UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-K/A


(Amendment
No. 1)





[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
              04-2601571(State
      or other Jurisdiction of
                Incorporation
      or Organization
              (I.R.S.
      Employer Identification No.)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.








Table of
Contents


Index
              PageExplanatory
      Note
              4PART
      IItem
      1. Description of Business
              6PART
      IIItem
      6. Selected Financial Data
              21Item
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              23Item
      8. Financial Statements and Supplementary Data
              35Index
      to financial statements
              F-1PART
      IVItem
      15. Exhibits and Financial Statement Schedules
              69Signatures
              73
 
   Explanatory
Note
 
 This
amendment to the Company’s report on Form 10-K, filed with the Commission on
September 29, 2009, is being filed to include information that was inadvertently
deleted from the original EDGAR document before filing and to make various edits
and corrections to the document that were not reflected in the filed EDGAR
document. These changes are outlined below for reference.
 
 PART
I
 
 Item 1.
“Description of Business” is being amended to include the paragraph describing
Seven Hills Hospital which was inadvertently deleted from the original EDGAR
document.
 
 PART
II
 
 Item 6.
“Selected Financial Data” is being amended to correct the “Net income (loss)
from continuing operations” figure for 2008 to $1,584. The edit to this number
was missed in the filed EDGAR document.
 
 Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” is being amended as follows:
 
 1.
                In
      the “Statement of Operations Data” table, to revise the title of
      “Provision for (benefit from) income taxes” to “Provision for income
      taxes” and to remove the brackets from the related line items for 2009 and
      to revise the amount in 2009 to $65, where these revisions were
      inadvertently missed in editing the final EDGAR
  document.2.
                To
      revise the first paragraph under the heading “Year ended June 30, 2009 as
      compared to year ended June 30, 2008” to correct the two pre-tax amounts
      to $1,041,375 and $1,584,607 where these revisions were inadvertently
      missed in editing the original EDGAR document3.
                To
      insert the paragraph describing “Restricted Cash” between “Liquidity and
      Capital Resources” and “Contractual Obligations.” This paragraph was
      inadvertently deleted from the original EDGAR
  document
 
 Item 8.
“Financial Statements and Supplementary Data” is being amended as
follows:
 1.
                To
      correct the “Consolidated Statement of Operations” to make revisions that
      were inadvertently missed in editing the original EDGAR document to remove
      the brackets from the “Provision for income taxes” figure for 2008; to
      correct the tax provisions shown in the “Loss from discontinued operations
      net of tax...” heading to $889,246 and $770,140; and to correct the “Basic
      net income (loss) per common share” from “Discontinued operations” figure
      for 2008 to $(0.06).2.
                To
      correct the “Consolidated Statements of Changes in Stockholders’ Equity”
      to delete a misplaced number in the EDGAR document that was missed in
      proofing3.
                To
      correct the “Consolidated Statements of Cash Flows” to make revisions that
      were inadvertently missed in editing the original EDGAR document to
      correct the “Net cash provided by (used in) investing activities” figure
      for 2009 to $1,714,836; to remove the brackets from the “Net (decrease)
      increase in cash, continuing operations” figure for 2009; to add brackets
      to the “Net increase (decrease) in cash, discontinued operations” figure
      for 2009; to correct the “Net (loss) income from continuing operations”
      figure for 2008 to $1,584,607; to correct the amount of “Deferred income
      taxes” for 2008 to $392,841; and, add a bracket to the “Net increase
      (decrease) in cash and cash equivalents” figure for
  2008.4.
                To
      add the paragraph under “Recently Adopted Standards” regarding FASB
      Statement No. 165, “Subsequent Events” on page F-16 which was
      inadvertently deleted from the original EDGAR document.5.
                To
      revise information in “NOTE D- OTHER ASSETS” to remove duplicative
      disclosure in the paragraph below the table on page F-18. This revision
      was inadvertently missed in editing the original EDGAR
      document6.
                To
      correct the “Less current portion” figure of future minimum lease payments
      in “NOTE F- CAPITAL LEASE OBLIGATION” to $103,561. This revision was
      inadvertently missed in editing the original EDGAR
  document7.
                To
      revise the “Accrued legal and accounting fees” heading to “Accrued legal
      and accounting” and the related figure for 2008 to $317,990 in the table
      in “NOTE G – ACCRUED EXPENSES AND OTHER LIABILITIES” to reflect revisions
      that were inadvertently missed in editing the original EDGAR
      document8.
                To
      correct the “Deferred” tax total figure for 2009 to $(359,793), the
      “Non-deductible expenses” figure for 2009 to -11.45% and the “Effective
      income tax rate” figures for 2009 and 2008 to -6.74% and 46.31%,
      respectively, in the table in “NOTE H – INCOME TAXES” to reflect revisions
      that were inadvertently missed in editing the original EDGAR
      document.9.
                To
      correct the number of options issued in the last sentence of the first
      paragraph to 1,507,500 and to delete the final paragraph on page F-25 in
      “NOTE J – STOCK HOLDERS’EQUITY AND STOCK PLANS” to reflect two revisions
      that were inadvertently missed in editing the original EDGAR
      document10.
                To
      correct information in “NOTE K – BUSINESS SEGMENT INFORMATION” to make
      revisions to “Segment net income (loss)” for “Discontinued Operations” for
      2009 to $(1,412,663) and for 2008 to $(1,259,879) and for “Administrative
      Services” for 2009 to $(4,471,141) and for 2008 to $(5,200,769) where
      these revisions were inadvertently missed in editing the original EDGAR
      document11.
                To
      add brackets to the “Income tax (benefit) provision” figure for 2008 in
      the table in “NOTE M – Discontinued Operations” to reflect a revision that
      was inadvertently missed in editing the original EDGAR
      document





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.











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.





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.





Although
Highland Ridge does provide services to individuals from all of the States
through contracts with the railroads and other major employers, most patients at
this facility are from Utah and surrounding states. Individuals typically access
Highland Ridge’s services through professional referrals, family members,
employers, employee assistance programs or contracts between the Company and
health maintenance organizations located in Utah.





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.





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.





Managed health care organizations,
state agencies, physicians and patients themselves refer patients to our
facilities. These facilities have a patient population ranging from children as
young as five years of age to senior citizens. Compared to the substance abuse
facilities, the psychiatric facilities treat a larger percentage of female
patients.





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.





Harbor Oaks has become a primary
provider for Medicaid patients from Wayne, Macomb and St. Clair counties.
Utilization of a short-term crisis management model in conjunction with strong
case management has allowed Harbor Oaks to successfully enter this segment of
the market. Reimbursement for these services is comparable to traditional
managed care payors. Given the current climate of public sector treatment
availability, Harbor Oaks anticipates continued growth in this sector of the
business.





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.







SEVEN HILLS
HOSPITAL -The Company participated in the construction of the Seven
Hills Hospital through its relationship with Seven Hills Psych Center, LLC. The
construction was completed and the facility was opened in the fourth quarter of
fiscal 2008. Seven Hills Hospital, a 55-bed psychiatric hospital located in Las
Vegas, Nevada, began admitting patients on May 14, 2008. Seven Hills Hospital is
licensed by the State of Nevada, accredited by The Joint Commission and has
passed the initial CMS survey in its pursuit of Medicare certification. Seven
Hills provides services to clients covered under the capitated contracts of the
Company’s other subsidiary, Harmony Healthcare. Seven Hills provides inpatient
psychiatric care to adults only at this time and has recently expanded its
programs to include detoxification and residential treatment of chemical
dependency. The facility also expects to expand its patient base and programs
over the next fiscal year to include partial hospitalization.





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.





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.





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.


(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.





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.





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
            Treatment
            ContractYear End
            Services
            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.





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 Requirements





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.





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.








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.





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
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
            )
            
            
            1,584
            
            
            
            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








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














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.





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 years 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, 2008Amount
              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




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 valuation 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 $1,365,723 excluding discontinued operations and during
fiscal 2009 the Company recorded a tax expense from continuing operations of
$65,764.





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.





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 out patient 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
investor 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 income taxes
            
            
            65
            
            
            
            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
            %





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 $1,041,375 for the fiscal year
ended June 30, 2009 from income of $1,584,607 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.





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.





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 result 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 issue 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.





Restricted
Cash





During
the quarter ended December 31, 2008, the litigation involving the Company and a
terminated employee 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 recommended an appeal, which the Company has initiated.
Since 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.





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 a 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.





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
it’s 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:











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.





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
Statement.





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. We don’t expect adoption of
these FASB Staff Positions to 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.





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, October 2,
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.










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/A.








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-32


























F-1





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


October
2, 2009





F-2





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












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.








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
              )
              
              
              147,607
              )Income
      (loss) before income taxes
              
              
              (975,611
              )
              
              
              2,950,330Provision
      for income taxes
              
              
              65,764
              
              
              
              1,365,723Income
      (loss) from continuing operation
              
              
              (1,041,375
              )
              
              
              1,584,607Loss
      from discontinued operations net of tax benefit of
                $889,246
      and $770,140, 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)
              
              
              
              (0.06)$
              (0.12
              )
              
              $
              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







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 warrants
              exercised
            
            
            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 sharesConversion
      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
            
            
            
            
            
            
            
            
            
            
            
            28,347Purchase
      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.







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 warrants
              exercised
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            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 sharess
            
            
            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
      loss 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








12


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 continuing operations
              
              
              (1,412,633
              )
              
              
              (1,259,879
              )Net
      (loss) income from continuing operations
              
              $
              (1,041,375
              )
              
              $
              1,584,607Adjustments
      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
              )
              
              
              392,841Stock
      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
              )repaid
      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 continuing operations
              
              
              1,747,024
              
              
              
              (4,055,846
              )Net
      cash provided by investing discontinued operations
              
              
              (32,188
              )
              
              
              (31,495
              )Net
      cash provided by (used in) investing activities
              
              
              1,714,836
              
              
              
              (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
              )
              
              
              (1,249,921
              )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.









PHC,
INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows (continued)


As of 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.








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)













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








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








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
            Term
      of lease Lesser of useful life or term of lease (2 to 10
      years)





Other
assets:





Other
assets consists 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








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








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.





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











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 true-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.














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
Financial 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 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.

















F-15








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.





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.





F-16





13




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, October 2,
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








14


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 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










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
            
            
            267,740$
            1,173,973





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







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
            
            
            103,561Long-term
      obligations under capital leases
            
            $
            132,368





F-20







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
            
            
            295,877
            
            
            
            317,990Accrued
      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(359,793
            )
            
            
            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










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
            
            
            -11.45
            %
            
            
            5.06
            %Other,
      net
            
            
            -0.17
            %
            
            
            0.65
            %Effective
      income tax rate
            
            
            -6.74
            %
            
            
            46.31
            %





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







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










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





15


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, 1,507,500
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.








F-25


16




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.














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








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
              33,000Exercised
              --Expired
              --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









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
            
            
            
            (1,412,633
            )
            
            
            795,345
            
            
            
            (4,471,141
            )
            
            
            --
            
            
            
            (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
            
            
            
            (1,259,879
            )
            
            
            1,084,060
            
            
            
            (5,200,769
            )
            
            
            --
            
            
            
            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
            
            
            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”.



















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
              s1stQuarter
              2ndQuarter
              3rdQuarter
              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 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)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)
              ($0.00)Income
      (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


17





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 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
            )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





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.





s F-31


18


PHC,
INC. AND SUBSIDIARIES





Notes
to Consolidated Financial Statements


June
30, 2009





Note
M- Discontinued Operations (continued)





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
            )
            
            $
            (770,140
            )Net
      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 Party Transactions





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
              
              $
              200,000Stephen
      J. Shear
              
              
              75,000





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










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).s3.2
            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, 2001and 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 CapitalSource 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 on Form 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).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 with the Securities and Exchange
      Commission 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 Securities 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).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 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 10-K
      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).10.24
            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).Exhibit
      No.
            Description10.31
            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








SIGNATURESPursuant
      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.SIGNATURES
              TITLE(S)
              DATESPHC,
      INCDate:  October
      5, 2009
              By:/s/ BRUCE A.
      SHEAR
              October
      5, 2009Bruce
      A. Shear, President and Chief Executive Officer./s/ Bruce
      A. Shear
                Bruce
      A. Shear
              President,,
      Chief Executive Officer (Principal  executive
      officer)
              October
      5, 2009/s/ Paula
      C. Wurts
                Paula C,.
      Wurts
              Chief
      Financial Officer, Treasurer and Clerk, (principal financial and
      accounting officer
              October
      5, 2009_________________
                Donald
      E. Robar
              Director_________________
                Howard
      Phillips
              Director_________________
                William
      F. Grieco
              Director_________________
                David
      E. Dangerfield
              Director