtained by dividing the total number of patient days in each period including capitated contract bed days by the number of beds available in such period.  Occupancy rates are artificially depressed for the current fiscal year as we added 32 beds at Seven Hills at the beginning of the year and six
new beds on line and relocated to Capstone in January causing low occupancy rates while census was building at both start up sites.







11


(3)
Private pay percentage is the percentage of total patient revenue derived from all payors other than Medicare and Medicaid and county programs.(4)
Government pay percentage is the percentage of total patient revenue derived from the Medicare and Medicaid and county programs.





(5)
Wellplace provides contract support services including clinical support, referrals management and professional services for a number of the Company’s national contracts and operates the Wayne County Michigan call center.





Business Strategy





The Company’s objective is to become the leading national provider of behavioral health services.





The Company focuses its marketing efforts on “safety-sensitive” industries such as transportation and medical.  This focus results in customized outcome oriented programs that the Company believes produce overall cost savings to the patients and/or client organizations.  The Company intends to leverage experience
gained from providing services to customers in certain industries that it believes will enhance its selling efforts within these certain industries.





Marketing and Customers





The Company markets its substance abuse, inpatient and outpatient psychiatric health services both locally and nationally, primarily to safety sensitive industries, including transportation, manufacturing and healthcare services.  Additionally, the Company markets its services in the gaming industry both in Nevada and nationally
and its help line services nationally.





The Company employs three individuals dedicated to marketing the Company’s facilities.  Each facility performs marketing activities in its local region.  The Senior Vice President of the Company coordinates the Company’s national marketing efforts.  In addition, employees at certain facilities
perform local marketing activities independent of the Senior Vice President.  The Company, with the support of its owned integrated outpatient systems and management services, continues to pursue more at-risk contracts and outpatient, managed health care fee-for-service contracts.  “At risk” contracts require that the Company provides all the clinically necessary behavioral health services for a group of people for a set fee per person per month.  The Company currently
has two at risk contracts with large insurance carriers, which require the Company to provide behavioral health services to a large number of its insured for a fixed fee.  These at risk contracts represent less than 15% of the Company’s total gross revenues.  In addition to providing excellent services and treatment outcomes, the Company will continue to negotiate pricing policies to attract patients for long-term intensive treatment which meet length of stay and clinical requirements
established by insurers, managed health care organizations and the Company’s internal professional standards.





The Company’s integrated systems of comprehensive outpatient mental health programs complement the Company’s inpatient facilities.  These outpatient programs are strategically located in Nevada, Virginia, Michigan, and Utah.  They make it possible for the Company to offer wholly integrated, comprehensive,
mental health services for corporations and managed care organizations on an at-risk or exclusive fee-for-service basis.  Additionally, the Company operates Wellplace located in the Highland Ridge facility in Salt Lake City, Utah and in Detroit, Michigan.  Wellplace provides clinical support, referrals, management and professional services for a number of the Company’s national contracts.  It gives the Company the capacity to provide a complete range of fully integrated mental
health services.





The Company provides services to employees of a variety of corporations including: Boyd Gaming Corporation, CSX Corporation, MGM Mirage, Union Pacific Railroad, Union Pacific Railroad Hospital Association and others.





In addition to its direct patient care services, the Company maintains its web site, Wellplace.com, which provides articles and information of interest to the general public as well as the behavioral health professional.  The Company’s internet company also provides the added benefit of web availability of information for
various Employee Assistance Program contracts held and serviced by those subsidiaries providing direct treatment services.





12


Competition





The Company’s substance abuse programs compete nationally with other health care providers, including general and chronic care hospitals, both non-profit and for-profit, other substance abuse facilities and short-term detoxification centers.  Some competitors have substantially greater financial resources than the Company.  The
Company believes, however, that it can compete successfully with such institutions because of its success in treating poor prognosis patients.  The Company will compete through its focus on such patients, its willingness to negotiate appropriate rates and its capacity to build and service corporate relationships.





The Company’s psychiatric facilities and programs compete primarily within the respective geographic area serviced by them.  The Company competes with private doctors, hospital-based clinics, hospital-based outpatient services and other comparable facilities.  The main reasons that the Company competes well are
its integrated delivery and dual diagnosis programming.  Integrated delivery provides for more efficient follow-up procedures and reductions in length of stay.  Dual diagnosis programming provides a niche service for clients with a primary mental health and a secondary substance abuse diagnosis.  The Company developed its dual diagnosis service in response to demand from insurers, employers and treatment facilities.  The Company’s internet company provides the competitive
edge for service information and delivery for our direct patient care programs.





Revenue Sources and Contracts





The Company has entered into relationships with numerous employers, labor unions and third-party payors to provide services to their employees and members for the treatment of substance abuse and psychiatric disorders.  In addition, the Company admits patients who seek treatment directly without the intervention of third parties
and whose insurance does not cover these conditions in circumstances where the patient either has adequate financial resources to pay for treatment directly or is eligible to receive free care at one of the Company’s facilities.  The Company’s psychiatric patients either have insurance or pay at least a portion of treatment costs based on their ability to pay.  Most of our patients are covered by insurance.  Free treatment provided each year amounts to less than 5% of
the Company’s total patient days.





Each contract is negotiated separately, taking into account the insurance coverage provided to employees and members, and, depending on such coverage, may provide for differing amounts of compensation to the Company for different subsets of employees and members.  The charges may be capitated, or fixed with a maximum charge per
patient day, and, in the case of larger clients, frequently result in a negotiated discount from the Company’s published charges.  The Company believes that such discounts are appropriate as they are effective in producing a larger volume of patient admissions.  The Company treats non-contract patients and bills them on the basis of the Company’s standard per diem rates and for any additional ancillary services provided to them by the Company.





Until fiscal 2008, the Company billed for its behavioral healthcare services at its inpatient and outpatient facilities using different software platforms for each type of service.  During fiscal 2008, the Company converted all facilities providing behavioral health under insurance contracts to Meditech software, which is still
in use. With Meditech, as with the previous software platforms, the charges are contractually adjusted at the time of billing using adjustment factors based on agreements or contracts with the insurance carriers and the specific plans held by the individuals as outlined above.  This method may still require additional adjustment based on ancillary services provided and deductibles and copays due from the individuals, which are estimated at the time of admission based on information received from the
individual.  Adjustments to these estimates are recognized as adjustments to revenue in the period they are identified, usually when payment is received, and are not material to the financial statements.





The Company’s policy is to collect estimated co-payments and deductibles at the time of admission in the form of an admission deposit.  Payments are made by way of cash, check or credit card.  For inpatient services, if the patient does not have sufficient resources to pay the estimated co-payment in advance,
the Company’s policy is to allow payment to be made in three installments, one third due upon admission, one third due upon discharge and the balance due 30 days after discharge.  At times the patient is not physically or mentally stable enough to comprehend or agree to any financial arrangement.  In this case the Company will make arrangements with the patient once his or her condition is stabilized.  At times, this situation will require the Company to extend payment arrangements
beyond the three payment method previously outlined.  Whenever extended payment arrangements are made, the patient, or the individual who is financially responsible for the patient, is required to sign a promissory note to the Company, which includes interest on the balance due.  For outpatient services, the Company’s policy is to charge a $5.00 billing/statement fee for any accounts still outstanding at month end.


13





The Company’s days sales outstanding (“DSO”) are significantly different for each type of service and each facility based on the payors for each service.  Overall, the DSO for the combined operations of the Company was 62 and 68 days as of June 30, 2009 and 2008, respectively.  This decrease in the
DSO is due primarily to increased capitated contract revenue which is paid within 45 days.  Contract services DSO’s fluctuate dramatically by the delay in payment of a few days for any of our large contracts.  There was such a delay in payments for the Michigan call center at the end of fiscal 2009, artificially inflating the DSO’s for the period.





DSO’s for each year for each business segment are as follows:





Fiscal Year End
Treatment Services
Contract Services06/30/2009
52
5106/30/2008
59
43




Amounts pending approval from Medicare or Medicaid, as with all other third party payors, are maintained as receivables based on the discharge date of the patient, while appeals are made for payment.  If accounts remain unpaid, when all levels of appeal have been exhausted, accounts are written
off.  Where possible, the Company will turn to the patient or the responsible party to seek reimbursement and send the account to collections before writing the account off.





Insurance companies and managed care organizations are entering into sole source contracts with healthcare providers, which could limit our ability to obtain patients.Private insurers, managed care organizations and, to a lesser extent, Medicaid and Medicare, are beginning to
carve-out specific services, including mental health and substance abuse services, and establish small, specialized networks of providers for such services at fixed reimbursement rates.  We are not aware of any lost business as a result of sole source contracts to date, as we have not been advised by any payor that we have been eliminated as a provider from their system based on an exclusivity contract with another provider.  Continued growth in the use of carve-out systems could materially
adversely affect our business to the extent we are not selected to participate in such smaller specialized networks or if the reimbursement rate is not adequate to cover the cost of providing the service.





Quality Assurance and Utilization Review





The Company has established comprehensive quality assurance programs at all of its facilities.  These programs are designed to ensure that each facility maintains standards that meet or exceed requirements imposed upon the Company with the objective of providing high-quality specialized treatment services to its patients.  To
this end, The Joint Commission surveys and accredits the Company’s inpatient facilities, except Detroit Behavioral Institute which is accredited through the Council on Accreditation (“COA”).  The Company’s outpatient facilities comply with the standards of National Commission on Quality Assurance (“NCQA”) although the facilities are not NCQA certified.  The Company’s outpatient facilities in Michigan are certified by the American Osteopathic Association
(“AOA”), which is a nationally accepted accrediting body, recognized by payors as the measure of quality in outpatient treatment and the only accrediting body whose standards are recognized by CMS. The Company’s professional staff, including physicians, social workers, psychologists, nurses, dietitians, therapists and counselors, must meet the minimum requirements of licensure related to their specific discipline, in addition to each facility’s own internal quality assurance criteria as
adopted by the facility for operational purposes and approved by the Executive Committee.  The Company participates in the federally mandated National Practitioners Data Bank, which monitors professional accreditation nationally.  In each facility, continuing quality improvement (CQI) activity is reviewed quarterly by the Company’s corporate compliance unit and quality assurance activities are approved by the executive committee.





In response to the increasing reliance of insurers and managed care organizations upon utilization review methodologies, the Company has adopted a comprehensive documentation policy to satisfy relevant reimbursement criteria.  Additionally, the Company has developed an internal case management system, which provides assurance
that services rendered to individual patients are medically appropriate and reimbursable.  Implementation of these internal policies has been integral to the success of the Company’s strategy of providing services to relapse-prone, higher acuity patients.





14
 Government Regulation





The Company’s business and the development and operation of the Company’s facilities are subject to extensive federal, state and local government regulation.  In recent years, an increasing number of legislative proposals have been introduced at both the national and state levels that would affect major reforms of
the health care system if adopted.  Among the proposals under consideration are reforms to increase the availability of group health insurance, to increase reliance upon managed care, to bolster competition and to require that all businesses offer health insurance coverage to their employees.  Some states have already instituted laws that mandate employers offer health insurance plans to their employees.  The Company cannot predict whether additional legislative proposals will be
adopted and, if adopted, what effect, if any, such proposals would have on the Company’s business.





In addition, both the Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy, intermediary determinations and governmental funding restrictions, all of which may materially increase or decrease the rate of program payments to health care facilities.  Since
1983, Congress has consistently attempted to limit the growth of federal spending under the Medicare and Medicaid programs and will likely continue to do so.  Additionally, congressional spending reductions for the Medicaid program involving the issuance of block grants to states is likely to hasten the reliance upon managed care as a potential savings mechanism of the Medicaid program.  As a result of this reform activity, the Company can give no assurance that payments under such programs
will in the future remain at a level comparable to the present level or be sufficient to cover the costs allocable to such patients.





Control of the healthcare industry exercised by federal, state and local regulatory agencies can increase costs, establish maximum reimbursement levels and limit expansion.  Our Company and the health care industry are subject to rapid regulatory change with respect to licensure and conduct of operations at existing facilities,
construction of new facilities, acquisition of existing facilities, the addition of new services, compliance with physical plant safety and land use requirements, implementation of certain capital expenditures, reimbursement for services rendered and periodic government inspections.  Governmental budgetary restrictions have resulted in limited reimbursement rates in the healthcare industry including our Company.  As a result of these restrictions, we cannot be certain that payments under government
programs will remain at a level comparable to the present level or be sufficient to cover the costs allocable to such patients.  In addition, many states, including the State of Michigan, where the majority of our Medicaid revenue is generated, are considering reductions in state Medicaid budgets.




Health Planning Reqyuirements
 
 Most of the states in which the Company operates have health planning statutes which require that prior to the addition or construction of new beds, the addition of new services, the acquisition of certain medical equipment or certain capital expenditures in excess of defined levels, a state health planning agency must determine that a
need exists for such new or additional beds, new services, equipment or capital expenditures.  These state determinations of need or certificate of need (“DoN”) programs are designed to enable states to participate in certain federal and state health related programs and to avoid duplication of health services.  DoN’s typically are issued for a specified maximum expenditure, must be implemented within a specified time frame and often include elaborate compliance procedures
for amendment or modification, if needed.


15





16





Licensure and Certification





All of the Company’s facilities must be licensed by state regulatory authorities.  The Company’s Harbor Oaks facility is certified for participation as a provider in the Medicare and Medicaid programs.  The Company’s Seven Hills Hospital in Las Vegas is currently seeking certification to participate
in these programs.





The Company’s initial and continued licensure of its facilities, and certification to participate in the Medicare and Medicaid programs, depends upon many factors, including accommodations, equipment, services, patient care, safety, personnel, physical environment, the existence of adequate policies, procedures and controls and the
regulatory process regarding the facility’s initial licensure.  Federal, state and local agencies survey facilities on a regular basis to determine whether such facilities are in compliance with governmental operating and health standards and conditions for participating in government programs.  Such surveys include review of patient utilization and inspection of standards of patient care.  The Company has procedures in place to ensure that its facilities are operated in compliance
with all such standards and conditions.  To the extent these standards are not met, however, the license of a facility could be restricted, suspended or revoked, or a facility could be decertified from the Medicare or Medicaid programs.





Medicare Reimbursement





Currently, the only facility of the Company that receives Medicare reimbursement is Harbor Oaks.  For the fiscal year ended June 30, 2009, 12.2% of revenues for Harbor Oaks were derived from Medicare programs.  Total revenue from Harbor Oaks accounted for 19.7% of the Company’s total net patient care revenues
for fiscal 2009.





Effective for fiscal years beginning after January 1, 2005, the prospective payment system (“PPS”) was brought into effect for all psychiatric services paid through the Medicare program.  For the fiscal year ended June 30, 2009, Medicare reimbursement rates were based 100% on the prospective payment rates.  The
Company will continue to file cost reports annually as required by Medicare to determine ongoing rates.  These cost reports are routinely audited on an annual basis.  Activity and cost report expense differences are reviewed on an interim basis and adjustments are made to the net expected collectable revenue accordingly.  The Company believes that adequate provision has been made in the financial statements for any adjustments that might result from the outcome of Medicare audits.  Approximately  25% and
29% of the Company’s total revenue is derived from Medicare and Medicaid payors for the years ended June 30, 2009 and 2008 respectively.  Differences between the amounts provided and subsequent settlements are recorded in operations in the year of the settlement.  To date, settlement adjustments have not been material.





In order to receive Medicare reimbursement, each participating facility must meet the applicable conditions of participation set forth by the federal government relating to the type of facility, its equipment, its personnel and its standards of medical care, as well as compliance with all state and local laws and regulations.  In
addition, Medicare regulations generally require that entry into such facilities be through physician referral.  The Company must offer services to Medicare recipients on a non-discriminatory basis and may not preferentially accept private pay or commercially insured patients.  The Company currently meets all of these conditions and requirements and has systems in place to assure compliance in the future.





Medicaid Reimbursement





Currently, the only facilities of the Company that receive reimbursement under any state Medicaid program are Harbor Oaks and Detroit Behavioral Institute.  A portion of Medicaid costs is paid by states under the Medicaid program and the federal matching payments are not made unless the state’s portion is made.  Accordingly,
the timely receipt of Medicaid payments by a facility may be affected by the financial condition of the relevant state.  For the period ended June 30, 2009, 23% of total net patient revenues of the Company were derived from Medicaid programs.





Harbor Oaks and Detroit Behavioral Institute are both participants in the Medicaid programs administered by the State of Michigan.  The Company receives reimbursement on a per diem basis, inclusive of ancillary costs.  The state determines the rate and adjusts it annually based on cost reports filed by the Company.





17


Fraud and Abuse Laws





Various federal and state laws regulate the business relationships and payment arrangements between providers and suppliers of health care services, including employment or service contracts, and investment relationships.  These laws include the fraud and abuse provisions of the Medicare and Medicaid statutes as well as similar
state statutes (collectively, the “Fraud and Abuse Laws”), which prohibit the payment, receipt, solicitation or offering of any direct or indirect remuneration intended to induce the referral of patients, and the ordering, arranging, or providing of covered services, items or equipment.  Violations of these provisions may result in civil and criminal penalties and/or exclusion from participation in the Medicare, Medicaid and other government-sponsored programs.  The federal government
has issued regulations that set forth certain “safe harbors,” representing business relationships and payment arrangements that can safely be undertaken without violation of the federal Fraud and Abuse Laws.  Failure to fall within a safe harbor does not constitute a per se violation of the federal Fraud and Abuse Laws.  The Company believes that its business relationships and payment arrangements either fall within the safe harbors or otherwise comply with the Fraud and Abuse
Laws.





The Company has an active compliance program in place with a corporate compliance officer and compliance liaisons at each facility and a toll free compliance hotline.  Compliance in-services and trainings are conducted on a regular basis.  Information on our compliance program and our hot line number is available to
our employees on our intranet and to the public on our website at www.phc-inc.com.




Employees





As of August 6, 2009, the Company had 589 employees of which three were dedicated to marketing, 196 (37 part time and 5 seasonal) to finance and administration and 390 (176 part time and 21 contingent) to patient care.





The Company believes that it has been successful in attracting skilled and experienced personnel.  Competition for such employees is intense, however, and there can be no assurance that the Company will be able to attract and retain necessary qualified employees in the future.  On July 31, 2003, the Company's largest
facility, Harbor Oaks Hospital, with approximately 125 union eligible nursing and administrative employees, voted for union (UAW) representation.  In December 2004, the Company and the UAW reached a collective bargaining agreement, which was ratified by the employees on December 8, 2004 and signed by the UAW and the Company in January 2005.  This agreement was renewed and will expire in December 2010.  As of June 30, 2009, approximately 79% of the total number of employees of that
subsidiary were covered by the collective bargaining agreement.  In addition, in January, 2007 the Company’s largest out-patient facility, Harmony Healthcare, with approximately 43 union eligible employees, voted for union (Teamsters) representation.  In April, 2007 the Company and Teamsters reached a collective bargaining Agreement, which was signed by Teamsters on April 26, 2007 and the Company on April 30, 2007 to be effective January 1, 2007 and expiring on January 1, 2010.  As
of June 30, 2009, approximately 29% of the total number of employees of that subsidiary were covered by the collective bargaining agreement.





The limited number of healthcare professionals in the areas in which the Company operates may create staffing shortages.The Company’s success depends, in large part, on its ability to attract and retain highly qualified personnel, particularly skilled health care personnel,
which are in short supply.  The Company faces competition for such personnel from governmental agencies, health care providers and other companies and is constantly increasing its employee benefit programs, and related costs, to maintain required levels of skilled professionals.  As a result of staffing shortages, the Company uses professional placement services to supply it with a pool of professionals from which to choose.  These individuals generally are higher skilled, seasoned
individuals who require higher salaries, richer benefit plans, and in some instances, require relocation.  The Company has also entered into contracts with agencies to provide short-term interim staffing in addition to placement services.  These additional costs impact the Company’s profitability.





Insurance





Each of the Company’s subsidiaries maintains professional liability insurance policies with coverage of $1,000,000 per claim and $3,000,000 in the aggregate.  In addition to this coverage, all of the subsidiaries collectively maintain a $20,000,000 umbrella policy shared by all facilities.  In addition, each of
these entities maintains general liability insurance coverage in similar amounts, as well as property insurance coverage.





18


The Company maintains $1,000,000 of directors’ and officers’ liability insurance coverage and business owners' liability coverage of $1,000,000 per claim and $2,000,000 in the aggregate.  The Company believes, based on its experience, that its insurance coverage is adequate for its business and, although cost has
escalated in recent years, that it will continue to be able to obtain adequate coverage.





Acquisition and Expansion





If we acquire new businesses or expand our businesses, the operating costs may be far greater than revenues for a significant period of time.The operating losses and negative cash flow associated with start-up operations or acquisitions could have a material adverse
effect on our profitability and liquidity unless and until such facilities are fully integrated with our other operations and become self sufficient.  Until such time, we may be required to borrow at higher rates and less favorable terms to supplement short term operating cash flow shortages.





Item 1A. RISK FACTORS





OPERATING RISKS





AGING OF ACCOUNTS RECEIVABLE COULD RESULT IN OUR INABILITY TO COLLECT RECEIVABLES REQUIRING US TO INCREASE OUR DOUBTFUL ACCOUNTS RESERVE WHICH WOULD DECREASE OUR NET INCOME AND WORKING CAPITAL





As our accounts receivable age and become uncollectible our cash flow is negatively impacted.Our accounts receivable from patient accounts (net of allowance for bad debts) were $6,350,693 at June 30, 2009 compared with $6,474,733 at June 30, 2008.  As we expand, we
will be required to seek payment from a larger number of payors and the amount of accounts receivable will likely increase.  Because the behavioral health industry is typically a difficult collection environment, we have focused on better accounts receivable management through increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy in order to keep the change in receivables consistent with the change in revenue.  We have also established
a more aggressive reserve policy, allowing greater amounts of reserves as accounts age from the date of billing.  If the amount of receivables, which eventually become uncollectible, exceeds such reserves, we could be materially adversely affected.  The following chart represents our Accounts Receivable and Allowance for Doubtful Accounts at June 30, 2009 and 2008 and Bad Debt Expense for the fiscal years ended June 30, 2009 and 2008:








Accounts Receivable
Allowance for Doubtful Accounts
Bad Debt ExpenseJune 30, 2009
$8,781,311
$2,430,618
$1,637,738June 30, 2008
8,705,104
2,230,371
1,311,431





NEGATIVE CASH FLOW COULD ARISE AS A RESULT OF SLOW GOVERNMENT PAYMENTS WHICH COULD REQUIRE THE COMPANY TO BORROW ADDITIONAL FUNDS AT UNFAVORABLE RATES AND AFFECT OUR NET INCOME, WORKING CAPITAL AND LIQUIDITY




The concentration of accounts receivable due from government payors could create a severe cash flow problem should these agencies fail to make timely payment.We had substantial receivables from Medicaid and Medicare of approximately $1,417,000 at June 30, 2009 and $1,307,000
at June 30, 2008, which would create a cash flow problem should these agencies defer or fail to make reimbursement payments as due, which would require us to borrow at unfavorable rates or pay additional interest as overline fees on current debt instruments.  This would result in lower net income for the same services provided and lower earnings per share.




19


NEGATIVE CASH FLOW COULD IMPACT OUR ABILITY TO MEET OBLIGATIONS WHEN DUE WHICH COULD REQUIRE THE COMPANY TO BORROW ADDITIONAL FUNDS AT UNFAVORABLE RATES AND AFFECT OUR NET INCOME




If managed care organizations delay approving treatment, or reduce the patient length of stay number of visits or reimbursement, our Company’s ability to meet operating expenses is affected.  As managed care organizations and insurance companies adopt policies that limit the length of stay for substance abuse treatment,
our business is materially adversely affected since our revenues and cash flow go down and our fixed operating expenses continue or increase based on the additional resources required to collect accounts receivable.





Reimbursement for substance abuse and psychiatric treatment from private insurers is largely dependent on our ability to substantiate the medical necessity of treatment.  The process of substantiating a claim often takes up to four months and sometimes longer.  As a result, we experience significant delays in the collection
of amounts reimbursable by third-party payors, which requires us to increase staff to pursue payment and adversely affects our working capital condition.  This causes amounts borrowed on our accounts receivable revolver to remain outstanding for longer periods of time resulting in higher interest expense in addition to the reduced income resulting from the shorter lengths of stay, which combined reduce net income and earnings per share.





POTENTIAL STAFFING SHORTAGES COULD REQUIRE US TO INCREASE OUR EMPLOYEE COMPENSATION AND REDUCE OUR NET INCOME





The limited number of healthcare professionals in the areas in which we operate may create staffing shortages.Our success depends, in large part, on our ability to attract and retain highly qualified personnel, particularly skilled health care personnel, which are in short supply.  We
face competition for such personnel from governmental agencies, health care providers and other companies and are constantly increasing our employee benefit programs, and related costs, to maintain required levels of skilled professionals.  As a result of staffing shortages, we use professional placement services to supply us with a pool of professionals from which to choose.  These individuals generally are higher skilled, seasoned individuals who require higher salaries, richer benefit plans
and in some instances, relocation.  We have also entered into contracts with agencies to provide short-term interim staffing in addition to placement services.  These additional costs impact our profitability.





In December 2004, the Company’s largest inpatient facility voted for UAW representation.  Approximately 79% of the staff of the facility are members of the UAW and could vote to strike when the contract comes up for renewal in December 2010.  In April 2007, the Company’s largest outpatient operations voted
for Teamsters representation.  Approximately 29% of the staff of the facility are members of Teamsters and could vote to strike when the contract comes up for renewal in January 2010.  A strike vote on the part of either of these operations would negatively impact profitability by requiring the Company to transfer patients to competing facilities or providers or pay high short term staffing rates.  This could also negatively impact the Company’s reputation in the community
creating the need for increased marketing.





THE LOSS OF ANY KEY CLIENTS WOULD REDUCE OUR NET REVENUES AND OUR NET INCOME





The Company relies on contracts with more than ten clients to maintain patient census at its inpatient facilities and provide patients for our outpatient operations and our employee assistance programs.  The loss of any of such contracts would impact our ability to meet our fixed costs.  We have entered into relationships
with large employers, health care institutions, insurance companies and labor unions to provide treatment for psychiatric disorders, chemical dependency and substance abuse in conjunction with employer-sponsored employee assistance programs.  The employees of such institutions may be referred to us for treatment, the cost of which is reimbursed on a per diem or per capita basis.  Approximately 25% of our total revenue is derived from these clients.  No one of these large employers,
health care institutions, insurance companies or labor unions individually accounts for 10% or more of our consolidated revenues, but the loss of any of these clients would require us to expend considerable effort to replace patient referrals and would result in revenue losses and attendant loss in income.




20


GOVERNMENT REGULATION COULD RESTRICT OUR ABILITY TO EXPAND, REDUCE THE ALLOWABLE REIMBURSEMENT TO THE COMPANY AND REDUCE OUR NET INCOME





Control of the healthcare industry exercised by federal, state and local regulatory agencies can increase costs, establish maximum reimbursement levels and limit expansion.  Our Company and the healthcare industry are subject to rapid regulatory change with respect to licensure and conduct of operations at existing facilities,
construction of new facilities, acquisition of existing facilities, the addition of new services, compliance with physical plant safety and land use requirements, implementation of certain capital expenditures, reimbursement for services rendered and periodic government inspections.  Governmental budgetary restrictions have resulted in limited reimbursement rates in the healthcare industry including our Company.  As a result of these restrictions we cannot be certain that payments under government
programs will remain at a level comparable to the present level or be sufficient to cover the costs allocable to such patients.  In addition, many states, including the State of Michigan where the majority of our Medicaid Revenue is generated, are experiencing financial difficulties as a result of the recession and are considering reductions in state Medicaid budgets, which may be reflected through more limited access, lower rates, and higher State imposed utilization assessment fees.


SOLE SOURCE CONTRACTING BY MANAGED CARE ORGANIZATIONS MAY REDUCE OUR AVAILABLE PATIENTS BY ELIMINATING OUR ABILITY TO SERVICE THEM





Insurance companies and managed care organizations are entering into sole source contracts with healthcare providers, which could limit our ability to obtain patients.Private insurers, managed care organizations and, to a lesser extent, Medicaid and Medicare, are beginning to
carve-out specific services, including mental health and substance abuse services, and establish small, specialized networks of providers for such services at fixed reimbursement rates.  Continued growth in the use of carve-out systems could materially adversely affect our business to the extent we are not selected to participate in such smaller specialized networks or if the reimbursement rate is not adequate to cover the cost of providing the service.








ACQUISITION AND EXPANSION COULD RESULT IN NEGATIVE CASH FLOW WHICH COULD REQUIRE THE COMPANY TO BORROW ADDITIONAL FUNDS AT UNFAVORABLE RATES AND AFFECT OUR NET INCOME





If we acquire new businesses or expand our businesses, the operating costs may be far greater than revenues for a significant period of time.The operating losses and negative cash flow associated with start-up operations or acquisitions could have a material adverse effect on our
profitability and liquidity unless and until such facilities are fully integrated with our other operations and become self sufficient.  Until such time we may be required to borrow at higher rates and less favorable terms to supplement short term operating cash flow shortages.




MANAGEMENT RISKS





CONTROL OF THE COMPANY PROVIDES THE PRINCIPAL SHAREHOLDER WITH THE POWER TO APPROVE ALL TRANSACTIONS AND CONTROL THE BOARD OF DIRECTORS WITHOUT INPUT OF OTHER SHAREHOLDERS





Bruce A. Shear is in control of the Company since he is entitled to elect and replace a majority of the board of directors.Bruce Shear and his affiliates own and control 93.1% of the Class B Common Stock, which elects three of the five members of the Board of Directors.  Bruce
Shear can establish, maintain and control business policy and decisions by virtue of his control of the election of the majority of the members of the board of directors.




INABILITY TO RETAIN KEY PERSONNEL COULD AFFECT OUR CLIENT RELATIONS AND THUS REDUCE OUR REVENUE AND NET INCOME





Retention of key personnel with knowledge of key contracts and clients is essential to the success of the Company.  PHC is highly dependent on the principal members of its management and professional staff, who are: Bruce A. Shear, PHC’s President and Chief Executive Officer, Robert H. Boswell, PHC’s Senior Vice President
and other members of PHC’s management.





21


We do not anticipate any key member of management will leave the Company but do have a key man life insurance policy on Mr. Shear.





MARKET RISKS





THE COMPANY EXPECTS ITS STOCK PRICE TO BE VOLATILE








The market price of the Company’s common stock has been volatile in the past.  The shares have sold at prices varying between a low of $0.42 and a high of $3.25 from July 2007 through June 2009.  Trading prices may continue to fluctuate in response to a number of events and factors, including the following:





·
quarterly variations in operating results;


·
new products services and strategic developments by us or our competitors





·
developments in our relationships with our key clients;





·
regulatory developments; and





·
changes in our revenues, expense levels or profitability.








PREFERRED STOCK ISSUANCE COULD RESULT IN DIVIDEND, VOTING AND LIQUIDATION PREFERENCES SUPERIOR TO THE COMMON STOCK





Our right to issue convertible preferred stock may adversely affect the rights of the common stock.  Our Board of Directors has the right to establish the preferences for and issue up to 1,000,000 shares of preferred stock without further stockholder action. The terms of any series of preferred stock, which may include priority
claims to assets and dividends and special voting rights, could adversely affect the market price of and the ability to sell common stock.





Item 1B. UNRESOLVED STAFF COMMENTS





None.





Item 2.   DESCRIPTION OF PROPERTY





Executive Offices





The Company’s executive offices are located in Peabody, Massachusetts.  The Company’s lease agreement in Peabody covers approximately 4,800 square feet for a 60-month term, which expires September 16, 2014. The current annual payment under the lease is $93,000.  The Company believes that this facility will
be adequate to satisfy its needs for the foreseeable future.  The Company’s behavioral health administrative services segment uses this property.




Highland Ridge Hospital





The Highland Ridge premises consist of approximately 24,000 square feet of space occupying the majority of the first floor of a two-story hospital owned by Valley Mental Health and located in Midvale, Utah.  The lease is for a five-year term expiring June 30, 2012, which provides for monthly rental payments of approximately $33,000.
Changes in rental payments each year are based on increases or decreases in the Consumer Price Index.  The Company believes that these premises are adequate for its current and anticipated needs and does not anticipate any difficulty in renewing or securing alternate space on expiration of the lease.  The Company’s behavioral health treatment services segment and contract services segment use this property.








22
 Mount Regis Center





The Company owns the Mount Regis facility, which consists of a three-story building located on an approximately two-acre site in Salem, Virginia.  The building consists of over 14,000 square feet and is subject to a mortgage in the approximate amount of $196,000 as of June 30, 2009.  The facility is used for both inpatient
and outpatient services.  The Company believes that these premises are adequate for its current and anticipated needs.  The Company’s behavioral health treatment services segment uses this property.




Psychiatric Facilities





The Company owns or leases premises for each of its psychiatric facilities.  Detroit Behavioral Institute, Harmony Healthcare and North Point-Pioneer lease their premises.  The Company believes that each of these premises is leased at fair market value and could be replaced without significant
time or expense if necessary.  The Company believes that all of these premises are adequate for its current and anticipated needs.  The Company’s behavioral health treatment services segment and contract services segment uses this property.





Harbor Oaks Hospital





The Company owns the building in which Harbor Oaks operates, which is a single story brick and wood frame structure comprising approximately 32,000 square feet situated on an approximately three acre site.  The Company has a $935,000 mortgage on this property as of June 30, 2009.  The
Company believes that these premises are adequate for its current and anticipated needs.  The Company’s behavioral health treatment services segment uses this property.





Seven Hills Hospital





The Seven Hills premises is a two story steel and concrete block structure comprising approximately 26,500 square feet of space situated on an approximately one and a half acre site owned by Seven Hills Psych Center LLC and located in Las Vegas, Nevada.  The lease is for a ten-year term expiring April 30, 2018, which provides
for monthly rental payments of approximately $72,000. Changes in rental payments each year are based on increases in the Consumer Price Index.  The Company believes that these premises are adequate for its current and anticipated needs and does not anticipate any difficulty in renewing or securing alternate space on expiration of the lease.  The Company’s behavioral health treatment services segment use this property.





Item 3.                      LEGAL PROCEEDINGS.





The Company is subject to various claims and legal action that arise in the ordinary course of business.  In the opinion of management, the Company is not currently a party to any proceeding that would have a material adverse effect on its financial condition or results of operations.





Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended June 30, 2009.








23


PART II





Item 5.     MARKET FOR REGISTRANT’S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Our Class A Common Stock has been listed on the American Stock Exchange since February 2007 under the symbol “PHC”.  Prior to that date it was quoted on the Over-the-Counter Bulletin Board under the symbol “PIHC-BB.”  The following table sets forth the high and low sales price of the Company's
Class A Common Stock, as reported.





HIGH


LOW2008First Quarter (July 1, 2007 – September 30, 2007)

$
3.25


$
2.50Second Quarter (October 1, 2007 – December 31, 2007)

$
3.10


$
2.50Third Quarter (January 1, 2008 – March 31, 2008)

$
3.00


$
2.13Fourth Quarter (April 1, 2008 – June 30, 2008)

$
3.20


$
2.202009First Quarter (July 1, 2008 – September 30, 2008)

$
2.60


$
1.55Second Quarter (October 1, 2008 – December 31, 2008)

$
2.50


$
0.65Third Quarter (January 1, 2009 – March 31, 2009)

$
1.31


$
0.42Fourth Quarter (April 1, 2009 – June 30, 2009)

$
2.47


$
0.70





On August 1, 2009, there were 676 holders of record of the Company's Class A Common Stock and 298 holders of record of the Company's Class B Common Stock.  During fiscal 2009, the Company repurchased 409,784 shares of its equity securities that were registered under Section 12 of the Securities Act.








During the fourth quarter the Company purchased equity securities on the open market as follows:





Period

(a)
Total Number of Shares Purchased

(b)
Average Price Paid per ShareApril 1, 2009 – April 30, 2009May 1, 2009 – May 31, 2009

75,552

1.11June 1, 2009 – June 30, 2009

--

--





DIVIDEND POLICY





Although the Company has no current restrictions on the issuance of dividends, the Company has never paid any cash dividends on its common stock.  The Company anticipates that, in the future, earnings will be retained for use in the business or for other corporate purposes, and it is not anticipated that cash dividends in respect
to common stock will be paid in the foreseeable future.  Any decision as to the future payment of dividends will depend on the results of operations, the financial position of the Company and such other factors, as the Company’s board of directors, in its discretion, deems relevant.










24


SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





Information required with respect to “Securities Authorized for Issuance Under Equity Compensation Plans” is included in Part III, Item 12 in this Annual Report on Form 10-K.





MARKET RISKS





The market price of the Company’s common stock has been volatile in the past.  The shares have sold at prices varying between a low of $0.42 and a high of $3.25 from July 2007 through June 2009.  Trading prices may continue to fluctuate in response general market conditions and changes in the Company’s results
of operations from quarter to quarter.  The Company did not issue any unregistered shares during the fiscal year ended June 30, 2009.





Our right to issue convertible preferred stock may adversely affect the rights of the common stock.  Our Board of Directors has the right to establish the preferences for and issue up to 1,000,000 shares of preferred stock without further stockholder action. The terms of any series of preferred stock, which may include priority
claims to assets and dividends and special voting rights, could adversely affect the market price of and the ability to sell common stock.  During the twelve month period ended June 30, 2009, the Company did not issue any preferred stock.





STOCK PERFORMANCE GRAPH





The following table depicts the cumulative total return on the Company's common stock compared to the cumulative total return for the Nasdaq Composite-US Index and the Nasdaq Health Services Index (which includes both U.S. and foreign companies). The table assumes the investment of $100 on June 30, 2004 in stock and index-including reinvestment
of dividends.  Fiscal year ending June 30.











25
 Item 6.  SELECTED FINANCIAL DATA





The following table sets forth selected consolidated financial data of our Company.  The selected consolidated financial data as of June 30, 2009 and 2008 and for each of the two years in the period ended June 30, 2009 should be read with the "Management's Discussion and Analysis of Financial Condition and Results of Operations"
and have been derived from our consolidated financial statements which are included elsewhere in this annual report on Form 10-K and were audited by BDO Seidman, LLP, an independent registered public accounting firm, as of and for the two years ended June 30, 2009.  The selected consolidated financial data as of and for the year ended June 30, 2007, 2006 and 2005 have been derived from our consolidated financial statements not included herein. The consolidated financial statements for the year ended
June 30, 2007 were audited by Eisner LLP, also an independent registered public accounting firm, and the consolidated financial statements for the years ended June 30, 2006 and 2005 were audited by BDO Seidman, LLP.  All information has been adjusted to reflect the elimination of Pivotal Research Centers in February 2009 in order to present comparative information.





The historical results are not necessarily indicative of the results to be expected for any future period.





PHC, Inc.


Selected Financial Data


As of and for the Years Ended June 30,


2009
2008
2007
2006
2005


(in thousands, except share and per share data)


Statements of Operations Data:Revenues

$
46,411


$
45,397


$
40,563


$
32,213


$
29,554Cost and Expenses:Patient care expenses


23,835



22,133



19,738



14,270



12,906Contract expenses


3,016



3,390



3,103



2,676



2,198Administrative expenses


18,721



15,465



12,722



11,210



9,667Provision for doubtful accounts


1,638



1,311



1,933



1,913



1,272Interest expense


452



397



476



539



589Other (income) expenses including interest income, net


(275
)


(249
)


(468
)


(158
)


150
)Total expenses


47,387



42,447



37,504



30,450



26,482Income (loss) before income taxes


(976
)


2,950



3,059



1,763



3,072Provision for (benefit from) income taxes


65



1,366



1,144



(1,314
)


(74
)Net income (loss) from continuing operations


(1,041
)


2,449



1,915



3,077



3,146Net income (loss) from discontinued operations


(1,413
)


(1,259
)


(233
)


968



10Net income (loss) applicable to common shareholders

$
(2,454
)

$
325


$
1,682


$
4,045


$
3,156Basic income (loss) per common share

$
(0.12
)

$
0.02


$
0.09


$
0.22


$
0.18Basic weighted average number of shares outstanding


20,090,521



20,166,659



19,287,665



18,213,901



17,574,678Diluted income (loss) per common share

$
(0.12
)

$
0.02


$
0.09


$
0.21


$
0.17Diluted weighted average number of shares outstanding


20,090,521



20,464,255



19,704,697



19,105,193



18,364,076





26


2009


2008


2007


2006


2005Balance Sheet Data:Cash and cash equivalents

$
3,199


$
3,142


$
3,308


$
1,760


$
879Working capital


5,732



10,095



11,606



10,776



7,191Long-term debt and obligations under capital leases including current portions


1,377



1,444



1,047



1,153



1,483Total stockholders’ equity


16,044



18,659



18,250



13,455



9,102Total assets


22,692



26,507



26,856



21,949



18,115







27


Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE


SECURITIES LITIGATION REFORM ACT OF 1995.





In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act") and are
subject to the Safe Harbor provisions created by the statute. Generally words such as "may", "will", "should", "could", "anticipate", "expect", "intend", "estimate", "plan", "continue", and "believe" or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events
or otherwise.  Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements.





The following is a discussion and analysis of the financial condition and results of operations of the Company for the years ended June 30, 2009 and 2008.  It should be read in conjunction with the operating statistics (Part I, Item 1) and selected financial data (Part II, Item 6) and the accompanying consolidated financial statements
and related notes thereto included in this Annual Report on Form 10-K.





Overview





The Company presently provides behavioral health care services through two substance abuse treatment centers, two psychiatric hospitals, a residential treatment facility and eight outpatient psychiatric centers  (collectively called "treatment facilities").  The Company’s revenue for providing behavioral health
services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients.  The profitability of the Company is largely dependent on the level of patient census and the payer mix at these treatment facilities.  Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics.  Payor
mix is determined by the source of payment to be received for each client being provided billable services.  The Company’s administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases.  Until February 2009, the Company operated a research division, Pivotal Research Centers, Inc.  The results of operations for this division are shown as discontinued operations on the accompanying financial statements.  During
the third quarter of fiscal 2009, the Company returned to profitability, which continued in the fourth quarter of the year with census at Seven Hills progressively increasing and the Capstone facility full.





The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement.   In addition, there are on-going debates and initiatives regarding the restructuring
of the health care system in its entirety.  The extent of any regulatory changes and their impact on the Company’s business is unknown.  The previous administration put forth proposals to mandate equality in the benefits available to those individuals suffering from mental illness (The Parity Act).  This Act is now law and the target date for full implementation is January 1, 2010. This legislation will improve access to the Company’s programs but its total effect on
behavioral health providers has not yet been assessed.  Managed care has had a profound impact on the Company's operations, in the form of shorter lengths of stay, extensive certification of benefits requirements and, in some cases, reduced payment for services.





Critical Accounting Policies





The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates
and assumptions, including but not limited to those related to revenue recognition, accounts receivable reserves, income tax valuation allowances, and the impairment of goodwill and other intangible assets. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.





28


Revenue recognition and accounts receivable:





Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare.  Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due
to periodic changes in the regulatory environment.  Provisions for estimated third party payor settlements are provided in the period the related services are rendered.  Differences between the amounts provided and subsequent settlements are recorded in operations in the period of settlement.  Amounts due as a result of cost report settlements are recorded and listed separately on the consolidated balance sheets as “Other receivables” or “Other payables”.  The
provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable.  The allowance for doubtful accounts does not include the contractual allowances.




The Company currently has two “at-risk” contracts.  The contracts call for the Company to provide for all of the inpatient and outpatient behavioral health needs of the insurance carrier’s enrollees in a specified area for a fixed monthly fee per member per month.  Revenues
are recorded monthly based on this formula and the expenses related to providing the services under these contracts are recorded as incurred.  The Company provides as much of the care directly and, through utilization review, monitors closely, all inpatient and outpatient services not provided directly.  The contracts are considered “at-risk” because the cost of providing the services, including payments to third-party providers for services rendered, could equal or exceed the
total amount of the revenue recorded.





All revenues reported by the Company are shown net of estimated contractual adjustment and charity care provided.  When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA “Audit
and Accounting Guide for Health Care Organizations.”  Net contractual adjustments recorded in fiscal 2009 for revenue booked in prior years resulted in an increase in net revenue of approximately $59,200.  Net contractual adjustments recorded in fiscal 2008 for revenue booked in prior years resulted in an increase in net revenue of approximately $48,500.





During the fiscal year ended June 30, 2008, a Medicare cost report settlement of $360,588 was received. For the fiscal year ended June 30, 2009 no third party cost report settlements were expected, however, the Company sent a required Medicare settlement payment of approximately $170,000 based on desk review of the 2008 cost report.  This
settlement, although paid, is currently on appeal and is expected to be recouped; therefore, no settlement expense was recorded.





Below is revenue by payor and the accounts receivable aging information as of June 30, 2009 and June 30, 2008 for our treatment services segment.





Net Patient Care Revenue by Payor (in thousands)


For the Twelve Months Ended


June 30, 2009
June 30, 2008





Amount


Percent


Amount


PercentPrivate Pay

$
2,224



5
%

$
1,893



5
%Commercial


29,553



70
%


27,229



66
%Medicare*


1,027



2
%


1,263



3
%Medicaid


9,796



23
%


10,471



26
%Net Revenue

$
42,600






$
40,856





*includes Medicare cost report settlement revenue as noted above





29


Accounts Receivable Aging (Net of allowance for bad debts - in thousands)





June 30, 2009


Payor

Current


Over 30


Over 60


Over 90


Over 120


Over 150


Over 270


Over 360


TotalPrivate Pay

$
102


$
123


$
114


$
139


$
139


$
283


$
45


$
214


$
1,159Commercial


2,161



981



226



181



70



111



4



41



3,775Medicare


49



--



5



--



2



--



--



--



56Medicaid


1,110



157



26



32



16



18



--



2



1,361Total

$
3,422


$
1,261


$
371


$
352


$
227


$
412


$
49


$
257


$
6,351





June 30, 2008


Payor

Current


Over 30


Over 60


Over 90


Over 120


Over 150


Over 270


Over 360


TotalPrivate Pay

$
544


$
72


$
45


$
58


$
56


$
235


$
107


$
263


$
1,380Commercial


1,382



985



746



194



228



183



10



60



3,788Medicare


38



-



-



1



--



--



--



--



39Medicaid


1,140



98



5



-



--



25



--



--



1,268Total

$
3,104


$
1,155


$
796


$
253


$
284


$
443


$
117


$
323


$
6,475





Contract support service revenue is a result of fixed fee contracts to provide telephone support.  Revenue for these services is recognized ratably over the service period.  All revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually
paid within 30 days of the end of the month.





Allowance for doubtful accounts:





The provision for bad debts is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 360 days outstanding, at which time the provision is 80-100% of the outstanding
balance.  These percentages vary by facility based on each facility’s experience in and expectations for collecting older receivables which is reviewed at least quarterly and adjusted if required.  The Company compares this required reserve amount to the current “Allowance for doubtful accounts” to determine the required bad debt expense for the period.  This method of determining the required “Allowance for doubtful accounts” has historically resulted
in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance which the Company believes to be a reasonable valuatiuon of its accounts receivable.




Income Taxes:





The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, “Accounting for Income Taxes”.  SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of the assets and liabilities.  The Company’s policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods.   During fiscal 2008 the Company recorded a provision for tax expense of $1,365,723excluding discontinued operations and during fiscal 2009 the Company recorded a tax expense from continuing operations of $65,764.





30


On July 1, 2007 the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109”.  In accordance with FIN 48, we may establish reserves for tax uncertainties that reflect
the use of the comprehensive model for the recognition and measurement of uncertain tax positions.  Tax authorities periodically challenge certain transactions and deductions reported on our income tax returns.  We do not expect the outcome of these examinations, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations, or cash flows.


31





32


Valuation of Goodwill and Other Intangible Assets:





Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions.  The Company makes significant estimates and assumptions, which are derived from information obtained from the management of the acquired businesses and the Company’s business plans for the acquired businesses
in determining the value ascribed to the assets acquired.  Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to:  (i) future expected cash flows from services to be provided, customer contracts and relationships, and (ii) the acquired market position.  These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur.  If estimates and
assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment.





Investment in unconsolidated subsidiaries:





Included in other assets as of June 30, 2009 and 2008 is the Company’s investment in Seven Hills Psych Center, LLC of $354,428 and $399,735, respectively.  This LLC holds the assets of the Seven Hills Hospital completed in May, 2008, being leased and operated by the Company’s subsidiary Seven Hills Hospital, Inc.  Also
included, as of June 30, 2009 and 2008, is the Company’s investment in Behavioral Health Partners, LLC of $698,869 and $700,000, respectively.  This LLC constructed an outpatient clinic which was completed in the fourth fiscal quarter of 2009 and occupied as a fourth site to the Company’s Harmony subsidiary on July 1, 2009.  Both investments are accounted for based on the equity method of accounting.  Accordingly, the Company records its share of the investment companies' income/loss
as an increase/decrease to the carrying value of these investments.





Results of Operations





During the fiscal year ended June 30, 2009 the Company experienced continued increases in the patient treatment revenue, which was offset by the start up of our Seven Hills Hospital operation which opened in May 2008.  We also experienced a decrease in Contract Services revenue with the expiration of the smoking cessation contract.





The following table illustrates our consolidated results of operations for the years ended June 30, 2009 and 2008 (in thousands):





2009


2008Statements of Operations Data:

($ in thousands)Amount


%


Amount


%Revenues

$
46,411



100.0
%

$
45,397



100.0
%Cost and Expenses:Patient care expenses


23,835



51.4
%


22,133



48.7
%Contract expenses


3,016



6.5
%


3,390



7.5
%Administrative expenses


18,721



40.3
%


15,465



34.0
%Provision for doubtful accounts


1,638



3.5
%


1,311



2.9
%Interest expense


452



1.0
%


397



0.9
%Other (income) expenses including interest income, net


(275
)


(0.6
)%


(249
)


(0.5
)%Total expenses


47,387



102.1
%


42,447



93.5
%Income (loss) before income taxes


(976
)


(2.1
)%


2,950



6.5
%Provision for (benefit from) income taxes


(66
)


(0.1
)%


1,366



3.0
%Net income (loss) from continuing operations


(1,041
)


(2.2
)%


1,585



3.5
%Net income (loss) from discontinued operations


(1,413
)


(3.0)
%


(1,260
)


(2.8)
%Net income (loss) applicable to common shareholders

$
(2,454
)


(5.3)
%

$
325



0.7
%








33


Year ended June 30, 2009 as compared to year ended June 30, 2008





The Company returned to profitability during the third quarter of fiscal 2009 with steady increases in census and revenue at our two start up operations Seven Hills Hospital in Las Vegas and Capstone Academy in Michigan.  Fourth quarter results continued to improve significantly over the third quarter indicating that these businesses
are beginning to mature.  The Company’s income from continuing operations decreased to a loss of $1,067,899 for the fiscal year ended June 30, 2009 from income of $2,448,979 for the fiscal year ended June 30, 2008.  Net income decreased to a net loss of $2,454,008 for the fiscal year ended June 30, 2009 compared to net income of $324,728 for the fiscal year ended June 30, 2008.  Income from continuing operations before taxes decreased to a loss of $975,611 for the fiscal year
ended June 30, 2009 from $2,950,330 for the fiscal year ended June 30, 2008.  This decrease is primarily the result of the slow start up of Seven Hills Hospital, the relocation of the Detroit Behavioral Institute and as a result of deteriorating general economic conditions at the beginning of the fiscal year.  General economic conditions also resulted in very high utilization of services under our capitated contracts resulting in higher than anticipated costs under the contracts.  New
rates under these contracts were negotiated and implemented in the third quarter of the fiscal year as utilization continued to be higher than anticipated.





Total revenues increased 2.2% to $46,411,019 for the year ended June 30, 2009 from $45,397,337 for the year ended June 30, 2008.





Total net patient care revenue from all facilities increased 4.3% to $42,599,963 for the year ended June 30, 2009 as compared to $40,856,077 for the year ended June 30, 2008.  Patient days increased 1,591 days for the fiscal year ending June 30, 2009 over the fiscal year ended June 30, 2008, which includes 5,180 bed days provided
by Seven Hills Hospital for clients covered under the Harmony capitated contracts, which is recorded as intercompany revenue and eliminated in consolidation.  In fiscal 2009 the Company added residential beds at Detroit Behavioral Institute, increasing the total number of licensed beds at our facilities from 244 to 260.  These additional available beds accounted for the increase in patient days for the fiscal year ended June 30, 2009.  The contracted rate for the residential beds
is lower than that of our other facilities, which negatively impacts our revenue per patient day without positive changes in our census and payor mix at our other facilities.  Net inpatient care revenue from inpatient psychiatric services increased 5.9% to $23,634,602 for the year ended June 30, 2009 from $22,327,159 the fiscal year ended June 30, 2008.  This increase is due to a change in payor mix to payors with more favorable approved rates and from the increase in residential treatment
beds.  Net partial hospitalization and outpatient care revenue increased 2.4% to $18,965,362 for the year ended June 30, 2009 from $18,528,918 for the year ended June 30, 2008.  This increase is primarily due to a more favorable payor mix.  Managed care continues to utilize these step-down programs as a treatment alternative to inpatient care.  Wellplace revenues decreased 16.1% to $3,811,056 for the year ended June 30, 2009 from $4,541,260 for the year ended June 30, 2008
due to the expiration of the smoking cessation contract.  All revenues reported in the accompanying consolidated statements of operations are shown net of estimated contractual adjustments and charity care provided.  When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA Audit and Accounting Guide for Health Care Organizations.





34
 Patient care expenses increased by $1,701,641, or 7.7%, to $23,834,841 for the year ended June 30, 2009 from $22,133,200 for the year ended June 30, 2008 due to the increase in available beds contributing to the increase in patient census at our inpatient facilities and increased utilization under our capitated contracts.  Inpatient census
increased by 1,591 patient days, 2.8%, for the year ended June 30, 2009 compared to the year ended June 30, 2008.  Contract expense, which includes the cost of outside service providers for our capitated contracts, increased  43.5% to $4,723,122 for the year ended June 30, 2009 from $3,291,891 for the year ended June 30, 2008 due to high utilization under the capitated contracts.  Payroll and service related consulting expenses, including agency nursing, increased 13.7% to $18,946,118
for the year ended June 30, 2009 from $16,656,560 for the year ended June 30, 2008.  Food and dietary expense increased 11.5% to $954,654 for the year ended June 30, 2009 from $856,114 for the year ended June 30, 2008.  Hospital supplies expense increased 15.0% to $94,707 for the year ended June 30, 2009 from $82,363 for the year ended June 30, 2008.  Housekeeping expense increased 43.4% to $137,649 for the year ended June 30, 2009 from $96,019 for the year ended June 30, 2008.  Lab
fees increased 5.3% to $268,373 for the year ended June 30, 2009 from $254,965 for the year ended June 30, 2008.  Laundry expense increased 19.9% to $114,461 for the year ended June 30, 2009 from $95,434 for the year ended June 30, 2008.  Pharmacy expense increased 36.1% to $881,778 for the year ended June 30, 2009 from $647,952 for the year ended June 30, 2008.  Other patient related expenses increased 45.2% to $156,718 for the year ended June 30, 2009 from $107,918 for the year
ended June 30, 2008.  All of these increases were a result of increased patient census and the inclusion of a full twelve months of operations for our Seven Hills Hospital and six months of operations of our new site at Detroit Capstone Academy.   We continue to closely monitor the ordering of all hospital supplies, food and pharmaceutical supplies, but these expenses all relate directly to the number of days of inpatient services we provide and are expected to increase with higher patient
census and outpatient visits. (see “Operating Statistics” Part I, Item 1).





Cost of contract support services related to Wellplace decreased 11.0% to $3,015,782 for the year ended June 30, 2009 from $3,390,224 for the year ended June 30, 2008.  Payroll expense decreased 20.7% to $1,059,178 for the year ended June 30, 2009 from $1,334,954 for the year ended June 30, 2008.  Maintenance decreased
39.8% to $74,788 for the fiscal year ended June 30, 2009 from $124,200 for the year ended June 30, 2008.  Office expense decreased 46.9% to $24,040 for the year ended June 30, 2009 from $45,303 for the year ended June 30, 2008.  All of these decreases in expense are a result in the expiration of the smoking cessation contract mentioned above.  Postage expense increased 35.18% to $23,220 for the year ended June 30, 2009 from $17,177 for the year ended June 30 2008 as mailing requirements
for the Wayne County contract continued to increase.





Provision for doubtful accounts increased 24.9% to $1,637,738 for the fiscal year ended June 30, 2009 from $1,311,431 for the fiscal year ended June 30, 2008.  This increase is a result of increases in the age of accounts resulting from the new Seven Hills Hospital.  The policy of the Company is to provide an allowance
for doubtful accounts based on the age of receivables resulting in higher bad debt expense as receivables age.  The goal of the Company, given this policy, is to keep any changes in the provision for doubtful accounts at a rate lower than changes in aged accounts receivable





The environment the Company operates in today makes collection of receivables, particularly older receivables, more difficult than in previous years.  Accordingly, the Company has increased staff, standardized some procedures for collecting receivables and instituted a more aggressive collection policy, which has for the most
part resulted in an overall decrease in the age of its accounts receivable.    The Company’s gross receivables from direct patient care increased 0.9% to $8,781,311 for the year ended June 30, 2009 from $8,705,104 for the year ended June 30, 2008.  The Company believes its reserve of approximately 28% is sufficient based on the age of the receivables.  We continue to reserve for bad debt based on managed care denials and past difficulty in collections.  The
growth of managed care has negatively impacted reimbursement for behavioral health services with higher contractual adjustments and a higher rate of denials requiring higher reserves.




Total administrative expenses increased 21.1% to $18,721,491 for the year ended June 30, 2009 from $15,464,544 for the year ended June 30, 2008.  Payroll and consultant expense increased 7.6% to $6,760,875 for the year ended June 30, 2009 from $6,285,678 for the year ended June 30, 2008.  Payroll tax expense increased
12.1% to $467,287 for the year ended June 30, 2009 from $417,023 for the year ended June 30, 2008.  Employee benefits increased 20.7% to $951,413 for the year ended June 30, 2009 from $788,309 for the year ended June 30, 2008.  All of these increases in payroll and employee related expenses are a result of an increase in staff to facilitate the opening of our new facility, Seven Hills Hospital, expansion of the Detroit Behavioral Institute and greater competition for experienced health care
administrative staff.  Rent expense increased 96.1% to $3,687,305 for the year ended June 30, 2009 from $1,879,896 for the year ended June 30, 2008.  This increase is due to the opening of Seven Hills Hospital in Las Vegas, the opening of the new Detroit Behavioral Institute site, the start of the lease on the new Harmony location at Post Road which officially opened July 1, 2009 and normal CPI increases included in our property leases.  Depreciation expense increased 40.9% to $956,703
for the year ended June 30, 2009 from $679,214 for the year ended June 30, 2008 due to the new equipment purchased related to new operations mentioned above.  Utilities increased 72.8% to $364,284 for the year ended June 30, 2009 from $210,834 for the year ended June 30, 2008, due to the opening of Seven Hills in May of 2008 and the change in location of Detroit Behavioral Institute to Capstone Academy in January 2009.





35


Interest expense increased 14.0% to $452,207 for the year ended June 30, 2009 from $396,630 for the year ended June 30, 2008.  This increase is primarily due to a temporary cash shortage experienced during the third quarter of the fiscal year prior to the sale of the research division.  The need to access short term
capital in today’s fiscal environment carried with it high origination fees and high interest expense.





The Company recorded a tax expense on continuing operations of $65,764 on a loss of approximately $975,000.  The provision is primarily the results of state income taxes generated in locations where the Company generated income.





Liquidity and Capital Resources





As of June 30, 2009, the Company had working capital of $5,731,802, including cash and cash equivalents of $3,199,344, compared to working capital of $10,095,282, including cash and cash equivalents of $3,142,226 and $5,313,993 in assets held for sale at June 30, 2008.





Cash used in operating activities was $507,805 for the year ended June 30, 2009, compared to cash provided by operations of $5,171,596 for the year ended June 30, 2008.  Cash flow used in operations in fiscal 2009 consists of net loss of $1,041,375 offset by non-cash activity including depreciation and amortization of $1,233,646,
non-cash interest expense of $150,027, non-cash share based charges of $211,462, provision for doubtful accounts of $1,637,738 offset by a gain on unconsolidated subsidiaries, a non-cash increase in deferred tax asset, an increase in accounts receivable of $1,719,131, and an increase in other assets of $447,776  offset by a decrease in prepaid expenses of $49,558, a decrease in prepaid income taxes of $235,493, an increase in accounts payable of $57,015 and an increase in accrued expenses and other
liabilities of $68,515 and net cash provided by discontinued operations of $376,904.





Cash provided by investing activities in fiscal 2009 consisted of $53,340 in distributions from the equity investments in unconsolidated subsidiaries, $3,000,000 in proceeds from the sale of the research division assets and $32,188 used in investing activities of discontinued operations, net of $1,306,316 used for capital
expenditures for the acquisition of property and equipment.





Cash used in financing activities in fiscal 2009 consisted of $181,250 in net debt repayments, $606,841 used in the repurchase of 409,784 shares of the Company’s Class A common stock and the payment of $15,000 in deferred financing cost, offset by $34,705 received from the issuance of stock as a result of the exercise of options
and the issuance of shares under the employee stock purchase plan and $381,527 used in discontinued operations for financing activities.





A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of June 30, 2009 accounts receivable from patient care, net of allowance for doubtful accounts, decreased approximately 1.9% to $6,350,693 from $6,474,733 on June 30, 2008.  This decrease is due to the faster
turnaround of receivables related to a new capitated contract.  The Company’s goal is to reduce receivables or to have any increases result from higher revenues.  Better accounts receivable management due to increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy has made this possible in behavioral health, which is typically a difficult collection environment.  Increased staff has allowed the Company to concentrate
on current accounts receivable and resolve any problem issues before they become uncollectible.  The Company’s collection policy calls for early contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process.  The Company’s collectors will also seek assistance through every legal means, including the State Insurance Commissioner’s office,
when appropriate, to collect claims.  At the same time, the Company continues to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections.





36











Contractual Obligations





The Company’s future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of June 30, 2009 are as follows (in thousands):





YEAR ENDING June 30

TERM NOTES


CAPITAL LEASES


OPERATING LEASES


TOTAL*Principal


Interest


Principal


Interest


Payments2010

$
653


$
16


$
104


$
19


$
3,351


$
4,1432011


381



12



113



9



3,021



3,5362012


50



8



19



--



3,019



3,0962013


57



1



--



--



2,599



2,6572014


--



--



--



--



2,497



2,497Thereafter


--



--



--



--



9,600



9,600Total

$
1,141


$
37


$
236


$
28


$
24,087


$
25,529





* Total does not include the amount due under the revolving credit note of $863,404.  This amount represents accounts receivable funding as described below and is shown as current note payable in the accompanying financial statements.





In October 2004, the Company entered into a revolving credit, term loan and security agreement with CapitalSource Finance, LLC to replace the Company’s primary lender and provide additional liquidity.  Each of the Company’s material subsidiaries is a co-borrower under the agreement. This agreement was amended on June
13, 2007 to increase the amount available under the term loan, extend the term, decrease the interest rates and modify the covenants based on the Company’s current financial position.  The agreement now includes a term loan in the amount of $3,000,000, with a balance of $935,000 at June 30, 2009, and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000 and a current balance of $863,404.  In conjunction with this refinancing the Company paid
$32,500 in commitment fees and approximately $53,000 in legal fees and issued a warrant to purchase 250,000 shares of Class A Common Stock at $3.09 per share valued at $456,880.  The relative fair value of the warrants was recorded as deferred financing costs and is being amortized over the period of the loan as additional interest.





The term loan note carries interest at prime plus .75%, but not less than 6.25%, with twelve monthly reductions in available credit of $50,000 beginning July 1, 2007 and increasing to $62,500 on July 1, 2009 until the expiration of the loan.   As of June 30, 2009 the Company had $865,000 available under the term loan.





37


The revolving credit note carries interest at prime (3.25% at June 30, 2009) plus 0.25%, but not less than 4.75% paid through lockbox payments of third party accounts receivable.  The revolving credit term is three years, renewable for two additional one-year terms.  The balance on the revolving credit agreement as
of June 30, 2009 was $863,404.  For additional information regarding this transaction, see the Company’s current report on form 8-K filed with the Securities and Exchange Commission on October 22, 2004.  The balance outstanding as of June 30, 2009 for the revolving credit note is not included in the above table.  The average interest rate paid on the revolving credit loan, which includes the amortization of deferred financing costs related to the financing of the debt, was
7.56%.





This agreement was amended on June 13, 2007 to modify the terms of the agreement.  Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable.   The amended term of the agreement is for two years, automatically
renewable for two additional one year terms.  Upon expiration, all remaining principal and interest are due.  The revolving credit note is collateralized by substantially all of the assets of the Company’s subsidiaries and guaranteed by PHC.  Availability under this agreement is based on eligible accounts receivable and fluctuates with the accounts receivable balance and aging.





On February 5, 2009, the Company signed the first amendment to the amended and restated revolving credit term loan and security agreement as outlined above, to increase availability under its revolving credit line for six months or until the Pivotal sale was complete (the “overline”).  The interest rate on the overline was Prime plus 3.25% with an origination
fee of $25,000.  In addition to increasing the availability for borrowing as noted above, it provided for additional availability of $200,000 as part of this short-term borrowing.  This overline was paid in full from operations prior to the closing of Pivotal.





In addition to the above overline, during the quarter ended March 31, 2009, the Company’s Board of Directors voted by unanimous written consent to allow short-term borrowing from related parties up to a maximum of $500,000, with an annual interest rate of 12% and a 2% origination fee.  The Company utilized this funding
during the March 31, 2009 quarter for a total of $275,000.  This amount was paid in full in March 2009.





The opening of Seven Hills Hospital and the ramping up of Capstone Academy had a material negative impact on the results of operations for the six months of the fiscal year ended June 30, 2009 as facilities are required to be fully operational and, in some cases units fully staffed in order to be considered for licensure and accreditation.  These
increased costs are reflected in our increased administrative and patient care expenses with minimal related increases in revenue for the first six months.  The start-up of these facilities, in addition to having a negative impact on operations, also has a negative impact on cash flow in the form of increased receivables as collections are subject to the usual delay in payment experienced in all health care receivables.  In anticipation of this negative cash flow, the Company expanded its
availability under its term loan in June 2007 to provide cash flow during the start-up phase.  Due to general economic conditions the effects of these start-up activities impacted our operations and cash flow longer than anticipated; however, with both start-ups fully operational at year end results of operations were significantly improved for the fourth quarter of fiscal 2009.




Off Balance Sheet Arrangements





The Company has no off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.





Aging of accounts receivable could result in our inability to collect receivables. As our accounts receivable age and become uncollectible our cash flow is negatively impacted.Our accounts receivable from patient accounts
(net of allowance for bad debts) were $6,350,693 at June 30, 2009 compared with $6,474,733 at June 30, 2008.  As we expand, we will be required to seek payment from a larger number of payors and the amount of accounts receivable will likely increase.  We have focused on better accounts receivable management through increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy in order to keep the change in receivables consistent with
the change in revenue.  We have also established a more aggressive reserve policy, allowing greater amounts of reserves as accounts age from the date of billing.  If the amount of receivables, which eventually become uncollectible, exceeds such reserves, we could be materially adversely affected.  The following chart represents our Accounts Receivable and Allowance for Doubtful Accounts at June 30, 2009 and 2008, respectively, and Bad Debt Expense for the years ended June 30, 2009
and 2008:





38


Accounts Receivable


Allowance for doubtful accounts


Bad Debt ExpenseJune 30, 2009

$
8,781,311


$
2,430,618


$
1,637,738June 30, 2008


8,705,104



2,230,371



1,311,431




The Company relies on contracts with more than ten clients to maintain patient census at its inpatient facilities and the loss of any of such contracts would impact our ability to meet our fixed costs.  We have entered into relationships with large employers, health care
institutions and labor unions to provide treatment for psychiatric disorders, chemical dependency and substance abuse in conjunction with employer-sponsored employee assistance programs.  The employees of such institutions may be referred to us for treatment, the cost of which is reimbursed on a per diem or per capita basis.  Approximately 25% of our total revenue is derived from these clients.  No one of these large employers, health care institutions or labor unions individually
accounts for 10% or more of our consolidated revenues, but the loss of any of these clients would require us to expend considerable effort to replace patient referrals and would result in revenue losses and attendant loss in income.





39


Recent accounting pronouncements:





Recently Issued Standards





In January 2008, FASB issued EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“EITF 03-6-1”). EITF 03-6-1 requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid
or unpaid) are participating securities and should be included in the two-class method of computing earnings per share. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008.  The Company does not expect the adoption of EITF 03-6-1 to have a material affect on the Company’s Consolidated Financial Statements.





In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“FAS 141”) and Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“FAS 160”). FAS No. 141 (revised 2007) requires an acquirer to measure the identifiable assets acquired,
the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies. FAS 141 (revised 2007) applies prospectively to business combinations and is effective for fiscal years beginning on or after December 15, 2008.





FAS 160 requires that a non-controlling interest in a subsidiary be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the non-controlling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings
per share will continue to be based on income amounts attributable to the parent. The presentation provisions of FAS 160 are to be applied retrospectively, and FAS 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of FAS 160 to have a material effect on the Company’s Consolidated Financial Statements.





In June 2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature)
is indexed to its own stock, including evaluating the instrument’s contingent exercise and the instruments settlement provisions. EITF 07-5 clarifies the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning after December 15, 2008.  The Company does not expect the adoption of EITF 07-5 to have a material effect on the Company’s Consolidated Financial Statements.





40





Recently Adopted Standards





In April 2009, the FASB issued Staff Position (“FSP”) No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 require that disclosures about the fair value of a company’s financial instruments be made whenever
summarized financial information for interim reporting periods is made. The provisions of FSP 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 did not have a material impact on our consolidated financial statements.




In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 does not change the definition of fair value as detailed in FAS 157,
but provides additional guidance for estimating fair value in accordance with FAS 157 when the volume and level of activity for the asset or liability have significantly decreased. The provisions of FSP 157-4 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on our consolidated financial statements.





In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FAS 124-2”). FSP 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities and provides
additional disclosure requirements for other-than-temporary impairments for debt and equity securities. FSP 115-2 and FAS 124-2 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The provisions of FSP 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP 115-2 and FAS 124-2 did not have a material impact on our consolidated financial
statements.





In May 2009, the FASB issued FASB Statement No. 165, “Subsequent Events” (“FAS 165”) effective for interim financial periods ending after June 15, 2009. FAS 165 establishes principles and requirements for subsequent events. FAS 165 defines the period after the balance sheet date during which events or transactions
that may occur would be required to be disclosed in a company’s financial statements. Public entities are required to evaluate subsequent events through the date that financial statements are issued. FAS 165 also provides guidelines in evaluating whether or not events or transactions occurring after the balance sheet date should be recognized in the financial statements.  FAS 165 requires disclosure of the date through which subsequent events have been evaluated.  We have evaluated
subsequent events through the date of issuance of this report September 28, 2009.




41


In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires disclosures of the fair values of derivative instruments and their gains and losses in a tabular format. FAS 161 requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of FAS 161 did not have a material impact on our consolidated financial statements.





Item 7A. Quantitative and Qualitative Disclosures About Market Risk





The market price of our common stock could be volatile and fluctuate significantly in response to various factors, including:





·
Differences in actual and estimated earnings and cash flows;·
Operating results differing from analysts’ estimates;


·
Changes in analysts’ earnings estimates;·
Quarter-to-quarter variations in operating results;


·
Changes in market conditions in the behavioral health care industry;·
Changes in general economic conditions; and


·
Fluctuations in securities markets in general.







42


Financial Risk





·
Our interest expense is sensitive to changes in the general level of interest rates.  With respect to our interest-bearing liabilities, all of our long-term debt outstanding is subject to rates at prime plus .25% and prime plus .75%, which makes interest expense increase with changes in the prime rate. On this debt, each 25 basis
point increase in the prime rate will affect an annual increase in interest expense of approximately $2,200; however, the prime rate is currently lower than the base interest rate of 4.50% therefore the Prime rate would have to increase 1.25% before there would be any interest expense increase.





·
Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements requiring a waiver from our lender.  A waiver of the covenants may require our lender to perform additional audit procedures to assure the stability of their security, which could require additional fees.







43


Item 8.           Financial Statements and Supplementary Data.





Financial statements and supplementary data required pursuant to this Item 8 begin on page F-1 of this Annual Report on Form 10-K.





PAGEIndex
F-1Report of Independent Registered Public Accounting Firm
F-2Consolidated balance sheets
F-3Consolidated statements of operations
F-4Consolidated statements of changes in stockholders' equity
F-5Consolidated statements of cash flows
F-6 – F-7Notes to consolidated financial statements
F-8 – F-31

















































































































F-1







44


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Board of Directors and Stockholders of


PHC, Inc.:








We have audited the accompanying consolidated balance sheets of PHC, Inc. and subsidiaries as of June 30, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s
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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes 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 Company’s 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of PHC, Inc. and subsidiaries at June 30, 2009 and 2008 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in
the United States of America.























/s/ BDO Seidman, LLP








Boston, Massachusetts


September 28, 2009












































F-2










45


PHC, INC.  AND SUBSIDIARIES


Consolidated Balance Sheets                                                                                                                                                                                                               June
30,


2009


2008ASSETSCurrent assets:Cash and cash equivalents

$
3,199,344


$
3,142,226Accounts receivable, net of allowance for doubtful accounts of $2,430,618 and
$2,230,371 at June 30, 2009 and 2008, respectively


6,315,693



6,439,733Assets held for sale-Pivotal


--



5,313,993Prepaid expenses


441,945



491,503Prepaid income taxes


33,581



269,074Other receivables and advances


844,990



623,295Deferred tax assets


923,625



1,040,999Total current assets


11,759,178



17,320,823Restricted cash


512,197



--Accounts receivable, non-current


35,000



35,000Other receivables


55,627



71,889Property and equipment, net


4,687,110



4,382,421Deferred financing costs, net of amortization of $436,440 and $286,413 at June 30,
2009 and 2008, respectively


335,801



470,829Goodwill


969,098



969,098Deferred tax assets- long term


1,902,354



472,000Other assets


2,435,628



2,784,965Total assets

$
22,691,993


$
26,507,025LIABILITIESCurrent liabilities:Accounts payable

$
1,375,436


$
1,318,421Current maturities of long-term debt


652,837



651,379Revolving credit note


863,404



977,203Current portion of obligations under capital leases


103,561



170,285Accrued payroll, payroll taxes and benefits


1,570,639



1,528,640Accrued expensesand other liabilities


1,461,499



1,434,983Liabilities held for sale-Pivotal


--



1,144,630Total current liabilities


6,027,376



7,225,541Long-term debt, less current maturities


488,426



393,705Obligations under capital leases


132,368



229,274Total liabilities


6,648,170



7,848,520Commitments and contingent liabilitiesSTOCKHOLDERS’ EQUITYPreferred stock, 1,000,000 shares authorized, none issued


--



--Class A Common Stock, $.01 par value; 30,000,000 shares authorized, 19,840,793
and 19,806,147 shares issued at June 30, 2009 and 2008, respectively


198,408



198,061Class B Common Stock, $.01 par value; 2,000,000 shares authorized, 775,080 and
775,672 issued and outstanding at June 30, 2009 and 2008, respectively, each
convertible into one share of Class A Common Stock


7,751



7,757Additional paid-in capital


27,667,597



27,388,821Treasury stock, 626,541 and 387,698 Class A common shares at cost at June 30, 2009
and 2008, respectively


(1,125,707
)


(685,916
)Accumulated deficit


(10,704,226
)


(8,250,218
)Total stockholders’ equity


16,043,823



18,658,505Total liabilities and stockholders’ equity

$
22,691,993


$
26,507,025


See accompanying notes to consolidated financial statements


F-3 46


PHC, INC.  AND SUBSIDIARIES


Consolidated Statements of Operations





For the Years Ended June 30,2009


2008Revenues:Patient care, net

$
42,599,963


$
40,856,077Contract support services


3,811,056



4,541,260Total revenues


46,411,019



45,397,337Operating expenses:Patient care expenses


23,834,841



22,133,200Cost of contract support services


3,015,782



3,390,224Provision for doubtful accounts


1,637,738



1,311,431Administrative expenses


18,721,491



15,464,545Total operating expenses


47,209,852



42,299,400Income (loss) from operations


(798,833
)


3,097,937Other income (expense):Interest income


170,360



194,294Interest expense


(452,207
)


(396,630
)Other income, net


105,069



54,729Total other expense, net


(176,778
)


(147,607Income (loss) before income taxes


(975,611
)


2,950,330Provision for income taxes


65,764



(1,365,723
)Income (loss) from continuing operation


(1,041,375
)


1,584,607Loss from discontinued operations net of tax of $915,770, (94,233), respectively


(1,412,633
)


(1,259,879)Net income (loss) applicable to common shareholders

$
(2,454,008
)

$
324,728Basic net income (loss) per common shareContinuing operations

$
(0.05)


$
0.08Discontinued operations


(0.07
)


(0.66
)$
(012)


$
0.02Basic weighted average number of shares outstanding


20,090,521



20,166,659Fully diluted net income (loss) per common share :Continuing operations

$
(0.05)


$
0.08Discontinued operations

$
(0.07
)

$
(0.06)(0.12)



0.02Fully diluted weighted average number of shares outstanding


20,090,521



20,464,255





See accompanying notes to consolidated financial statements.


F-4




47


PHC, INC.  AND SUBSIDIARIES


Consolidated Statements of Changes In Stockholders’ Equity





Class A


Class B


AdditionalCommon Stock


Common Stock


Paid-inShares


Amount


Shares


Amount


CapitalBalance – June 30, 2007


19,622,076



196,221



775,760



7,758



26,812,808Fair value of options


















380,187Issuance of shares for warrantsexercised


20,000



200











17,800Issuance of shares for options exercised


159,652



1,596











104,293Warrants issued


















62,949Issuance of employee stock purchase plan shares


4,331



43











10,784Purchase of treasury shares


















--Conversion from Class B to Class A


88



1



(88
)


(1
)


--Net income year ended June 30, 2008Balance – June 30, 2008


19,806,147


$
198,061



775,672


$
7,757


$
27,388,821Fair value of options


















188,795Issuance of shares for options exercised


16,359



164











6,017Warrants issued


















22,667Issuance of employee stock purchase plan shares


17,695



177











--Purchase of treasury shares


















--Issuance of treasury stock in payment of earnout debt


















32,950Conversion from Class B to Class A


592



6



(592
)


(6
)


--Net  loss  year ended June 30, 2009Balance – June 30, 2009


19,840,793


$
198,408



775,080


$
7,751


$
27,667,597












































See accompanying notes to consolidated financial statements.





48


PHC, INC.  AND SUBSIDIARIES (continued)


Consolidated Statements of Changes In Stockholders’ Equity





Class ATreasury Stock


AccumulatedShares


Amount


Deficit


TotalBalance – June 30, 2007


199,098



(191,700
)


(8,574,946
)


18,250,141Fair value of options














380,187Issuance of shares for warrantsexercised














18,000Issuance of shares for options exercised














105,889Warrants issued














62,949Issuance of employee stock purchase plan shares














10,827Purchase of treasury shares


188,600



(494,216
)






(494,216
)Conversion from Class B to Class A














--Net income year ended June 30, 2008










324,728



324,728Balance – June 30, 2008


387,698


$
(685,916
)

$
(8,250,218
)

$
18,658,505





Fair value of options











188,795Issuance of shares for options exercised











6,181Warrants issued











22,667Issuance of employee stock purchase plan shares











28,524Purchase of treasury shares


409,784



(606,841
)





(606,841
)Issuance of treasury stock in payment of earnout debt


(170,941
)


167,050






200,000Conversion from Class B to Class A













--Net income year ended June 30, 2009










(2,454,008
)


(2,454,008
)Balance – June 30, 2009


626,541


$
(1,125,707
)

$
(10,704,226
)

$
16,043,823



































See accompanying notes to consolidated financial statements


F-5







49


PHC, INC.  AND SUBSIDIARIES


Consolidated Statements of Cash Flows





For the Years Ended June 30,2009


2008Cash flows from operating activities:Net income (loss)

$
(2,454,008
)

$
324,728Net loss income from discontinued operations


(1,412,633
)


(1,259,879
)Net (loss) income from continuing operations

$
(1,041,375
)

$
2,448,979Adjustments to reconcile net income (loss) to net cash provided  by operating activities:Non-cash (gain)/loss on equity method investments


(6,901
)


265Depreciation and amortization


1,233,646



938,874Non-cash interest and other non-cash expense


150,027



143,036Deferred income taxes


(1,312,980
)


342,840Stock based compensation


211,462



443,136Provision for doubtful accounts


1,637,738



1,311,431Changes in operating assets and liabilities:Accounts and other receivables


(1,719,131
)


(961,636)Prepaid expenses and other current assets


285,051



(74,195
)Other assets


(447,776
)


1,408,235Accounts payable


57,015



163,816Accrued expenses and other liabilities


68,515



(142,902
)Net cash (used in) provided by continuing operations


(884,709
)


5,207,508Net cash provided by (used in) discontinued operations


376,904



(35,912
)Net cash (used in) provided by operations


(507,805
)


5,171,596Cash flows from investing activities:Acquisition of property and equipment


(1,306,316
)


(3,056,957
)Proceeds from the sale of Pivotal assets


3,000,000



--Equity investment in unconsolidated subsidiary


53,340



(700,000
)Construction in progress


--



(298,889
)Net cash provided by (used in) investing activities of continuing operations


1,747,024



(4,055,846
)Net cash provided by investing activities of discontinued operations


(32,188)



(31,495)Net cash provided by (used in) investing activities


1,741,836



(4,087,341)Cash flows from financing activities:Repayment on revolving debt, net


(113,799
)


(541,539
)Principal payments on long-term debt


(67,451
)


397,414Deferred financing costs


(15,000
)


--Purchase of treasury stock


(606,841
)


(494,216
)Proceeds from issuance of common stock, net


34,705



134,715Net cash used in financing continuing operations


(768,386
)


(503,626
)Net cash used in financing discontinued operations


(381,527
)


(746,295
)Net cash used in financing activities


(1,149,913)



(1,249,921
)Net (decrease) increase in cash, continuing operations


(93,929
)


648,036Net increase (decrease) in cash, discontinued operations


36,811



(813,702
)Net increase (decrease) in cash and cash equivalents


57,118



165,666
)Beginning cash and cash equivalents


3,142,226



3,307,892Cash and cash equivalents, end of year

$
3,199,344


$
3,142,226


See accompanying notes to consolidated financial statements.


F-6










50


PHC, INC.  AND SUBSIDIARIES


Consolidated Statements of Cash Flows (continued)





For the Years Ended June 30,2009


2008Supplemental cash flow information:Cash paid during the period for:Interest

$
316,024


$
253,557Income taxes


378,707



424,267Supplemental disclosures of non-cash investing and financing activities:Issuance of common stock in cashless exercise of options

$
8,359


$
406Issuance of treasury stock in payment of earn-out debt


200,000



--Obligations under capital leases


--



23,693Disposal of fully depreciated equipment


--



5,614















































































See accompanying notes to consolidated financial statements.


F-7







51


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Operations and business segments:





PHC, Inc. ("PHC" or the “Company”) is incorporated in the Commonwealth of Massachusetts.  The Company is a national healthcare company which operates subsidiaries specializing in behavioral health services including the treatment of substance abuse, which includes alcohol and drug dependency and related disorders
and the provision of psychiatric services.  The Company also operates help lines for employee assistance programs, call centers for state and local programs and provides management, administrative and online behavioral health services.  The Company primarily operates under three business segments:





(1)
Behavioral health treatment services, including two substance abuse treatment facilities:  Highland Ridge Hospital, located in Salt Lake City, Utah, which also treats psychiatric patients, and Mount Regis Center, located in Salem, Virginia, and eleven psychiatric treatment locations which include
Harbor Oaks Hospital, a 73-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 66-bed residential facility in Detroit Michigan, a 55-bed psychiatric hospital in Las Vegas, Nevada and eight outpatient behavioral health locations (one in New Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, four in Las Vegas, Nevada as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area);





(2)
Call center and help line services (contract services), including two call centers, one operating in Midvale, Utah and one in Detroit, Michigan.  The Company provides help line services through contracts with major railroads and a call center contract with Wayne County, Michigan.  The
call centers both operate under the brand name Wellplace; and





(3)
Behavioral health administrative services, including delivery of management and administrative and online services.  The parent company provides management and administrative services for all of its subsidiaries and online services for its behavioral health treatment subsidiaries and its call
center subsidiaries.  It also provides behavioral health information through its website, Wellplace.com.





Principles of consolidation:








The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All material intercompany accounts and transactions have been eliminated in consolidation.  In January 2007, the Company purchased a 15.24% membership interest in the Seven Hills Psych Center, LLC, the entity that
is the landlord of the Seven Hills Hospital subsidiary.  In March 2008, the Company, through its subsidiary PHC of Nevada, Inc., purchased a 25% membership interest in Behavioral Health Partners, LLC, the entity that will be the landlord of a new outpatient location for Harmony Healthcare once construction is complete.  These investments are accounted for under the equity method of accounting and are included in other assets on the consolidated balance sheet.  (Note D)
































F-8










52


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Revenues and accounts receivable:





Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare.  Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due
to periodic changes in the regulatory environment.  Provisions for estimated third party payor settlements are provided in the period the related services are rendered.  Differences between the amounts provided and subsequent settlements are recorded in operations in the period of settlement.  The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable.  The allowance for doubtful accounts does
not include the contractual allowances.





Medicaid reimbursements are based on established rates depending on the level of care provided and are adjusted prospectively.  Effective for fiscal years beginning after January 1, 2005, the prospective payment system (“PPS”) was brought into effect for all psychiatric services paid through the Medicare program.  The
new system changed the TEFRA-based (Tax Equity and Fiscal Responsibility Act of 1982) system to the new variable per diem-based system.  The new rates are based on a statistical model that relates per diem resource use for beneficiaries to patient and facility characteristics available from “Center for Medicare and Medicaid Services, (“CMS’s”), administrative data base (cost reports and claims data).  Patient-specific characteristics include, but are not limited to,
principal diagnoses, comorbid conditions, and age.  Facility specific variables include an area wage index, rural setting, and the extent of teaching activity.  This change was phased in over three fiscal years with a percentage of payments being made at the old rates and a percentage at the new rates, 75/25, 50/50, and 25/75, respectively.  During fiscal 2008 we were operating under the third and final stage at 25/75.  In the current fiscal year we are operating under
PPS.





For the fiscal year ended June 30, 2009, Medicare reimbursement rates were based 100% on the prospective payment rates.  The Company will continue to file cost reports annually as required by Medicare to determine ongoing rates.  These cost reports are routinely audited on an annual basis.  Activity and cost
report expense differences are reviewed on an interim basis and adjustments are made to the net expected collectable revenue accordingly.  The Company believes that adequate provision has been made in the financial statements for any adjustments that might result from the outcome of Medicare audits.  Approximately 25% and 29% of the Company’s total revenue is derived from Medicare and Medicaid payors for the years ended June 30, 2009 and 2008, respectively.  Differences between
the amounts provided and subsequent settlements are recorded in operations in the year of the settlement.  To date, settlement adjustments have not been material.





Patient care revenue is recognized as services are rendered, provided there exists persuasive evidence of an arrangement, the fee is fixed or determinable and collectability of the related receivable is reasonably assured.  Pre –admission screening of financial responsibility of the patient, insurance carrier or other contractually
obligated payor, provides the Company the net expected collectable patient revenue to be recorded based on contractual arrangements with the payor or pre-admission agreements with the patient.  Revenue is not recognized for emergency provision of services for indigent patients until authorization for the services can be obtained.























F-9







53


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES      (CONTINUED)Revenues and accounts receivable (continued):





Contract support service revenue is a result of fixed fee contracts to provide telephone support.  Revenue for these services is recognized ratably over the service period.





Long-term assets include non-current accounts receivable, other receivables and other assets (see below for description of other assets).  Non-current accounts receivable consist of amounts due from former patients for service.  This amount represents estimated amounts collectable under supplemental payment agreements,
arranged by the Company or its collection agencies, entered into because of the patients’ inability to pay under normal payment terms.  All of these receivables have been extended beyond their original due date.  Reserves are provided for accounts of former patients that do not comply with these supplemental payment agreements and accounts are written off when deemed unrecoverable.  Other receivables included as long-term assets include the non-current portion of loans provided
to employees and amounts due on a contractual agreement





Charity care amounted to approximately $62,588 and $94,336 for the years ended June 30, 2009 and 2008, respectively.  Patient care revenue is presented net of charity care in the accompanying consolidated statements of operations.





The Company had accounts receivable from Medicaid and Medicare of approximately $1,417,000 at June 30, 2009 and $1,307,000 at June 30, 2008.  Included in accounts receivable is approximately $961,859 and $913,636 in unbilled receivables at June 30, 2009 and 2008, respectively.





Allowance for doubtful accounts:





The Company records an allowance for uncollectible accounts which reduces the stated value of receivables on the balance sheet.  This allowance is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account
remains outstanding until the account is over 360 days outstanding, at which time the provision is 80-100% of the outstanding balance.  These percentages vary by facility based on each facility’s experience in and expectations for collecting older receivables.  The Company compares this required reserve amount to the current “Allowance for doubtful accounts” to determine the required bad debt expense for the period.  This method of determining the required “Allowance
for doubtful accounts” has historically resulted in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance, which the Company believes to be a reasonable valuation of its accounts receivable.





Estimates and assumptions:





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount 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.  Such estimates include patient care billing rates, realizability of receivables from third-party payors, rates for Medicare and Medicaid, the realization of deferred tax benefits and the valuation of goodwill, which represents a significant portion of the estimates made by management.














F-10







54


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Reliance on key clients:





The Company relies on contracts with more than ten clients to maintain patient census at its inpatient facilities and patients for our outpatient operations and our employee assistance programs.  The loss of any of such contracts would impact the Company’s ability to meet its fixed costs.  The Company has entered
into relationships with large employers, health care institutions, insurance companies and labor unions to provide treatment for psychiatric disorders, chemical dependency and substance abuse in conjunction with employer-sponsored employee assistance programs.  The employees of such institutions may be referred to the Company for treatment, the cost of which is reimbursed on a per diem or per capita basis.  Approximately 25% of the Company’s total revenue is derived from these clients
for all periods presented.  No one of these large employers, health care institutions or labor unions individually accounts for 10% or more of the Company’s consolidated revenues, but the loss of any of these clients would require the Company to expend considerable effort to replace patient referrals and would result in revenue and attendant losses.





Cash equivalents:





Cash equivalents include short-term highly liquid investments with maturities of less than three months when purchased.





Property and equipment:





Property and equipment are stated at cost.  Depreciation is provided over the estimated useful lives of the assets using the straight-line method.  The estimated useful lives are as follows:





Assets
Estimated
Useful LifeBuildings
39 yearsFurniture and equipment
3 through 10 yearsMotor vehicles
5 yearsLeasehold improvements
Lesser of useful life or term of lease (2 to 10 years)





Other assets:





Other assets consist of deposits, deferred expenses, advances, investment in Seven Hills LLC, investment in Behavioral Health Partners, LLC, software license fees, and internally developed and acquired software which is being amortized over three to seven years based on its estimated useful life in accordance with specific guidelines outlined
in AICPA Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.





Long-lived assets:





In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be recoverable.  Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less costs to sell.  The Company believes that the carrying value of its long-lived assets is fully realizable at June 30, 2009.





F-11







55


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)








Fair value of financial instruments:





The carrying amounts of cash, trade receivables, other current assets, accounts payable, notes payable and accrued expenses approximate fair value based on their short-term maturity.  The carrying value of long term debt, which have variable interest rates, approximates fair value.





Basic and diluted income per share:





Income per share is computed by dividing the income applicable to common shareholders by the weighted average number of shares of both classes of common stock outstanding for each fiscal year.  Class B Common Stock has additional voting rights.  All dilutive common stock equivalents have been included in the calculation
of diluted earnings per share for the fiscal years ended June 30, 2009 and 2008 using the treasury stock method.





The weighted average number of common shares outstanding used in the computation of earnings per share is summarized as follows:





Years Ended June 30,2009


2008Weighted average shares outstanding –  basic


20,090,521



20,166,659Employee stock options


--



297,596Weighted average shares outstanding – fully diluted


20,090,521



20,464,255





The following table summarizes securities outstanding as of June 30, 2009 and 2008, but not included in the calculation of diluted net earnings per share because such shares are antidilutive:








Years Ended June 30,





2009


2008Employee stock options


1,554,250



338,500Warrants


343,000



310,000Total


1,897,250



648,500





During fiscal 2009, the Company repurchased 409,784 shares of its Class A Common Stock.  This repurchase did not have a material impact on earnings per share.

















F-12







56


PHC, INC. AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Income taxes:





The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, “Accounting for Income Taxes”("SFAS No. 109").  SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of the assets and liabilities.  The Company’s policy is to record a valuation allowance against deferred tax assets, when the deferred tax asset is not recoverable.  The Company considers estimated future taxable income or loss and other available evidence when assessing the need for its deferred tax valuation allowance.  As a result of this assessment, during fiscal 2006, the Company eliminated 100% of
the Federal deferred tax valuation allowance.





On July 1, 2007 the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109”.  In accordance with FIN 48, the Company may establish reserves for tax uncertainties
that reflect the use of the comprehensive model for the recognition and measurement of uncertain tax positions.  Tax authorities periodically challenge certain transactions and deductions reported on our income tax returns.  We do not expect the outcome of these examinations, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations, or cash flows.





Comprehensive income:





SFAS No. 130, “Reporting Comprehensive Income”, requires companies to classify items of other comprehensive income in a financial statement.  Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.  The
Company’s comprehensive income (loss) is equal to its net income (loss) for all periods presented.





Stock-based compensation:





The Company issues stock options to its employees and directors and provides employees the right to purchase stock pursuant to stockholder approved stock option and stock purchase plans.  The Company follows the provisions of SFAS No. 123 (revised 2004), “Share-Based
Payment” (SFAS No. 123R).




Under the provisions of SFAS No. 123R, the Company recognizes the fair value of stock compensation in net income, over the requisite service period of the individual grantees, which generally equals the vesting period. All of the Company’s stock based awards are accounted for as equity instruments.





Under the provisions of SFAS 123R, the Company recorded $188,795 and $380,187 of stock-based compensation in its consolidated statements of operations for the years ended June 30, 2009 and 2008, respectively, which is included in administrative expenses as follows:











F-13










57


PHC, INC. AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Stock-based compensation: (continued)





Year ended June 30, 2009


Year ended June 30, 2008Directors fees

$
65,182


$
116,661Employee compensation


123,613



263,526Total


188,795


$
380,187





The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted after the adoption of SFAS 123R. The weighted-average fair values of the options granted under the stock option plans for the years ended June 30, 2009 and 2008 were calculated using the following assumptions:








Year ended June 30,


2009
2008Risk free interest rate
3.25% - 4.00%
4.00%Expected dividend yield
--
--Expected lives
5-10 years
5-10 yearsExpected volatility
50.2%  - 57.0%
41.0%Weighted average value of grants per share
$0.68
$1.32Weighted average remaining contractual life of options outstanding (years)
3.70
3.74





The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate
is the U.S. Treasury rate on the date of grant. The expected life was calculated using the Company’s historical experience for the expected term of the option.





Based on the Company’s historical voluntary turnover rates for individuals in the positions who received options, there was no forfeiture rate assessed.  It is assumed these options will remain outstanding for the full term of issue.  Under the true-up provisions of SFAS 123R, a recovery of prior expense will
be recorded if the actual forfeiture rate is higher than estimated or additional expense if the forfeiture rate is lower than estimated.  To date there have been no ture-ups required








Advertising Expenses:





Advertising costs are expensed when incurred.  Advertising expenses for the years ended June 30, 2009 and 2008 were $163,110 and $140,207, respectively.








F-14










58


PHC, INC. AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE A – THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Reclassifications:





Certain June 30, 2008 amounts have been reclassified to be consistent with the June 30, 2009 presentation.





Recent accounting pronouncements:





Recently Issued Standards





In January 2008, FASB issued EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“EITF 03-6-1”). EITF 03-6-1 requires that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid
or unpaid) are participating securities and should be included in the two-class method of computing earnings per share. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008.  The Company does not expect the adoption of EITF 03-6-1 to have a material effect on the Company’s consolidated cinancial statements.





In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“FAS 141”) and Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). FAS No. 141 (revised 2007) requires an acquirer to measure the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies. FAS 141 (revised 2007) applies prospectively to business combinations and is effective for fiscal years beginning on or after December 15, 2008.





FAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per
share will continue to be based on income amounts attributable to the parent. The presentation provisions of FAS 160 are to be applied retrospectively, and FAS 160 is effective for fiscal years beginning on or after December 15, 2008.   The Company does not expect the adoption of FAS160 to have a material effect on the company's consolidated financial statements.
























F-15







59


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





Recent accounting pronouncements: (continued)


In February 2008, the FASB issued FSP 157-2, “Partial Deferral of the Effective Date of Statement 157” (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008.  In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This FASB Staff Position (“FSP”) applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS 157. This FSP clarifies the application of SFAS 157
in determining the fair values of assets or liabilities in a market that is not active. This FSP is effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of these FASB Staff Positions did not have a material impact on our consolidated financial statements. Recently Adopted Standards





In April 2009, the FASB issued Staff Position (“FSP”) No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 require that disclosures about the fair value of a company’s financial instruments be made whenever
summarized financial information for interim reporting periods is made. The provisions of FSP 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 did not have a material impact on our consolidated financial statements.





In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 does not change the definition of fair value as detailed in FAS 157,
but provides additional guidance for estimating fair value in accordance with FAS 157 when the volume and level of activity for the asset or liability have significantly decreased. The provisions of FSP 157-4 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on our consolidated financial statements.





In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP 115-2 and FAS 124-2”). FSP 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities and provides additional disclosure requirements
for other-than-temporary impairments for debt and equity securities. FSP 115-2 and FAS 124-2 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The provisions of FSP 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP 115-2 and FAS 124-2 did not have a material impact on our consolidated financial statements.














F-16










60


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





Recent accounting pronouncements: (continued)





Public entities are required to evaluate subsequent events through the date that financial statements are issued. FAS 165 also provides guidelines in evaluating whether or not events or transactions occurring after the balance sheet date should be recognized in the financial statements.  FAS 165 requires disclosure of the
date through which subsequent events have been evaluated.  We have evaluated subsequent events through the date of issuance of this report September 28, 2009








In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires disclosures of the fair values of derivative instruments and their gains and losses in a tabular format. FAS 161 requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of FAS 161 did not have a material impact on our consolidated financial statements.


.


NOTE B - PROPERTY AND EQUIPMENT





Property and equipment is composed of the following:





As of June 30,2009


2008Land

$
69,259


$
69,259Buildings


1,136,963



1,136,963Furniture and equipment


3,603,249



3,221,117Motor vehicles


152,964



172,966Leasehold improvements


4,626,839



3,731,3389,589,274



8,331,643Less accumulated depreciation and amortization


4,902,164



3,949,222Property and equipment, net

$
4,687,110


$
4,382,421





Total depreciation and amortization expenses related to property and equipment were $1,001,627 and $740,373 for the fiscal years ended June 30, 2009 and 2008, respectively.




















F-17










61


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS:





Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions.  Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to:  (i) future expected cash flows from services to be provided, customer
contracts and relationships, and (ii) the acquired market position.  These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur.  If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company
identifies the impairment.





SFAS No. 142, “Goodwill and Other Intangible Assets”, requires, among other things, that companies not amortize goodwill, but instead test goodwill for impairment at least annually.  In addition, SFAS 142 required that the Company identify reporting units for the purpose of assessing potential future impairments of
goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life.





The Company’s goodwill of $969,098 relating to the treatment services reporting unit of the Company were evaluated under SFAS No. 142 as of June 30, 2009.  As a result of the evaluation, the Company determined that no impairment exists related to the goodwill associated with the treatment services reporting unit. The Company
will continue to test goodwill for impairment at least annually in accordance with the guidelines of SFAS No. 142.





NOTE D - OTHER ASSETS





Included in other assets are investments in unconsolidated subsidiaries.  As of June 30, 2009 this includes the Company’s investment in Seven Hills Psych Center, LLC of $354,428 (this LLC holds the assets of the Seven Hills Hospital which is being leased by a subsidiary of the Company) and the Company’s investment
in Behavioral Health Partners, LLC, of $698,869.  The first phase of this LLC’s building project, an additional out patient clinic being leased by PHC of Nevada, Inc, the Company’s outpatient operations in Las Vegas, Nevada, was completed in the fourth quarter of 2009.





The following table lists amounts included in other assets:








Description

As of June 30,2009


2008Software development & license fees

$
1,173,973


$
1,400,957Investment in unconsolidated subsidiary


1,053,297



1,099,735Deposits and other assets


208,358



284,273Total

$
2,435,628


$
2,784,965








Total accumulated amortization of software license fees was $558,450 and $326,429 as of June 30, 2009 and $326,429 as of June 30, 2008 respectively.  Total amortization expense related to software license fees was $232,019 and $198,501 for the fiscal years ended June 30, 2009 and 2008, respectively.











F-18










62


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE D - OTHER ASSETS (CONTINUED)





The following is a summary of expected amortization expense of software licensure fees for the succeeding fiscal years and thereafter as of June 30, 2009:





Year EndingJune 30,

Amount2010

$
235,0602011


206,7702012


154,8012013


154,8012014


154,801Thereafter


267,7401,173,973




NOTE E – NOTES PAYABLE AND LONG-TERM DEBT
 
 Notes payable and long-term debt is summarized as follows:

As of June 30,2009


2008Term mortgage note payable with monthly principal installments of  $50,000 beginning July 1, 2007 increasing to $62,500 July 1, 2009 until the loan terminates.  The note bears interest at prime (3.25% at June 30, 2009) plus 0.75% but not less than 6.25% and is collateralized by all of the assets of the Company and
its material subsidiaries except Pivotal Research Centers, Inc.

$
935,000


$
787,1439% mortgage note due in monthly installments of $4,850 including interest through July 1, 2012, when the remaining principal balance is payable, collateralized by a first mortgage on the PHC of Virginia, Inc, Mount Regis Center facility.


195,704



234,671Note payable due in monthly installments of $578 including interest at 5.9% through May 2010.


5,638



12,026Note payable due in monthly installments of $555 including interest at 3.9% through March 2010.


4,921



11,244Total

$
1,141,263


$
1,045,084Less current maturities


652,837



651,379Long-term portion

$
488,426


$
393,705
 
 Maturities of notes payable and long-term debt are as follows as of June 30, 2009:
 
 Year EndingJune 30,
Amount2010
$ 652,8372011
381,2432012
50,5822013
56,601Thereafter
--$1,141,263


F-19










63


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE E – NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)





In October 2004, the Company refinanced its revolving credit note under which a maximum of $3,500,000 may be outstanding at any time.  The outstanding balance on this note was $863,404 and $977,203 at June 30, 2009 and 2008, respectively.  This agreement was amended on June 13, 2007 to modify the terms of the agreement.  Advances
are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable.  Interest is payable monthly at prime (3.25% at June 30, 2009) plus 0.25%, but not less than 4.75%.  The average interest rate paid during the fiscal year ended June 30, 2009 was 7.56%, which includes the amortization of deferred financing costs related to the initial financing.  The amended term of the agreement is for two years,
renewable for two additional one year terms. The Agreement was automatically renewed June 13, 2009 to effect the term through June 13, 2010.   Upon expiration, all remaining principal and interest are due.  The revolving credit note is collateralized by substantially all of the assets of the Company’s subsidiaries except Pivotal Research Centers, Inc. and guaranteed by PHC.  The Company paid $32,500 in commitment fees and issued a warrant to purchase 250,000 shares
of Class A Common Stock at $3.09 expiring on June 13, 2017.





As of June 30, 2009, the Company was in compliance with all of its financial covenants under the revolving line of credit note.  These covenants were modified with the refinancing of the debt in June 2007 to include only a debt coverage ratio and a decreased minimum EBITDA.





NOTE F - CAPITAL LEASE OBLIGATION





At June 30, 2009, the Company was obligated under various capital leases for equipment providing for aggregate monthly payments of approximately $14,233 and terms expiring from June 2010 through June 2011.





The carrying value of assets under capital leases included in property and equipment and other assets are as follows:





June 30,2009


2008Equipment and software

$
574,402


$
574,402Less accumulated amortization and depreciation


(263,915
)


(143,535
)$
310,487


$
430,867





Amortization and depreciation expense related to these assets for the years ended June 30, 2009 and 2008 was $120,380 and $113,839 respectively.





Future minimum lease payments under the terms of the capital lease agreements are as follows at June 30, 2009:





Year Ending June 30,2010


122,9972011


121,1902012


19,737Future minimum lease payments


263,924Less amount representing interest


27,995Total future principal payments


235,929Less current portion


1,312,981Long-term obligations under capital leases

$
132,368











F-20










64


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE G – ACCRUED EXPENSES AND OTHER LIABILITIES





Accrued expenses and other liabilities consist of the following:





June 30,2009


2008Accrued Contract Expenses

$
559,466


$
1,031,717Accrued legal and accounting feesl


295,877



307,990Accrued operating expenses


606,156



85,276Total

$
1,461,499


$
1,434,983





NOTE H - INCOME TAXES





The Company has the following deferred tax assets included in the accompanying balance sheets:


Years Ended June 30,2009


2008Deferred tax asset:Stock based compensation

$
33,382


$
--Allowance for doubtful accounts


923,625



847,000Depreciation


236,401



320,000Difference between book and tax bases of intangible assets


1,030,515



151,999Credits


198,936



184,000Operating loss carryforward


403,120



10,000Gross deferred tax asset


2,825,979



1,512,999Current portion


923,625



1,040,999Long-term portion


1,902,354



472,000





The components of the income tax provision (benefit) for the years ended June 30, 2009 and 2008 are as follows:





2009


2008CurrentFederal

$
--


$
112,582State


425,557



73,545425,557



186,127DeferredFederal


(364,738
)


958,707State


4,945



220,889(259,793
)


1,179,596Income tax provision (benefit)

$
65,764


$
1,365,723





A reconciliation of the federal statutory rate to the Company’s effective tax rate for the years ended June 30, 2009 and 2008 is as follows:











F-21










65


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE H - INCOME TAXES (CONTINUED)





2009


2008Income tax provision at federal statutory rate


34.0
%


34.0
%Increase (decrease) in tax resulting from:State tax provision, net of federal benefit


-29.12
%


6.60
%Non-deductible expenses


-11.475
%


5.06
%Other, net


-0.17
%


0.65
%Effective income tax rate


-6.747
%


46.29
%





At June 30, 2009, the Company had a federal operating loss carryforward amounting to approximately $1.1 million which begin to expire in fiscal year 2024 and state operating loss carryforwards of approximately $760,000 which begin to expire in fiscal year 2010.  The Company has also generated Alternative Minimum Tax credit of approximately
$199,000 which do not expire.  The Company’s federal net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and the State operating loss carryforwards are subject to review and possible adjustment by the state taxing authorities.  Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards.  Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized.  The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.





The Company adopted the provisions of FIN 48 on July 1, 2007.  It requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change.  As a result of the implementation of FIN 48, the Company recognized no material
adjustment in the liability for unrecognized tax benefits.





The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expense. As of June 30, 2009, the Company has not recorded any provisions for accrued interest and penalties related to uncertain tax positions.  The adoption of FIN 48 did not have a material impact on our financial
reporting or our disclosure requirements.





Tax years 2005-2008 remain open to examination by the major taxing authorities to which the Company is subject.





NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES





Operating leases:





The Company leases office and treatment facilities, furniture and equipment under operating leases expiring on various dates through May 2018.  Rent expense for the years ended June 30, 2009 and 2008 was $3,811,374 and $1,987,494, respectively.  Rent expense includes certain short-term rentals.  Minimum
future rental payments under non-cancelable operating leases, having remaining terms in excess of one year as of June 30, 2009 are as follows:





























F-22










66


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)





Year EndingJune 30,

Amount2010

$
3,350,6482011


3,021,4482012


3,019,3442013


2,598,8992014


2,496,812Thereafter


9,599,822$
24,086,973


Litigation:





The Company is a party in an action with a former employee who was terminated and filed a claim for wrongful termination.  During the current fiscal year this litigation reached binding arbitration.  As a result of this arbitration, the arbitrator awarded the employee approximately $410,000 plus costs.  In
the calculation of the amount awarded, the Company believes the Arbitrator erroneously took into consideration an employment agreement that was not in question and not terminated by the Company.  Based on this miscalculation, the Company’s attorney has recommended an appeal, which the Company intends to pursue.  The Company appealed this decision and the Company’s attorney expects a favorable outcome, no provision has been made for this judgment in the accompanying financial
statements.  However, the Company has placed $512,197 in escrow as required by the courts.  This amount is shown as restricted cash on the accompanying 2009 balance sheet.





The Company is subject to various claims and legal action that arise in the ordinary course of business.  In the opinion of management, the Company is not currently a party to any proceeding that would have a material adverse effect on its financial condition or results of operations.





NOTE J – STOCKHOLDERS’ EQUITY AND STOCK PLANS





Preferred Stock





The Board of Directors is authorized, without further action of the shareholders, to issue up to 1,000,000 shares in one or more classes or series and to determine, with respect to any series so established, the preferences, voting powers, qualifications and special or relative rights of the established class or series, which rights may
be in preference to the rights of common stock.  No shares of the Company’s preferred stock are currently issued.





Common Stock





The Company has authorized two classes of common stock, the Class A Common Stock and the Class B Common Stock.  Subject to preferential rights in favor of the holders of the Preferred Stock, the holders of the common stock are entitled to dividends when, as and if declared by the Company’s Board of Directors. Holders of
the Class A Common Stock and the Class B Common Stock are entitled to share equally in such dividends, except that stock dividends (which shall be at the same rate) shall be payable only in Class A Common Stock to holders of Class A Common Stock and only in Class B Common Stock to holders of Class B Common Stock.





F-23
















67


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE J – STOCK HOLDERS’ EQUITY AND STOCK PLANS (CONTINUED)





Class A Common Stock





The Class A Common Stock is entitled to one vote per share with respect to all matters on which shareholders are entitled to vote, except as otherwise required by law and except that the holders of the Class A Common Stock are entitled to elect two members to the Company’s Board of Directors.





The Class A Common Stock is non-redeemable and non-convertible and has no pre-emptive rights.





All of the outstanding shares of Class A Common Stock are fully paid and nonassessable.





Class B Common Stock





The Class B Common Stock is entitled to five votes per share with respect to all matters on which shareholders are entitled to vote, except as otherwise required by law and except that the holders of the Class A Common Stock are entitled to elect two members to the Company’s Board of Directors.  The holders of the Class B
Common Stock are entitled to elect all of the remaining members of the Board of Directors.





The Class B Common Stock is non-redeemable and has no pre-emptive rights.





Each share of Class B Common Stock is convertible, at the option of its holder, into a share of Class A Common Stock.  In addition, each share of Class B Common Stock is automatically convertible into one fully-paid and non-assessable share of Class A Common Stock (i) upon its sale, gift or transfer to a person who is not an
affiliate of the initial holder thereof or (ii) if transferred to such an affiliate, upon its subsequent sale, gift or other transfer to a person who is not an affiliate of the initial holder.  Shares of Class B Common Stock that are converted into Class A Common Stock will be retired and cancelled and shall not be reissued.





All of the outstanding shares of Class B Common Stock are fully paid and nonassessable.





Stock Plans


The Company has three active stock plans: a stock option plan, an employee stock purchase plan and anon-employee directors’ stock option plan, and three expired plans, the 1993 Employee and Directors Stock Option plan, the 1995 Non-employee Directors’ stock option
plan and the 1995 Employee Stock Purchase Plan.





















































F-24










68


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009








NOTE J – STOCK HOLDERS’ EQUITY AND STOCK PLANS (CONTINUED)





The stock option plan, dated December 2003 and expiring in December 2013, as amended in October 2007, provides for the issuance of a maximum of 1,900,000 shares of Class A Common Stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others
whose efforts are important to the success of the Company.  Subject to the provisions of this plan, the compensation committee of the Board of Directors has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be lessthan the market price of the Class A Common
Stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options.  As of June 30, 2009, 507,500 options were granted under this plan leaving 536,563 options available for grant under this plan.





On October 18, 1995, the Board of Directors voted to provide employees who work in excess of 20 hours per week and more than five months per year rights to elect to participate in an Employee Stock Purchase Plan (the “Plan”), which became effective February 1, 1996.  The price per share shall be the lesser of 85%
of the average of the bid and ask price on the first day of the plan period or the last day of the plan period to encourage stock ownership by all eligible employees.  The plan was amended on December 19, 2001 and December 19, 2002 to allow for a total of 500,000 shares of Class A Common Stock to be issued under the plan.  Before its expiration on October 18, 2005, 157,034 shares were issued under the plan.  On January 31, 2006 the stockholders approved a replacement Employee Stock
Purchase Plan to replace the 1995 plan.  A maximum of 500,000 shares may be issued under the January 2006 plan.  The new plan is identical to the old plan and expires on January 31, 2016.  As of June 30, 2009, 32,881 shares have been issued under this plan.  During fiscal 2008 the Board of Directors authorized a new offering for a six month contribution term instead of the former one year term.  Eight employees participated and 6,801 shares were issued in the
first six-month offering period, which began on February 1, 2008 and ended on July 31, 2008.  Ten employees participated and 10,894 shares were issued in the second offering which began on August 1, 2008 and ended January 31, 2009.  At June 30, 2009 there were 467,119 shares available for issue under the January 2006 plan.





The non-employee directors’ stock option plan provides for the grant of non-statutory stock options automatically at the time of each annual meeting of the Board.  Through June 30, 2009, options for 145,500 shares were granted under the 1995 plan.  This plan expired in August 2005 and, in January 2005, the shareholders
voted to approve a new non-employee directors’ stock plan.  The new plan is identical to the plan it replaced.  Under the new plan a maximum of 350,000 shares may be issued.  As of June 30, 2009, a total of 280,000 options were issued under the new plan.  On January 31, 2006, this plan was amended to increase the number of options issued to each outside director each year from 10,000 options to 20,000 options.  Each outside director is granted an option
to purchase 20,000 shares of Class A Common Stock annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date.  The new plan will expire in January 2015, ten years from the date of shareholder approval.  At June 30, 2009 there were 70,000 options available for grant under this plan.





Under the above plans, at June 30, 2009, 1,167,182 shares were available for future grant or purchase.



































F-25










69


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE J – STOCK HOLDERS’ EQUITY AND STOCK PLANS (CONTINUED)





The Company had the following activity in its stock option plans for fiscal 2009 and 2008:


Number


Weighted-Averageof


Exercise

Remaining
AggregateShares


Price

Contractual Term
Intrinsic ValueOutstanding balance – June 30, 2007


1,096,000


$
1.76Granted


377,500


$
2.84Exercised


(174,000
)

$
0.84Expired


(52,500
)

$
2.80Outstanding balance – June 30, 2008


1,247,000


$
2.17Granted


428,750


$
1.31Exercised


(28,000
)

$
1.03Expired


(93,500
)

$
1.61Outstanding balance – June 30, 2009


1,554,250


$
1.99

3.70
$150,240Exercisable at June 30, 2009


985,059


$
2.07

3.01
$100,683





Of the options granted during the fiscal year ended June 30, 2009, 47,811 were vested and the remaining options will vest over the next three years.  The fair value of the options vested was $0.68 per option.





In August 2008, 6,801 shares of common stock were issued under the employee stock purchase plan.  The Company recorded share based compensation expense of $2,380.  In February 2009, 10,894 shares of common stock were issued under the employee stock purchase plan.  The Company recorded share based compensation
expense of $1,961.





During the fiscal year ended June 30, 2009, 28,000 options were exercised resulting in approximately $6,181 in proceeds.  Included in the above balance, 20,000 options were exercised using a cashless exercise feature resulting in the issuance of 8,359 common shares.





The weighted average grant-date fair value of options granted during the fiscal years ended June 30, 2009 and 2008 was $0.68 and $1.32, respectively.  The total intrinsic value of options exercised during the fiscal years ended June 30, 2009 and 2008 was $20,760 and $335,438, respectively.





As of June 30, 2009 there was $274,442 in unrecognized compensation cost related to nonvested share-based compensation arrangements granted under existing stock option plans.  This cost is expected to be recognized over the next four years.












































F-26










70


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE J – STOCK HOLDERS’ EQUITY AND STOCK PLANS (CONTINUED)





In addition to the outstanding options under the Company’s stock plans, the Company has the following warrants outstanding at June 30, 2009:





Date  of Issuance
Description
Number of Shares
Exercise
Price
Expiration
Date06/13/2007
Warrants issued in conjunction with long-term debt transaction, $456,880 recorded as deferred financing costs
250,000 shares
$3.09 per share
June 201709/01/2007
Warrants issued for consulting services $7,400 charged to professional fees
6,000 shares
$3.50 per share
Sept 201210/01/2007
Warrants issued for consulting services $6,268 charged to professional fees
6,000 shares
$3.50 per share
Oct 201211/01/2007
Warrants issued for consulting services $6,013 charged to professional fees
6,000 shares
$3.50 per share
Nov 201212/01/2007
Warrants issued for consulting services $6,216 charged to professional fees
6,000 shares
$3.50 per share
Dec 201201/01/2008
Warrants issued for consulting services $7,048 charged to professional fees
6,000 shares
$3.50 per share
Jan 201302/01/2008
Warrants issued for consulting services $5,222 charged to professional fees
6,000 shares
$3.50 per share
Feb 201303/01/2008
Warrants issued for consulting services $6,216 charged to professional fees
6,000 shares
$3.50 per share
Mar 201304/01/2008
Warrants issued for consulting services $5,931 charged to professional fees
6,000 shares
$3.50 per share
Apr 201305/01/2008
Warrants issued for consulting services $6,420 charged to professional fees
6,000 shares
$3.50 per share
May 201306/01/2008
Warrants issued for consulting services $6,215 charged to professional fees
6,000 shares
$3.50 per share
June 201307/01/2008
Warrants issued for consulting services $5,458 charged to professional fees
6,000 shares
$3.50 per share
Jul 201308/01/2008
Warrants issued for consulting services $4,914 charged to professional fees
6,000 shares
$3.50 per share
Aug 201309/01/2008
Warrants issued for consulting services $5,776 charged to professional fees
6,000 shares
$3.50 per share
Sep 201310/01/2008
Warrants issued for consulting services $2,603 charged to professional fees
3,000 shares
$3.50 per share
Oct 201311/01/2008
Warrants issued for consulting services $1,772 charged to professional fees
3,000 shares
$3.50 per share
Nov 201312/01/2008
Warrants issued for consulting services $780 charged to professional fees
3,000 shares
$3.50 per share
Dec 201301/01/2009
Warrants issued for consulting services $725 charged to professional fees
3,000 shares
$3.50 per share
Jan 201402/01/2009
Warrants issued for consulting services $639 charged to professional fees
3,000 shares
$3.50 per share
Feb 2014





Warrants issued for services or in connection with debt are valued at fair value at grant date using the Black-Scholes pricing model and accounted for in a manner consistent with the underlying reason the warrants were issued.  Charges to operations in connection with warrants were $22,667 and $62,949 in fiscal 2009 and 2008,
respectively.  All of these warrants were fully vested at the grant date.














F-27










71


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE J – STOCK HOLDERS’ EQUITY AND STOCK PLANS (CONTINUED)





The Company had the following warrant activity during fiscal 2009 and 2008:





Outstanding balance – June 30, 2007


280,000Warrants issued


60,000Exercised


(20,000
)Expired


10,000
)Outstanding balance – June 30, 2008


310,000Warrants issued


33,000ExercisedExpired


--Outstanding balance – June 30, 2009


343,000





During fiscal 2009, the Company issued warrants to purchase 33,000 shares of Class A common stock as part of a consulting agreement for marketing services.  The fair value of these warrants of $22,667 was recorded as professional fees when each warrant was issued as reflected in the table above.





During fiscal 2007, the Company issued warrants to purchase 250,000 shares of Class A common stock to the Company’s lender as part of the refinancing of its term loan.  The relative fair value of the warrant of $456,880 was recorded as deferred financing costs and is being amortized as non-cash interest expense over the
period of the loan of two years.





During the fiscal year ended June 30, 2009, the Company acquired 409,784 shares of Class A common stock for $606,841 through a broker under a Board approved plan.







































































F-28










72


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE K - BUSINESS SEGMENT INFORMATION





The Company’s behavioral health treatment services have similar economic characteristics, services, patients and clients.  Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment.  The Company’s segments are more fully described in Note A above.  Residual
income and expenses from closed facilities are included in the administrative services segment.  The following summarizes the Company’s segment data:




Behavioral Health Treatment Services


Discontinued
Operations


Contract
Services


Administrative
Services


Eliminations


TotalFor the year ended
June 30, 2009Revenues-external customers

$
42,599,963


$
--


$
3,811,056



---



--


$
46,411,019Revenues – intersegment


3,065,600



--



--



5,358,800



(8,424,400
)


--Segment net income (loss)


2,634,421



(1,208,064
)


795,345



(4,675,710
)


--



(2,454,008
)Total assets


13,010,748



--



478,925



9,202,320



--



22,691,993Capital expenditures


1,289,381



--



5,092



11,843



--



1,306,316Depreciation & amortization


927,151



--



100,928



205,567



--



1,233,646Goodwill


969,098



--



--



--



--



969,098Interest expense


191,062



--



20



261,125



--



452,207Income tax expense (benefit)


--



--



--



65,764



--



65,764For the year ended
June 30, 2008Revenues-external      customers

$
40,856,077


$
--


$
4,541,260


$
--


$
--


$
45,397,337Revenues – intersegment


674,359



--



--



4,362,890



(5,037,249
)


--Segment net income (loss)


5,701,316



(2,340,866
)


1,084,060



(4,119,782
)


--



324,728Total assets


11,903,346



5,313,993



504,705



8,784,981



--



26,507,025Capital expenditures


3,191,075



--



62,911



101,860



--



3,355,846Depreciation & amortization


604,359



--



117,163



217,352



--



938,874Goodwill


969,098



--



--



--



--



969,098Interest expense


203,417



--



2,092



191,121



--



396,630Income tax expense (benefit)


806,215



--



73,292



486,216



--



1,365,723





All revenues from contract services provided for the treatment services segment and treatment services provided to other facilities included in the treatment services segment are eliminated in the consolidation and shown on the table above under the heading “Revenues intersegment.


























F-29










73


PHC, INC.  AND SUBSIDIARIES





Notes to Consolidated Financial Statements


June 30, 2009





NOTE L – QUARTERLY INFORMATION (Unaudited)
 
 The following presents selected quarterly financial data for each of the quarters in the years ended June 30, 2009 and 2008.
 
 
 2009

1stQuarter


2ndQuarter                     3rd Quarter


4thQuarterRevenue

$
11,691,905


$
11,020,316


$
12,006,169


$
11,692,629Income (loss) from operations


(434,819
)


(843,215
)


97,540



381,661Income (loss) from continuing operations


(394,919
)


(403,793
)


7,388



(250,051
)Income (loss) from discontinued operations


62,216



(1,312,280
)


(159,031
)


(3,538
)Net income (loss) available to common shareholders


(332,703
)


(1,716,073
)


(151,643
)


(253,589
)Basic net income (loss) per common shareContinued operations

$
(0.02
)

$
(0.02
)

$
0.00


$
(0.01
)Discontinued operations

$
(0.00
)

$
(0.07
)

$
(0.01
)

$
0.00Income (loss)

$
(0.02
)

$
(0.09
)

$
(0.01
)

$
(0.01
)Basic weighted average number of shares outstanding


20,178,087



20,131,080



20,017,703



20,033,007Fully diluted net income per common shareContinuing operations

$
(0.02
)

$
(0.02
)

$
0.00


$
(0.01
)Discontinued operations

$
0.00


$
(0.07
)

$
(0.01
)

$
0.00Income (loss)

$
(0.02
)

$
(0.09
)

$
(0.01
)

$
(0.01
)Fully diluted weighted average number of shares outstanding


20,178,087



20,131,080



20,017,703



20,033,007
 
 
 
 
 
 
 
 
 F-30
 
 
 
 
 
 
  74
  
 PHC, INC.  AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 June 30, 2009
 
 NOTE L – QUARTERLY INFORMATION (Unaudited) (continued)2008

1stQuarter


2ndQuarter


3rdQuarter


4thQuarterRevenue

$
11,283,201


$
11,272,577


$
11,339,388


$
11,502,171Income from operations


1,152,317



834,175



716,874



394,571Income (loss) from continuing operations


623,795



524,490



606,824



(170,502
)Income (loss) from discontinued operations


176,216



(42,658
)


(450,789
)


(942,648
)Net income available to common shareholders


800,011



481,832



156,035



(1,113,150
)Basic net income (loss) per common shareContinued operations

$
0.03


$
0.03


$
0.03


$
(0.01
)Discontinued operations

$
0.01


$
(0.01
)

$
(0.02
)

$
(0.05
)Income (loss)

$
0.04


$
0.02


$
0.01


$
(0.06
)Basic weighted average number of shares outstanding


20,136,781



20,143,636



20,188,228



20,198,572Fully diluted net income per common shareContinuing operations

$
0.03


$
0.03


$
0.03


$
(0.01
)Discontinued operations

$
0.01


$
(0.01
)

$
(0.02
)

$
(0.05
)Income (loss)

$
0.04


$
0.02


$
0.01


$
(0.06
)Fully diluted weighted average number of shares outstanding


20,601,828



20,485,294



20,477,709



20,198,572
  75







76
 PHC, INC.  AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 June 30, 2009
 Note M- Discontinued Operations
 
 During the quarter ended March 31, 2009, the Company sold the assets of its research division, Pivotal Research Centers, Inc. (“Pivotal”), a Delaware corporation, for $3,000,000, to Premier Research International, LLC (“Premier”) a Delaware limited liability company.  The other parties to the Agreement
included Premier Research Arizona, LLC, a Delaware limited liability company and wholly-owned subsidiary of Premier, and Pivotal Research Centers, LLC, an Arizona limited liability company.  This transaction resulted in a gain of approximately $161,000.
 The following table summarizes the discontinued operations for the periods presented:
 
 For the year ended
June 30,2009


2008Revenue

$
2,364,969


$
4,733,174Gain on sale of assets


161,418



--Operating Expenses

$
4,828,266


$
6,763,193Loss before taxes

$
(2,301,879
)

$
(2,030,019
)Income tax (benefit) provision

$
(889,246
)

$
770,140Net income (loss) from discontinued operations

$
(1,412,633
)

$
(1,259,879
)
 
 The following table summarizes the Assets and Liabilities held for sale as presented:
  
 As ofJune 30,
2009


June 30, 2008Cash

$
--


$
190,162Accounts receivable


--



2,102,347Property and equipment


--



74,314Intangible assets


--



2,748,277Other assets


--



198,893Total Assets held for sale

$
--


$
5,313,993Accounts payable

$
--


$
162,660Deferred revenue


--



54,242Accrued expenses


--



197,846Other liabilities


--



729,882Total Liabilities held for sale

$
--


$
1,144,630
 Note N - Related Parts Transaction
 During the quarter ended March 31, 2009, the Company’s Board of Directors voted by unanimous written consent to allow short-term borrowing from related parties up to a maximum of $500,000, with an annual interest rate of 12% and a 2% origination fee.  The Company utilized this funding during the March 31, 2009 quarter for
a total of $275,000 as follows:
 
 Related Party

AmountEric E. Shear

$
200,000.00Stephen J. Shear


75,000.00
 
 Both individuals are brothers of Bruce A. Shear, the Company’s CEO and President of the Board of Directors.  This amount was paid in full in March 2009 including $1,447 in interest.
 
 F-32
 77


Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





During the fiscal year ended June 30, 2008, the Company changed independent registered public accounting firms from Eisner LLP to BDO Seidman, LLP.  This change was not made as a result of any disagreements between the accountants and the management of the Company.  See the Company’s report on form 8-K filed with
the Securities and Exchange Commission on May 1, 2008.





Item 9A(T).  CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management to
allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.





Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud.  A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of a control system are met.  Further, any control system
reflects limitations on resources and the benefits of a control system must be considered relative to its costs.  These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control.  A design of a control system is also based upon certain
assumptions about potential future conditions and over time controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.





At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures to meet the criteria referred to above.  Based on
the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.





Change in Internal Controls





There were no changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluations.





Management’s Report on Internal Control over Financial Reporting





Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Management has employed a framework consistent with Exchange Act Rule 13a-15(c) to evaluate our internal control over financial reporting described
below.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.





Management conducted an evaluation of the design and operations of our internal control over financial reporting as of June 30, 2009 based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  As a result of this assessment,
management concluded that, as of June 30, 2009, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.





This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.







78
 PART III





Item 10.     Directors, Executive Officers, Promoters and Control Persons





DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT





The directors and officers of the Company as of the date of the Company’s Annual Report on Form 10-K are as follows:





Name
Age
PositionBruce A. Shear
54
Director, President and Chief Executive OfficerRobert H. Boswell
61
Senior Vice PresidentPaula C. Wurts
60
Treasurer, Chief Financial Officer and ClerkDonald E. Robar (1)(2)(3)
72
DirectorHoward W. Phillips
79
DirectorWilliam F. Grieco (1)(2)(3)
55
DirectorDavid E. Dangerfield (1)(3)
68
Director





(1)      Member of Audit Committee.


(2)      Member of Compensation Committee.


(3)   Member of the Nominating/Governance Committee.





Directors may be nominated by the Board of Directors or by stockholders in accordance with the Company’s Amended and Restated Articles of Incorporation and Bylaws.  All of the directors hold office until the next annual meeting of stockholders following their election, or until their successors are elected and qualified.  The
primary duties of the various committees of the Board are shown below.  The board appoints officers of the Company for undefined terms.  There are no family relationships among any of the directors or officers of the Company.





Information with respect to the business experience and affiliations of the directors and officers of the Company is set forth below.





BRUCE A. SHEAR has been President, Chief Executive Officer and a Director of the Company since 1980 and Treasurer of the Company from September 1993 until February 1996. From 1976 to 1980, he served as Vice President, Financial Affairs, of the Company. Mr. Shear has served on the Board of Governors of the Federation of American Health
Systems for over fifteen years and is currently a member of the board of directors of the National Association of Psychiatric Health Systems. Mr. Shear received an M.B.A. from Suffolk University in 1980 and a B.S. in Accounting and Finance from Marquette University in 1976.  Since November 2003, Mr. Shear has been a member of the board of directors of Vaso Active Pharmaceuticals, Inc., a company marketing and selling over-the-counter pharmaceutical products that incorporate Vaso’s transdermal
drug delivery technology.





ROBERT H. BOSWELL has served as the Senior Vice President of the Company since February 1999 and as Executive Vice President of the Company from 1992 to 1999.  From 1989 until the spring of 1994, Mr. Boswell served as the Administrator of the Company’s Highland Ridge Hospital facility where he is based. Mr. Boswell is principally
involved with the Company’s substance abuse facilities. From 1981 until 1989, he served as the Associate Administrator at the Prevention Education Outpatient Treatment Program--the Cottage Program, International. Mr. Boswell graduated from Fresno State University in 1975 and from 1976 until 1978 attended Rice University’s doctoral program in philosophy.  Mr. Boswell is a Board Member of the National Foundation for Responsible Gaming and the Chair for the National Center for Responsible Gaming.





PAULA C. WURTS has served as the Chief Financial Officer and Controller of the Company since 1989, as Assistant Clerk from January 1996 until February 2006, when she became Clerk, as Assistant Treasurer from 1993 until April 2000 when she became Treasurer.  Ms. Wurts served as the Company’s Accounting Manager from 1985
until 1989.  Ms. Wurts received an Associate’s degree in Accounting from the University of South Carolina in 1980, a B.S. in Accounting from Northeastern University in 1989 and passed the examination for Certified Public Accountants.  She received a Master’s Degree in Accounting from Western New England College in 1996.





DONALD E. ROBAR has served as a Director of the Company since 1985 and as the Treasurer from February 1996 until April 2000.  He served as the Clerk of the Company from 1992 to 1996. Dr. Robar has been a professor of Psychology at Colby-Sawyer College in New London, New Hampshire from 1967 to 1997 and is now Professor Emeritus.  Dr.
Robar received an Ed.D. (Counseling) from the University of Massachusetts in 1978, an M.A. in Clinical Psychology from Boston College in 1968 and a B.A. from the University of Massachusetts in 1960.





HOWARD W. PHILLIPS has served as a Director of the Company since August 1996 and has been employed by the Company as a public relations specialist since August 1995.  From 1982 until 1995, Mr. Phillips was the Director of Corporate Finance for D.H. Blair Investment Corp.  From 1969 until 1981, Mr. Phillips was associated
with Oppenheimer & Co. where he was a partner and Director of Corporate Finance.





WILLIAM F. GRIECO has served as a Director of the Company since February 1997.  Since 2008, Mr. Grieco has served as the Managing Director of Arcadia Strategies, LLC, a legal and business consulting organization servicing healthcare science and technology companies.  From 2003 to 2008 he served as Vice President and
General Counsel of American Science and Engineering, Inc., an X-Ray inspection technology company, as well as,  Managing Director of Arcadia Strategies, LLC.  From 2001 to 2002, he also served as Senior Vice President and General Counsel of IDX Systems Corporation, a healthcare information technology Company.  Previously, from 1995 to 1999, he was Senior Vice President and General Counsel for Fresenius Medical Care North America.  Prior to that, Mr. Grieco was a partner
at Choate, Hall & Stewart, a general service law firm.  Mr. Grieco received a B.S. from Boston College in 1975, an M.S. in Health Policy and Management from Harvard University in 1978 and a J.D. from Boston College Law School in 1981.







79


DAVID E. DANGERFIELD has served as a Director of the Company since December 2001.  He formerly served as the Chief Executive Officer for Valley Mental Health in Salt Lake City, Utah from 1977-2007.  Since 1974, he has been a partner for Professional Training Associates (PTA).  In 1989, he became a consultant
across the nation for managed mental health care and the enhancement of mental health delivery services.  David Dangerfield served for a number of years as a Board member of the Mental Health Risk Retention Group and Utah Alliance for the Mentally Ill, an advocacy organization of family and friends of the mentally ill, which are privately held corporations, and the Utah Hospital Association, which is a trade organization in Utah.  Mr. Dangerfield graduated from the University of Utah in 1972
with a Doctorate of Social Work after receiving his Masters of Social Work from the University in 1967.  He currently serves as President and CEO of Avalon Health Care, Inc. (AHC).  AHC is a multi-state, post-acute health care provider in senior care operating nursing homes, assisted living, rehabilitation and hospice services.





Meetings of the Board of Directors





During fiscal 2009, the Board of Directors held a total of four meetings and took action by written consent four times.  Each director attended all of the meetings of the Board and committees of the Board on which such director served.





Audit Committee





The Board of Directors has appointed an audit committee to assist the Board in the oversight of the financial reports, internal controls, accounting policies and procedures.  The primary responsibilities of the Audit Committee are as follows:





·
Hire, evaluate and, when appropriate, replace the Company’s independent registered public accounting firm, whose duty it is to audit the books and accounts of the Company and its subsidiaries for the fiscal year in which it is appointed.·
Approve all audit fees in advance of work performed.





·
Approve any accounting firm and fees to be charged for taxes or any other non-audit accounting fees.·
Review internal controls over financial reporting with the independent accountant and a designated accounting staff member.





·
Review with management and the registered public accounting firm:o
The independent accountant's audit of and report on the financial statements.





o
The accountants qualitative judgments about the appropriateness, not just the acceptability, of accounting principles and financial disclosures and how aggressive (or conservative) the accounting principles and underlying estimates are.o
Any serious difficulties or disputes with management encountered during the course of the audit.





o
Anything else about the audit procedures or findings that PCAOB requires the accountants to discuss with the committee.·
Consider and review with management and a designated accounting staff member:





o
Any significant findings during the year and management's responses to them.o
Any difficulties an accounting staff member encountered while conducting audits, including any restrictions on the scope of their work or access to required information.





o
Any changes to the planned scope of management's internal audit plan that the committee thinks advisable.·
Review the annual filings with the SEC and other published documents containing the company's financial statements and consider whether the information in the filings is consistent with the information in the financial statements.





·
Review the interim financial reports with management, the independent registered public accounting firm and an accounting staff member.·
Prepare a letter for inclusion in the annual report that describes the committee's composition and responsibilities and how the responsibilities were fulfilled.





·
Review the audit committee charter at least annually and modify as needed.





During fiscal 2009 the Audit Committee consisted of Dr. David Dangerfield, Mr. Donald Robar and Mr. William Grieco.  As required by the SEC, all members of the audit committee are “independent” as such term is defined pursuant to applicable SEC rules and regulations and as required under NYSE Amex listing standard
Section 121.  Dr. Dangerfield serves as the chairman and is the audit committee financial expert.  The Company reviewed Dr. Dangerfield’s extensive experience managing the budget and operations for large Behavioral Healthcare organizations and determined that this industry experience qualifies him to act as the financial expert in accordance with SEC requirements.  During fiscal 2009, the Audit Committee met five times and took action by written consent once.  All
of the committee members attended the meetings.





Nominating and Corporate Governance Committee





The Nominating and Corporate Governance Committee was established in October, 2005.  This committee is appointed by the Board of Directors for the purpose of (i) identifying individuals qualified to become Board members and to recommend that the Board select these individuals as nominees for election to the Board at the next
annual meeting of the Company’s stockholders, and (ii) developing and recommending to the Board a set of effective corporate governance policies and procedures applicable to the Company.  The Nominating and Corporate Governance Committee consists of Dr. David Dangerfield, Mr. Donald Robar and Mr. William Grieco.  All members of the Nominating and Corporate Governance Committee are independent as required under NYSE Amex listing standards.










80


Compensation Committee





The Board of Directors has appointed the members of the Compensation Committee to review and approve officer’s compensation, formulate bonuses for management and administer the Company’s equity compensation plans.  The Compensation Committee is a chartered committee made up of independent members of the Board of Directors.  During
fiscal 2009 the Compensation Committee consisted of Mr. Donald Robar and Mr. William Grieco.  Both members of the Compensation Committee are independent as required under NYSE Amex listing standards.  The Compensation Committee met twice during fiscal 2009, once telephonically and once in person.  Mr. Shear does not participate in discussions concerning, or vote to approve, his salary.





Code of Ethics





The Company maintains a Corporate Compliance Plan, which incorporates our code of ethics that is applicable to all employees, including all officers.  The Corporate Compliance Plan incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations.  It
also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications.  In addition, it incorporates our guidelines pertaining to topics such as health and safety compliance, diversity and non-discrimination, patient care and privacy.





The full text of our Corporate Compliance Plan is published on our website at www.phc-inc.com.  We will post any amendments to the Corporate Compliance Plan, as well as any waivers that are required to be disclosed by the rules of the SEC, on our website.





Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s Common Stock, to file with the SEC reports of ownership and reports of changes in ownership of Common Stock.  SEC rules also require the reporting persons
and entities to furnish the Company with a copy of the reports they file.  The Company is required to report any failure to file these reports.





Based on the review of the filings and written representations from the Company’s directors and executive officers, the Company believes that all reports required to be filed with the SEC by Section 16(a) during the most recent fiscal year were filed, however, each of the officers and directors below did not timely file a Form 4
relating to the grant of stock options on June 15, 2009.





Bruce A. Shear
Howard PhillipsRobert Boswell
Donald RobarPaula Wurts
David DangerfieldWilliam Grieco





All forms, reporting the above stock option grant to officers and directors were filed on July 2, 2009.





Item 11.    Executive Compensation





Compensation Discussion and Analysis





The Board of Directors, the Compensation Committee and senior management share responsibility for establishing, implementing and continually monitoring our executive compensation program, with the Board making the final determination with respect to executive compensation.  The goal of our executive compensation program is to
provide a competitive total compensation package to our executive management team through a combination of base salary, quarterly cash incentive bonuses, long-term equity incentive compensation in the form of stock options and benefits programs.  This Compensation Discussion and Analysis explains our compensation objectives, policies and practices with respect to our Chief Executive Officer, Chief Financial Officer and one of our other most highly-compensated executive officers as determined in accordance
with applicable SEC rules, who are collectively referred to in this report as the Named Executive Officers.





Objectives of our Executive Compensation Program





Our executive compensation program is designed to achieve the following objectives:


·
to attract and retain talented and experienced executives necessary to achieve our strategic objectives in the highly competitive industry in which we compete;·
to motivate and reward executives whose knowledge, skills and performance are critical to our success;





·
to align the interest of our executives and stockholders by motivating executives to increase stockholder value by increasing our Company’s long-term profitability;·
to provide a competitive compensation package in which a significant portion of total compensation is determined by Company and individual results and the creation of stockholder value; and,





·
to foster a shared commitment among executives by coordinating their Company and individual goals.





Role of the Compensation Committee







81


Our Compensation Committee oversees all aspects of executive compensation.  The committee plays a critical role in establishing our compensation philosophy and in setting and amending elements of the compensation package offered to our named executive officers.





The members of our Compensation Committee during fiscal 2009 were Donald Robar and William Grieco.  Each current member of our Compensation Committee is an independent, non-employee director.  During fiscal 2009, the Compensation Committee met twice, once telephonically and once in person.





On an annual basis, or in the case of promotion or hiring of an executive officer, the Compensation Committee reviews and makes recommendations to the Board of Directors regarding the compensation package to be provided to our named executive officers.  On an annual basis, the Compensation Committee undertakes a review of the
base salary and bonus targets of each of our named executive officers and evaluates their respective compensation based on the committee’s overall evaluation of their performance toward the achievement of our financial, strategic and other goals, with consideration given to each executive officer’s length of service and to comparative executive compensation data.  Based on its review, from time to time the Compensation Committee has increased the salary and/or potential bonus amounts for
our executive officers.





COMPENSATION COMMITTEE REPORT





The compensation committee report below is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission and is not incorporated by reference in any of our filings under the Securities Act of 1933 as amended, or the Securities Exchange Act of 1934, as amended, whether made before or
after this filing and irrespective of any general language to the contrary.





The Compensation Committee, comprised solely of independent directors, reviewed and discussed the above Compensation Discussion and Analysis with management.  Based on this review and discussions, the committee recommended to the Board of Directors, and the Board has approved, the inclusion of the Compensation Discussion and
Analysis in the Company’s annual report on Form 10-K.





Compensation Committee


Donald E. Robar


William F. Grieco





Elements of Executive Compensation





Compensation for our named executive officers generally consists of the following elements:


·
base salary;·
cash bonuses;





·
stock-based awards;·
health, dental and life insurance and disability and retirement plans; and





·
severance and change-in-control arrangements.





The Company does not have a policy or target for allocating compensation between long-term and short-term compensation.  Instead the Compensation Committee determines subjectively what it believes to be the appropriate level and mix of various compensation components.  The Compensation Committee’s objective in
allocating between annual and long-term compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our Company and its stockholders.













82


Base Salary





Salary for our executives is generally set by reviewing compensation levels for comparable positions in the market and the historical compensation levels of our executives.  Salaries may then be adjusted from time to time, based upon market changes, actual corporate and individual performance and changes in responsibilities.





Bonuses





Bonuses are based on actual corporate and individual performances compared to targeted performance criteria and various subjective performance criteria.  Targeted financial performance for the Company is set annually by the compensation committee for each fiscal quarter.  In considering bonuses the Compensation
Committee does not rely on a formula that assigns a pre-determined value to each of the criteria, but instead evaluates each executive officer’s contribution in light of all relevant criteria.  Individual performance targets are used less frequently but may include completion of specific projects.  There were no individual performance targets specified in the prior or current fiscal years meetings of the compensation committee.





Stock Based Awards





Compensation for executive officers also includes the long-term incentives afforded by stock options and other equity-based awards.  Our stock option program is designed to align the long-term interests of our employees and our stockholders and assist in the retention of executives.  The size of stock-based awards is
generally intended to reflect the executive’s position and the executive’s expected contributions.  Although some awards may be provided as part of the hiring agreement of new executives, in general these stock-based awards follow the same benchmarks as the executive bonus element of the named executive’s compensation.  Options are generally granted with installment-vesting over a period of three years.





Because of the direct relationship between the value of an option and the market price of our common stock, the compensation committee believes that stock options are an effective method of motivating the named executive officers to manage our Company in a manner that is consistent with the interests of our Company and our Stockholders.





In addition the named executives are also eligible to participate in the Company’s Employee Stock purchase plan as long as all other criteria of the plan are met.





Insurance and Other Employee Benefits





We maintain insurance benefits for all employees that include health, dental and life insurance.  The Company bears one hundred percent of the cost of these benefits for the named executives.  In addition the Company provides a company vehicle or an auto allowance, additional supplemental life insurance and other supplemental
taxable fringe benefits for the named executive officers.  In addition, the Company provides a disability pool for the named executives based on the number of years of service.  The number of days of pay under the disability plan increases incrementally until it reaches a maximum accrual of 730 days.  This disability pool has no cash value and is not payable upon termination of employment.  The Company also provides an Executive Retirement plan, which allows for the use
of the accrued disability plan bank to be distributed as an annuity over a four year period at the named executive’s retirement providing the minimum term of employment of twenty years of service has been met.  For the fiscal year ended June 30, 2009, no accrual has been made for this retirement plan as each of the named executives have waived their right to the retirement plan based on the Company’s financial position at the time that the plan was approved.













83


Severance and Change-in-Control Arrangement





The Company has not entered into any severance agreements with any of the named executive officers; however, compensation for the named executive officers does include change-in-control arrangements.  These arrangements, like other elements of executive compensation, are structured with regard to practices at comparable companies
for similarly situated officers and in a manner we believe is likely to attract and retain high quality executive talent.  The plan calls for the named executive officers, in the event of a change in control, to receive payment of their average annual salary for the past five years times a multiplier based on their number of years of service in the position at the effective date as shown below.





Name and position

Multiplier


Amount at 6/30/2009Bruce A. Shear, Chief Executive Officer


2.99


$
1,269,172Robert H. Boswell, Senior Vice President


2.00



379,972Paula C. Wurts, Chief Financial Officer


2.00



327,493





Changes in Executive Compensation for Fiscal 2009





In September 2008, the Compensation Committee met to discuss the compensation of the named executive officers.  The meeting resulted in a proposal to the Board of Directors in light of current economic conditions to hold base salaries and the net earnings targets for the named executive officers the same for fiscal 2009 as fiscal
2008. The Board of Directors accepted the proposals of the Committee and no changes were made; however, due to continued depressed economic conditions, a 10% decrease in salaries was effected for the named executive officers and although bonus and stock-based compensation targets were available no targets were met during fiscal 2009.





Accounting for Executive Compensation





We account for equity based compensation paid to our employees under the rules of Statement of Financial Accounting Standards No. 123R (SFAS 123R), which requires us to measure and record an expense over the service period of the award.  Accounting rules also require us to record cash compensation as an expense at the time the
obligation is incurred.





Employment Agreements





The Company has not entered into any employment agreements with its executive officers.  The Company owns and is the beneficiary on a $1,000,000 key man life insurance policy on the life of Bruce A. Shear.





Three executive officers of the Company received compensation in the 2009 fiscal year, which exceeded $100,000.  The following table sets forth the compensation paid or accrued by the Company for services rendered to these executives in fiscal year 2009, 2008 and 2007:


Name and
Principal
Position
(a)

Year
(b)


Salary
($)
(c)


Bonus
($)
(d)


Option
Awards
($)
(f)


All Other
Compensation
($)
(i)

Total
($)
(j)Bruce A. Shear
President and Chief Executive Officer


2009
2008
2007


$
$
$
453,846
470,077
420,957


$
$
$
--
60,000
40,000


$
$
$
33,943
59,761
38,013


$
$
$
13,685(1)
24,312(2)
21,833(3)

$
$
$
501,474
614,150
520,803Robert H. Boswell
Senior Vice President


2009
2008
2007


$
$
$
201,923
210,000
196,538


$
$
$
--
26,000
20,000


$
$
$
12,977
22,653
11,778


$
$
$
14,001(4)
14,898 (5)
14,901 (6)

$
$
$
228,901
273,551
243,217Paula C. Wurts
Chief Financial Officer, Treasurer and Clerk


2009
2008
2007


$
$
$
174,039
181,000
170,231


$
$
$
--
26,000
20,000


$
$
$
12,899
22,356
11,481


$
$
$
13,268(7)
13,503(8)
76,563 (9)

$
$
$
200,206
242,859
278,275





*  The named executive officers did not forfeit any stock options during any of the fiscal years presented.  For information regarding the assumptions used to value these stock options, see “Note A THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Stock-based compensation” in the financial
statements included in this report.










84


(1)
This amount represents $8,894 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Mr. Shear, $3,706 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear and $1,085 in personal use of a Company car held by Mr. Shear.




(2)
This amount represents $8,894 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Mr. Shear, $11,261 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear and $4,157 in personal use of a Company car held by Mr. Shear.





(3)
This amount represents $9,019 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Mr. Shear, $9,152 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear and $3,662 in personal use of a Company car held by Mr. Shear.





(4)
This amount represents a $6,000 automobile allowance and $8,001 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Mr. Boswell.





(5)
This amount represents a $6,000 automobile allowance, $8,001 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Mr. Boswell and $897 in benefit derived from the purchase of shares through the employee stock purchase plan.





(6)
This amount represents a $6,000 automobile allowance, $8,001 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Mr. Boswell and $900 in benefit derived from the purchase of shares through the employee stock purchase plan.





(7)
This amount represents a $4,800 automobile allowance, $8,001 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Ms. Wurts and, $467 in benefit derived from the purchase of shares through the employee stock purchase plan.





(8)
This amount represents a $4,800 automobile allowance, $8,117 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Ms. Wurts and, $586 in benefit derived from the purchase of shares through the employee stock purchase plan.





(9)
This amount represents a $4,800 automobile allowance, $9,505 contributed by the Company to the Company’s Executive Employee Benefit Plan on behalf of Ms. Wurts, $218 in benefit derived from the purchase of shares through the employee stock purchase plan and $62,040 realized on the exercise of options.





COMPENSATION OF DIRECTORS





Directors who are employees of the Company receive no compensation for services as members of the Board. Directors who are not employees of the Company receive a $10,000 stipend per year and $2,500 for each Board meeting they attend. The Audit Committee Chairperson receives an annual stipend of $5,000, members of the audit committee receive
an annual stipend of $3,000 and compensation committee and nominating/governance committee members receive an annual stipend of $2,000.  In addition, Directors of the Company are entitled to receive certain stock option grants under the Company's Non-Employee Director Stock Option Plan (the "Director Plan").  During the last two quarters of the fiscal year the Directors affected a 10% decrease in their compensation based on general economic conditions.  The following table presents
Director compensation for the fiscal year ended June 30, 2009.





DIRECTOR COMPENSATIONName

(a)

Fees Earned or Paid in Cash
($)
(b)


Option Awards
($)
(d)


All Other
Compensation
($)
(g)


Total
($)
(h)Donald Robar

$
26,325


$
21,727


$
--


$
48,052William Grieco

$
26,325


$
21,727


$
--


$
48,052David Dangerfield

$
26,325


$
21,727


$
--


$
48,052Howard W. Phillips*

$
--


$
15,053


$
29,683


$
44,736





*
Mr. Phillips is an employee of the Company, serving as a Public Relations Specialist.  Other than his salary as an employee he receives no additional compensation as a director.





As of June 30, 2009 each member of the Board of Directors had the following options outstanding:  Donald Robar, 165,000 (123,750 vested); William Grieco, 169,000 (127,750 vested); David Dangerfield, 107,500 (66,250 vested); and, Howard Phillips, 107,500 (66,250 vested).





Compensation Committee Interlocks and Insider Participation





During fiscal 2009 the Compensation Committee consisted of Mr. Donald Robar and Mr. William Grieco, neither of whom was an officer or employee of the Company during the 2009 fiscal year.  Mr. Robar served as the Company’s Treasurer from February 1996 until April 2000.  During the 2009 fiscal year, none of our
executive officers served on our Compensation Committee (or equivalent) or board of directors of another entity whose executive officer(s) served on our Compensation Committee or Board of Directors.













85
 OPTION PLANS


Stock Plan





The Board of Directors adopted the Company’s first stock option plan on August 26, 1993.  This stock option plan has expired, however, options to purchase 55,000 shares remain outstanding under the plan.  On September 22, 2003 the Board of Directors adopted the Company’s current stock option plan and the
stockholders of the Company approved the plan on December 31, 2003.   The Stock Plan, as amended, provides for the issuance of a maximum of 1,900,000 shares of the Class A Common Stock of the Company pursuant to the grant of incentive stock options to employees and the grant of nonqualified stock options or restricted stock to employees, directors, consultants and others whose efforts are important to the success of the Company.





The Board of Directors administers the Stock Plan. Subject to the provisions of the Stock Plan, the Board of Directors has the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise
or purchase price (which in the case of an incentive stock option cannot be less than the market price of the Class A Common Stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, generally, no option may be exercised more than 60 days following termination of employment.
However, in the event that termination is due to death or disability, the option is exercisable for a period of one year following such termination.





During the fiscal year ended June 30, 2009, the Company issued additional options to purchase 368,750 shares of Class A Common Stock under the 2003 Stock Plan at a price per share ranging from $1.05 to $2.35.  Generally, options are exercisable upon grant for 25% of the shares covered with an additional 25% becoming exercisable
on each of the first three anniversaries of the date of grant; however, 177,500 of the options granted in fiscal 2009 vest 100% after  one year.





Employee Stock Purchase Plan





On October 18, 1995, the Board of Directors voted to provide employees who work in excess of 20 hours per week and more than five months per year rights to elect to participate in an Employee Stock Purchase Plan (the “Plan”), which became effective February 1, 1996.  The price per share was to be the lesser of 85%
of the average of the bid and ask price on the first day of the plan period or the last day of the plan period.  The plan was amended on December 19, 2001 and December 19, 2002 to allow for a total of 500,000 shares of Class A Common Stock to be issued under the plan.  On January 31, 2006 the stockholders approved a replacement Employee Stock Purchase Plan to replace the 1995 plan, which expired on October 18, 2005.  The new plan is identical to the old plan and expires on January
31, 2016.





A total of 157,034 shares of Class A Common Stock were issued under the 1995 plan before it’s expiration and 32,881 shares have been issued under the 2005 plan.   A total of 17,695 shares were issued in the two offerings during the fiscal year ended June 30, 2009.  Six employees are participating in
the current offering period under the plan, which began on August 1, 2009 and will end on January 31, 2010.




Non-Employee Director Stock Option Plan





The non-employee directors’ stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board.  Through June 30, 2009, options for 145,500 shares were granted under the 1995 plan.  This plan expired in August
2005 and, in January 2005, the shareholders voted to approve a new non-employee directors’ stock plan.  The new plan is identical to the plan it replaced.  Under the new plan a maximum of 350,000 shares may be issued.  On January 31, 2006, this plan was amended to increase the number of options issued to each outside director each year from 10,000 options to 20,000 options.  Each outside director is granted an option to purchase 20,000 shares of Class A Common Stock
annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date.  The new plan will expire in January 2015, ten years from the date of shareholder approval.  As of June 30, 2009, 280,000 options have been issued under the plan.





If an optionee ceases to be a member of the Board of Directors other than for death or permanent disability, the unexercised portion of the options, to the extent unvested, immediately terminate, and the unexercised portion of the options which have vested lapse 180 days after the date the optionee ceases to serve on the Board.  In
the event of death or permanent disability, all unexercised options vest and the optionee or his or her legal representative has the right to exercise the option for a period of 180 days or until the expiration of the option, if sooner.
















86


Options Exercised





During the fiscal year ended June 30, 2009, a total of 28,000 options were exercised under the plans at prices ranging from $0.22 to $1.20.





The following table provides information about options granted to the named executive officers during fiscal 2009 under the Company’s Stock Plan, Employee Stock Purchase Plan and Non-Employee Director Stock Plan.





GRANTS OF PLAN-BASED AWARDSName

(a)
Grant Date

(b)

All Other Option Awards Number of Securities Underlying Options
(#)
(j)


Exercise or Base Price of Option Awards ($/Share)*
(k)


Grant Date Fair Value of Stock and Option Awards


(l)Bruce A. Shear
11/28/2008
06/15/2009


50,000
20,000


$
$
1.25
1.20


$
$
30,200
12,448Robert H. Boswell
11/28/2008
06/15/2009


15,000
10,000


$
$
1.25
1.20


$
$
9,060
6,224Paula C. Wurts
11/28/2008
06/15/2009


15,000
10,000


$
$
1.25
1.20


$
$
9,060
6,224





These options were approved for issue by the board separate from the established Executive bonus plan.  None of the targets were met based on the Company’s performance in fiscal 2009.  The options issued on November 28, 2008 will vest 100% after one year and expire after five years.  The options issued June
15, 2009 were 25% vested when issued and vest 25% on each of the next three anniversary date of the grant and expire after five years.  The Company utilized the Black-Scholes valuation model for estimating the Grant Date Value with no adjustments for non-transferability or risk of forfeiture.  The assumptions used are as follows:





11/28/2008
06/15/2009Risk free interest rate
4.00%
3.25%Expected dividend yield
0.0%
0.0%Expected lives
5
5Expected volatility
50.24%
57.03%














87





The following table provides information about options outstanding, held by the named executive officers at the end of fiscal 2009.





OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDName

Number of Securities Underlying Unexercised Options
(#)
Exercisable


Number of Securities Underlying Unexercised Options
(#)
Unexercisable


Option Exercise Price
($)

Option Expiration Date(a)

(b)


(c)


(e)

(f)Bruce A. Shear


15,000
15,000
15,000
15,000
75,000
15,000
7,500
11,250
10,000
10,000
--
5,000



--
--
--
--
--
--
7,500
3,750
10,000
10,000
50,000
15,000


$
$
$
$
$
$
$
$
$
$
$
$
1.37
1.21
2.38
2.68
2.68
2.20
2.95
2.06
2.90
2.75
1.25
1.20

11/04/2009
11/04/2009
06/16/2010
09/20/2010
09/20/2010
05/22/2011
10/14/2012
10/31/2012
11/14/2012
02/18/2013
11/28/2013
06/15/2014Robert H. Boswell


25,000
20,000
1,250
7,500
3,750
5,625
5,000
5,000
--
2,500



--
--
--
--
3,750
1,875
5,000
5,000
15,000
7,500


$
$
$
$
$
$
$
$
$
$
1.41
2.73
1.95
2.20
2.95
2.06
2.90
2.75
1.25
1.20

12/21/2009
09/22/2010
02/16/2011
05/22/2011
10/14/2012
10/31/2012
11/14/2012
02/18/2013
11/28/2013
06/15/2014
















88











OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (continued)Name

Number of Securities Underlying Unexercised Options
(#)
Exercisable


Number of Securities Underlying Unexercised Options
(#)
Unexercisable


Option Exercise Price
($)

Option Expiration Date(a)

(b)


(c)


(e)

(f)Paula C. Wurts


25,000
20,000
7,500
3,750
5,625
5,000
5,000
--
2,500



--
--
--
3,750
1,875
5,000
5,000
15,000
7,500


$
$
$
$
$
$
$
$
$
1.41
2.73
2.20
2.95
2.06
2.90
2.75
1.25
1.20

12/21/2009
09/22/2010
05/22/2011
10/14/2012
10/31/2012
11/14/2012
02/18/2013
11/28/2013
06/15/2014








OPTIONS EXERCISED AND STOCK VESTED





There were no options exercised or stock vested held by the named executive officers in the fiscal year ended June 30, 2009.










89


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The following table sets forth certain information regarding the ownership of shares of the Company’s Class A Common Stock and Class B Common Stock (the only classes of common stock of the Company currently outstanding) as of August 15, 2009 by each person known by the Company to beneficially own more than 5% of any class of the
Company’s voting securities, each director of the Company, each of the named executive officers as defined in 17 CFR 228.402(a)(2) and all directors and officers of the Company as a group.  Shares of common stock subject to stock options vesting on or before October 14, 2009 (within 60 days of August 15, 2009) are deemed to be outstanding and beneficially owned for purposes of computing the percentage ownership of such person but are not treated as outstanding for purposes of computing the percentage
ownership of others.  Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law.  In preparing the following table, the Company has relied on the information furnished by the persons listed below:





Beneficial Owners 5%





Title of Class
Name and Address
of Beneficial Owner
Amount and Nature
of Beneficial Owner (11)
Percent of
ClassClass A Common Stock
Marathon Capital Mgmt, LLC
4 North Park Drive, Suite 106
Hunt Valley, MD  21030
1,950,650
10.17%Camden Partners Capital Management LLC
500 East Pratt Street, Suite 1200
Baltimore, MD 21202
2,456,788
12.8%





Beneficial Ownership of Named Executives and Directors





Title of Class
Name
of Beneficial Owner
Amount and Nature
of Beneficial Owner (11)
Percent of
ClassClass A Common Stock
Bruce A. Shear
777,495(1)
4.0%Robert H. Boswell
276,682(2)
1.4%Paula C. Wurts
223,789(3)
1.2%Howard W. Phillips
220,000(4)
1.1%Donald E. Robar
180,417(5)
1.0%William F. Grieco
192,000(6)
1.0%David E. Dangerfield
96,190(7)
*All Directors and Officers as a Group (7 persons)
1,966,573(8)
9.8%Class B Common Stock (9)
Bruce A. Shear
721,259(10)
93.1%All Directors and Officers as a Group (7 persons)
721,259
93.1%


*  Less than 1%













90








1.
Includes 197,500 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $1.20 to $2.95 per share.2.
Includes 77,500 shares of Class A Common Stock issuable pursuant to currently exercisable stock options at an exercise price range of $1.20 to $2.95 per share.




3.
Includes 76,250 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $1.20 to $2.95 per share.




5.
Includes 123,750 shares of Class A Common Stock issuable pursuant to currently exercisable stock options having an exercise price range of $.35 to $3.18 per share.6.
Includes 127,750 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $.22 to $3.18 per share.




7.
Includes 66,250 shares of Class A Common Stock issuable pursuant to currently exercisable stock options, having an exercise price range of $1.20 to $3.18 per share.8.
Includes an aggregate of 735,250 shares of Class A Common Stock issuable pursuant to currently exercisable stock options.  Of those options, 60,000 have an exercise price of $3.18, 22,500 have an exercise price of $2.95 per share, 20,000 have an exercise price of $2.90 per share, 40,000 have an exercise price of $2.84 per share,
15,000 have an exercise price of $2.83 per share, 20,000 have an exercise price of $2.75 per share, 40,000 have an exercise price of $2.73 per share, 90,000 have an exercise price of $2.68 per share, 15,000 have an exercise price of $2.38 per share, 30,000 have an exercise price of $2.20 per share, 80,000 have an exercise price of $2.11 per share, 22,500 have an exercise price of $2.06 per share, 1,250 have an exercise price of $1.95 per share, 20,000 have an exercise price of $1.50 per share, 40,000 have an
exercise price of $1.48 per share, 50,000 have an exercise price of $1.41 per share, 15,000 have an exercise price of $1.37 per share, 20,000 have an exercise price of $1.33 per share, 15,000 have an exercise price of $1.21 per share, 20,000 have an exercise price of $1.20 per share, 2,000 have an exercise price of $.81 per share, 20,000 have an exercise price of $.75 per share, 20,000 have an exercise price of $.74 per share, 35,000 have an exercise price of $.55 per share, 20,000 have an exercise price of $.35
per share and 2,000 have an exercise price of $.22 per share.




9.
Each share of Class B Common Stock is convertible into one share of Class A Common Stock automatically upon any sale or transfer or at any time at the option of the holder.10.
Includes 56,369 shares of Class B Common Stock pledged to Steven J. Shear of 2 Addison Avenue, Lynn, Massachusetts 01902, Bruce A. Shear’s brother, to secure the purchase price obligation of Bruce A. Shear in connection with his purchase of his brother’s stock in the Company in December 1988.  In the absence of any
default under this obligation, Bruce A. Shear retains full voting power with respect to these shares.




11.
“Amount and Nature of Beneficial Ownership”.  Each share of Class A Common Stock is entitled to one vote per share and each share of Class B Common Stock is entitled to five votes per share on all matters on which stockholders may vote (except that the holders of the Class A Common Stock are entitled to elect two members
of the Company’s Board of Directors and holders of the Class B Common Stock are entitled to elect all the remaining members of the Company’s Board of Directors).





By virtue of the fact that Mr. Shear owns 93% of the class B shares and the class B shareholders have the right to elect all of the directors except the two directors elected by the class A shareholders, Mr. Shear has the right to elect the majority of the members of the board of directors and may be deemed to be in control of the Company.








Based on the number of shares listed under the column headed “Amount and Nature of Beneficial Ownership,” the following persons or groups held the following percentages of voting rights for all shares of common stock combined as of August 15, 2009:





Bruce A. Shear
18.81%All Directors and Officers as a Group (7 persons)
23.37%










91
 SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS as of JUNE 30, 2009


PLAN

(a)



Number of securities to be issued upon exercise of outstanding options, warrants and rights


(b)





Weighted-average exercise price of outstanding options, warrants and rights


( c)


Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))1993 Option plan


55,000


$
0.62



--2003 Option plan


1,165,250


$
2.05



630,0632006 Employee stock Purchase plan


--


$
0.00



467,1191995 Director plan


64,000


$
0.78



--2005 Director plan


270,000


$
2.30



70,000Total Shares and Options authorized


1,554,250


$
1.99



1,167,182





All equity compensation plans were approved by the security holders.





Item 13.  CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE





During the quarter ended March 31, 2009, the Company’s Board of Directors voted by unanimous written consent to allow short-term borrowing from related parties up to a maximum of $500,000, with an annual interest rate of 12% and a 2% origination fee.  The Company utilized this funding during the March 31, 2009 quarter for
a total of $275,000 as follows:





Related Party

AmountEric E. Shear

$
200,000.00Stephen J. Shear


75,000.00





Both individuals are brothers of Bruce A. Shear, the Company’s CEO and President of the Board of Directors.  This amount was paid in full in March 2009.





In addition, during the fiscal year, the Company repurchased shares from beneficial owners of the Company as shown below:





Related Party

Number of Shares


AmountCamden Partners Limited Partnership, Camden Partners II Limited Partnership and Camden Partners Capital Management, LLC


146,024


$
235,098.64First Quadrant Mercury, L.P.


53,976



86,901.36Total


200,000


$
322,000.00





There were no other related party transactions for the periods presented in this Annual Report on 10-K.  There have been no other related party transactions as of the date of this report.





Before entering into any contract or agreement involving a related party the Board of Directors reviews and approves the transaction.  In the event one of the related parties is a member of the Board of Directors, that member of the Board recuses himself from participation in the discussion or approval of the transaction.





Item 14.  Principal Accountant Fees and Services





The information required by this item is incorporated by reference to PHC, Inc.’s Proxy Statement for its 2009 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended June 30, 2009.









92


PART IV





Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)
The following documents are filed as part of this Annual Report on Form 10-K.1)
Consolidated Financial Statements:                                                                                                           Page
Number





·
Report of Independent Registered Public Accounting Firm                                                       
      F-2·
Consolidated balance sheets                                                                                                                  F-3


·
Consolidated statements of operations                                                                                                 F-4·
Consolidated statements of changes in stockholders’ equity                                                           F-5


·
Consolidated statements of cash flows                                                                                                 F-6
– F-7·
Notes to consolidated financial statements                                                                                          F-8
– F-32





2)
Financial Statement Schedules:  All schedules are included in the consolidated financial statements and footnotes thereto.(b)
Exhibits





Exhibit No.
Description3.1
Restated Articles of Organization of the Registrant, as amended.  (Filed as exhibit 3.1 to the Company’s report on Form 10-K filed with the Securities and Exchange Commission on September 30, 2008, and hereby incorporated by reference.  Commission file number 1-33323).3.2
Amended and Restated By-laws of the Registrant  (Filed as exhibit 3.3 to the Company’s report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2007, and hereby incorporated by reference.  Commission file number 0-22916).4.1
Equity Purchase Warrant to purchase 1% equity in Behavioral Health Online by and between PHC, Inc., and Heller Healthcare Finance dated December 18, 2000.  (Filed as exhibit 4.36 to the Company’s report on Form 10-KSB filed with the Securities and Exchange Commission on September 26, 2001 and hereby incorporated by reference.  Commission
file number 0-22916).4.2
Form of Subscription Agreement and Warrant.  (Filed as exhibit 4.20 to the Company’s report on Form 8-K filed with the Securities and Exchange Commission on May 13, 2004, and hereby incorporated by reference.  Commission file number 0-22916).4.3
Warrant Agreement issued to Capital Source Finance, LLC to purchase 250,000 Class A Common shares dated June 13, 2007. (Filed as exhibit 4.4 to the Company’s report on Form 10-K filed with the Securities and Exchange Commission on September 28, 2007, and hereby incorporated by reference. Commission file number 0-22916).10.1
Deed of Trust Note of Mount Regis Center Limited Partnership in favor of Douglas M. Roberts, dated July 28, 1987, in the amount of $560,000, guaranteed by PHC, Inc., with Deed of Trust executed by Mount Regis Center, Limited Partnership of even date.  (Filed as exhibit 10.1 to the Company's registration statement onForm
SB-2, filed with the Securities and Exchange Commission on March 2, 1994, and hereby incorporated by reference.)10.2
Assignment and Assumption of Limited Partnership Interest, by and between PHC of Virginia Inc. and each assignor dated as of June 30, 1994.  (Filed as exhibit 10.57 to the Company's report on Form 10-KSB filed with the Securities and Exchange Commission on September 28, 1994, and hereby incorporated by reference).10.3
Copy of Note of Bruce A. Shear in favor of Steven J. Shear, dated December 1988, in the amount of $195,695; Pledge Agreement by and between Bruce A. Shear and Steven J. Shear, dated December 15, 1988; Stock Purchase Agreement by and between Steven J. Shear and Bruce A. Shear, dated December 1, 1988.  (Filed as exhibit 10.2 to
the Company’s registration statement on Form SB-2 filed with the Securities and Exchange Commission on March 2, 1994 and hereby incorporated by reference.  Commission file number 333-71418).10.4
Agreement between Family Independence Agency and Harbor Oaks Hospital effective January 1, 1997.  (Filed as exhibit 10.4 to the Company’s report on Form 10-KSB, filed with the Securities and Exchange Commission on October 14, 1997 and hereby incorporated by reference.  Commission file number 0-22916)













93





Exhibit No.
Description10.5
Master Contract by and between Family Independence Agency and Harbor Oaks Hospital effective January 1, 1997.  (Filed as exhibit 10.5 to the Company’s report on Form 10-KSB, filed on October 14, 1997 and hereby incorporated by reference.  Commission file number 0-22916).**10.6
The Company’s 1993 Stock Purchase and Option Plan, as amended December 2002.  (Filed as exhibit 10.23 to the Company’s registration statement  on Form S-8 filed with the Securitites and Exchange Commission on January 8, 2003, and hereby incorporated by reference.  Commission file number 333-102402).**10.7
The Company’s 1995 Non-Employee Director Stock Option Plan, as amended December 2002.  (Filed as exhibit 10.24 to the Company’s registration statement on Form S-8  filed with the Securities and Exchange Commission on January 8, 2003 and hereby incorporated by reference.  Commission file number 333-102402).**10.8
The Company’s 1995 Employee Stock Purchase Plan, as amended December 2002.  (Filed as exhibit 10.25 to the Company’s registration statement on Form S-8 filed with the Securities and Exchange Commission on January 8, 2003 and hereby incorporated by reference.  Commission file number 333-102402).10.9
Revolving Credit, Term Loan and Security Agreement, dated October 19, 2004, by and between PHC, Inc, PHC of Utah, Inc., PHC of Virginia, Inc. and PHC of Michigan, Inc., PHC of Nevada, Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral Institute, Inc. and CapitalSource Finance, LLC.  (Filed as exhibit 10.38 to
the Company's report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2004 and hereby incorporated by reference.  Commission file number 0-22916).10.10
Term Loan Note, dated October 19, 2004, by and between PHC, Inc, PHC of Utah, Inc., PHC of Virginia, Inc. and PHC of Michigan, Inc., PHC of Nevada, Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral Institute, Inc. and CapitalSource Finance, LLC in the amount of $1,400,000.  (Filed as exhibit 10.39 to the Company's
report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2004 and hereby incorporated by reference.  Commission file number 0-22916).10.11
Revolving Note dated October 19, 2004, by and between PHC, Inc, PHC of Utah, Inc., PHC of Virginia, Inc. and PHC of Michigan, Inc., PHC of Nevada, Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral Institute, Inc. and CapitalSource Finance, LLC in the amount of $3,500,000.  (Filed as exhibit 10.40 to the Company's
report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2004 and hereby incorporated by reference.  Commission file number 0-22916).10.12
One of two (2) Revolving Credit Notes in the amount of $1,500,000 issued to replace the $3,500,000 note signed in favor of Capital Source dated October 19, 2004 by and between PHC of Michigan, Inc., PHC of Nevada, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., North Point – Pioneer, Inc., Wellplace, Inc., Detroit Behavioral Institute,
Inc. and CapitalSource Finance LLC.  (Filed as exhibit 10.47 to the Company’s report on Form 10-QSB filed with the Securities and Exchange Commission on May 13, 2005 and hereby incorporated by reference.  Commission file number 0-22916).10.13
One of two (2) Revolving Credit Notes in the amount of $2,000,000 issued to replace the $3,500,000 note signed in favor of Capital Source dated October 19, 2004 by and between PHC of Michigan, Inc., PHC of Nevada, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., North Point – Pioneer, Inc., Wellplace, Inc., Detroit Behavioral Institute,
Inc. and CapitalSource Finance LLC.   (Filed as exhibit 10.48 to the Company’s report on Form 10-QSB filed with the Securities and Exchange Commission on May 13, 2005 and hereby incorporated by reference.  Commission file number 0-22916).10.14
Agreement to purchase licensed software by and between PHC, Inc., and Medical Information Technology, Inc., dated March 31, 2006.  (Filed as exhibit 10.49 to the Company’s report on Form 10-QSB filed with the Securities and Exchange Commission on May 22, 2006 and hereby incorporated by reference.  Commission file
number 0-22916).










94


Exhibit No.
Description10.15
Master lease agreement by and between PHC, Inc., and Banc of America Leasing & Capital, LLC, dated April 20, 2006, effective April 1, 2006, in the amount of $662,431.  (Filed as exhibit 10.50 to the Company’s report on Form 10-QSB filed with the Securities and Exchange Commission on May 22, 2006 and hereby incorporated
by reference.  Commission file number 0-22916).10.16
First Amendment to Revolving Credit, Term Loan and Security Agreement, dated October 19, 2004, by and between PHC, Inc, PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Michigan, Inc., PHC of Nevada, Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral Institute, Inc. and CapitalSource Finance, LLC., adjusting the covenants
for census and EBITDAM.  (Filed as exhibit 10.25 to the Company’s report on Form 10-K filed with the Securities and Exchange Commission on October 13, 2006 and hereby incorporated by reference.  Commission file number 0-22916).10.17
Second Amendment to Revolving Credit, Term Loan and Security Agreement, dated October 19, 2004, by and between PHC, Inc, PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Michigan, Inc., PHC of Nevada, Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral Institute, Inc. and CapitalSource Finance, LLC., extending the term of
the agreement through October 19, 2008.  (Filed as exhibit 10.26 to the Company’s report on Form 10-K filed with the Securities and Exchange Commission on October 13, 2006 and hereby incorporated by reference.  Commission file number 0-22916).**10.18
The Company's 2004 Non-Employee Director Stock Option Plan.  (Filed as exhibit 10.42 to the Company’s registration statement on Form S-8 filed with the Securities and Exchange Commission on April 5, 2005 and hereby incorporated by reference.  Commission file number 333-123842).**10.19
The Company's 2005 Employee Stock Purchase Plan.  (Filed as exhibit 10.29 to the Company’s registration statement report on Form S-8 filed with the Securities and Exchange Commission on March 6, 2008 and hereby incorporated by reference.  Commission file number 333-149579).**10.20
The Company's 2003 Stock Purchase and Option Plan, as amended December 2007.  (Filed as exhibit 10.30 to the Company’s registration statement on Form S-8 filed with the Securities and Exchange Commission on March 6, 2008 and hereby incorporated by reference.  Commission file number 333-149579).10.21
Amendment to Revolving Credit, Term Loan and Security Agreement, dated October 19, 2004, by and between PHC, Inc, PHC of Utah, Inc., PHC of Virginia, Inc., PHC of Michigan, Inc., PHC of Nevada, Inc., North Point Pioneer, Inc, Wellplace, Inc., Detroit Behavioral Institute, Inc. and CapitalSource Finance, LLC. To modify the agreement to increase
the amount available under the term loan, extend the agreement through June 13, 2010, reduce the interest rates on the notes and adjust the covenants under the agreement.  (Filed as exhibit 10.28 to the Company’s report on Form 10K filed with the Securities and Exchange Commission on September 28,  2007 and hereby incorporated by reference.  Commission file number 1-33323).10.22
Stock Purchase Agreement by and between PHC, Inc. and First Quadrant Mercury, L. P. dated December 30, 2008. (Filed as exhibit 10.28 to the Company’s report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2009 and hereby incorporated by reference.  Commission file number 1-33323).10.23
Stock Purchase Agreement by and between PHC, Inc. and Camden Partners Limited Partnership and Camden Partners II Limited Partnership and Camden Partners Capital Management, LLC (CPCM) dated December 30, 2008. (Filed as exhibit 10.28 to the Company’s report on Form 8-K filed with the Securities and Exchange Commission on January 6,
2009 and hereby incorporated by reference.  Commission file number 1-33323).










95





Exhibit No.
Description10.24
Asset Purchase Agreement by and among Premier Research International, LLC, Premier Research Arizona, LLC, PHC, Inc. d/b/a Pioneer Behavioral Health, Pivotal Research Centers, Inc. and Pivotal Research Centers, LLC. (Filed as exhibit 10.30 to the Company’s report on Form 10-Q filed with the Securities and Exchange Commission on February
17, 2009 and hereby incorporated by reference.  Commission file number 1-33323).10.31
First Amendment dated March 3, 2009 to the Asset Purchase Agreement by and among Premier Research International, LLC, Premier Research Arizona, LLC, Pivotal Research Centers, Inc., a Delaware corporation, Pivotal Research Centers, LLC, an Arizona limited liability company, and PHC, Inc, d/b/a Pioneer Behavioral Health, dated January 12,
2009. (Filed as exhibit 10.31 to the Company’s report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2009 and hereby incorporated by reference.  Commission file number 1-33323).10.32
Letter Agreement dated March 4, 2009 related to the Asset Purchase Agreement by and among Premier Research International, LLC, Premier Research Arizona, LLC, Pivotal Research Centers, Inc., a Delaware corporation, Pivotal Research Centers, LLC, an Arizona limited liability company, and PHC, Inc, d/b/a Pioneer Behavioral Health, dated January
12, 2009, regarding outside closing date matters.  (Filed as exhibit 10.32 to the Company’s report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2009 and hereby incorporated by reference.  Commission file number 1-33323).10.33
Second Amendment dated March 13, 2009 to the Asset Purchase Agreement by and among Premier Research International, LLC, Premier Research Arizona, LLC, Pivotal Research Centers, Inc., a Delaware corporation, Pivotal Research Centers, LLC, an Arizona limited liability company, and PHC, Inc, d/b/a Pioneer Behavioral Health, dated January 12,
2009 and amended March 3, 2009, regarding supplemental closing information.  (Filed as exhibit 10.33 to the Company’s report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2009 and hereby incorporated by reference.  Commission file number 1-33323).*14.1
Code of Ethics.  (Filed as exhibit 14.1 to the Company’s report on Form 10-K filed with the Securities and Exchange Commission on  October 13, 2006 and hereby incorporated by reference.  Commission file number 0-22916).*21.1
List of Subsidiaries*23.1
Consent of BDO Seidman, LLP, an independent registered public accounting firm.* 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





*    Filed herewith


**  Management contract or compensatory plan










96











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.





SIGNATURE








PHC, INC.





Date: September 28, 2009
By: /s/   Bruce A. Shear
Bruce A. Shear
President and Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.













97










SIGNATURE
TITLE(S)
DATE/s/    BRUCE A. SHEAR
Bruce A. Shear
President, Chief Executive Officer and Director (principal executive officer)
September 28, 2009/s/   PAULA C. WURTS
Paula C. Wurts
Chief Financial Officer, Treasurer and Clerk  (principal  financial and accounting officer)
September 28, 2009/s/   DONALD E. ROBAR
Donald E. Robar
Director
September 28, 2009/s/   HOWARD PHILLIPS
Howard Phillips_
Director
September 28, 2009/s/   WILLIAM F.GRIECO
William F. Grieco
Director
September 28, 2009/s/   DAVID E. DANGERFIELD
David E. Dangerfield
Director
September 28, 2009












98