UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2007. || TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to __________ Commission file number 1-33323 PHC, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2601571 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 Lake Street, Suite 102, Peabody MA 01960 (Address of principal executive offices) (Zip Code) 978-536-2777 (Registrant's telephone number) 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 past 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 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 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__ APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares outstanding of each class of common equity, as of October 30, 2007: Class A Common Stock 19,349,820 Class B Common Stock 775,760 1 PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements. Condensed Consolidated Balance Sheets - September 30, 2007 (unaudited) and June 30, 2007. Condensed Consolidated Statements of Income (unaudited) - Three months ended September 30, 2007 and September 30, 2006. Condensed Consolidated Statements of Cash Flows (unaudited) - Three months ended September 30, 2007 and September 30, 2006. Notes to Unaudited Condensed Consolidated Financial Statements - September 30, 2007 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Item 4T. Controls and Procedures PART II. OTHER INFORMATION Item 6. Exhibits Signatures 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30, June 30, ASSETS 2007 2007 ____ ____ (unaudited) Current assets: Cash and cash equivalents $ 2,759,303 $ 3,395,173 Accounts receivable, net of allowance for doubtful accounts of $2,878,902 at September 30, 2007 and $3,764,585 at June 30, 2007 6,694,412 6,524,387 Pharmaceutical receivables 1,723,159 1,942,268 Prepaid expenses 687,390 688,600 Other receivables and advances 960,527 868,628 Deferred income tax asset 1,596,796 2,015,000 ___________ ____________ Total current assets 14,421,587 15,434,056 Accounts receivable, non-current 35,000 35,000 Other receivable 85,619 91,697 Property and equipment, net 2,371,375 2,121,191 Deferred financing costs, net of amortization of $179,136 at September 30, 2007 and $143,377 June 30, 2007 578,105 613,865 Customer relationships, net of amortization of $410,000 at September 30, 2007 and $380,000 at June 30, 2007 1,990,000 2,020,000 Goodwill 3,508,576 3,508,576 Other assets 3,305,609 3,465,356 ___________ ____________ Total assets $26,295,871 $ 27,289,741 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,322,824 $ 1,261,841 Current maturities of long-term debt 1,120,110 1,134,300 Revolving credit note 562,496 1,518,742 Deferred revenue 270,492 433,301 Current portion of obligations under capital leases 195,024 205,858 Accrued payroll, payroll taxes and benefits 1,744,386 1,631,693 Accrued expenses and other liabilities 1,458,130 1,702,772 ___________ ____________ Total current liabilities 6,673,462 7,888,507 Long-term debt 623,455 831,387 Obligations under capital leases 187,612 226,706 Deferred tax liability 93,000 93,000 ___________ ____________ Total liabilities 7,577,529 9,039,600 ___________ ____________ Stockholders' equity: Preferred Stock, 1,000,000 shares authorized, none issued or outstanding -- -- Class A common stock, $.01 par value, 30,000,000 shares authorized, 19,622,076 and 19,622,076 shares issued at September 30, 2007 and June 30, 2007, respectively 196,221 196,221 Class B common stock, $.01 par value, 2,000,000 shares authorized, 775,760 issued and outstanding at September 30, 2007 and June 30, 2007, respectively, each convertible into one share of Class A common stock 7,758 7,758 Additional paid-in capital 26,875,513 26,812,808 Treasury stock, 349,098 shares of Class A common stock at September 30, 2007 and 199,098 at June 30, 2007, at cost (586,215) (191,700) Accumulated deficit (7,774,935) (8,574,946) ___________ ____________ Total stockholders' equity 18,718,342 18,250,141 Total liabilities and stockholders' equity $26,295,871 $27,289,741 =========== =========== See Notes to Condensed Consolidated Financial Statements 3 PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, 2007 2006 ____ ____ Revenues: Patient care, net $10,143,435 $ 7,876,432 Pharmaceutical studies 1,420,965 1,051,383 Contract support services 1,139,766 1,134,391 ___________ ___________ Total revenues 12,704,166 10,062,206 __________ ___________ Operating expenses: Patient care expenses 5,296,074 4,054,966 Patient care expenses, pharmaceutical 609,792 486,937 Cost of contract support services 802,648 838,555 Provision for doubtful accounts 422,226 452,525 Administrative expenses 3,609,936 2,996,141 Administrative expenses, pharmaceutical 571,856 679,108 __________ ___________ Total operating expenses 11,312,532 9,508,232 __________ ___________ Income from operations 1,391,634 553,974 __________ ___________ Other income (expense): Interest income 32,535 32,849 Other income (expense) 14,099 (943) Interest expense (131,381) (119,830) __________ ___________ Total other expenses, net (84,747) (87,924) __________ ___________ Income before provision for taxes 1,306,887 466,050 Provision for income taxes 506,876 182,767 __________ ___________ Net income $ 800,011 $ 283,283 ========== =========== Basic net income per common share $ 0.04 $ 0.02 ========== =========== Basic weighted average number of shares outstanding 20,136,781 18,514,142 ========== ========== Diluted net income per common share $ 0.04 $ 0.01 ============ =========== Diluted weighted average number of shares outstanding 20,601,828 19,296,638 ========== ========== See Notes to Condensed Consolidated Financial Statements. 4 PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended September 30 2007 2006 ____ ____ Cash flows from operating activities: Net income $ 800,011 $ 283,283 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 240,087 170,591 Non-cash interest expense 38,480 16,489 Deferred income tax expense 418,204 149,232 Non-cash stock-based compensation 62,705 70,781 Change in allowance for doubtful accounts 422,226 452,525 Changes in: Accounts receivable (458,963) (813,640) Prepaid expenses and other current assets 1,210 (457,819) Other assets (2,712) (1,188) Accounts payable 60,983 321,860 Accrued expenses and other liabilities (294,758) (100,690) __________ _________ Net cash provided by operating activities 1,287,473 91,424 __________ _________ Cash flows from investing activities: Acquisition of property and equipment (270,897) (152,959) Construction in Progress (26,919) -- __________ _________ Net cash used in investing activities (297,816) (152,959) __________ _________ Cash flows from financing activities: Revolving debt, net (956,246) 174,563 Principal payments on long-term debt (274,766) (223,088) Proceeds from issuance of common stock, net -- 64,365 Purchase of treasury stock (394,515) -- __________ _________ Net cash provided by financing activities (1,625,527) 15,840 Net decrease in cash and cash equivalents (635,870) (45,695) Beginning cash and cash equivalents 3,395,173 1,820,105 __________ _________ Ending cash and cash equivalents $2,759,303 $1,774,410 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 78,141 $ 171,548 Income taxes 256,094 116,384 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock in cashless exercise of warrants $ -- $ 30 Obligations under capital leases -- 104,497 See Notes to Condensed Consolidated Financial Statements. 5 PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2007 Note A - The Company PHC, Inc. (the "Company") is incorporated in the state 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 conducts pharmaceutical research studies, 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 four 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 ten psychiatric treatment locations which include Harbor Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 50-bed residential facility and six outpatient behavioral health locations (one in New Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, three in Las Vegas, Nevada and one in Bullhead City, Arizona, operating as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area); (2) Pharmaceutical research study services, including three clinic study sites: two in Arizona, in Peoria and Mesa and one in Midvale, Utah. These research sites conduct studies of the effects of specified pharmaceuticals on a controlled population through contracts with major manufacturers of the pharmaceuticals. All of the Company's research sites operate as Pivotal Research; (3) 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 (4) 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. Note B - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending June 30, 2008. The accompanying financial statements should be read in conjunction with the June 30, 2007 consolidated financial statements and footnotes thereto included in the Company's 10-K filed on September 28, 2007 and 10-K/A filed on October 5, 2007. 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 and the realization of deferred tax benefits represent a significant portion of the estimates made by management. 6 Revenue Recognition The Company bills for its behavioral healthcare services at its inpatient and outpatient facilities using different software platforms for each type of service; however, in all cases 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. 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 during the period identified, usually when payment is received. The Company's policy is to collect estimated co-payments and deductibles at the time of admission. Payments are made by way of cash, check or credit card. 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. Pharmaceutical study revenue is recognized only after a pharmaceutical study contract has been awarded and the patient has been selected and accepted based on study criteria and billable units of service are provided. Where a contract requires completion of the study by the patient, no revenue is recognized until the patient completes the study program. All revenues and receivables from our research division are derived from pharmaceutical companies with no related bad debt allowance. 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. 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 were 67 days for the three months ended September 30, 2007 and 56 days the fiscal year ended June 30, 2007. The table below shows the DSO by segment for the same periods. Period Treatment Pharmaceutical Contract End Services Services Services ______ _________ ______________ ________ 09/30/2007 60 110 50 06/30/2007 66 155 41 Changes in the Pharmaceutical Services DSO's are volatile as they are related to the irregular starts and stops of studies and the type of studies being conducted. Contract Services DSO's fluctuate dramatically by the delay in payment of a few days for any of our large contracts. Note C- Stock Based Compensation The Company has three active stock plans: a stock option plan, an employee stock purchase plan and a non-employee directors' stock option plan. The stock option plan provides for the issuance of a maximum of 1,300,000 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 less than the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. 7 The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 500,000 shares may be issued under this plan. The non-employee director's stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Under the plan a maximum of 350,000 shares may be issued. 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 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), using the Statement's modified prospective application method. 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 compensation is accounted for as an equity instrument and there have been no liability awards granted. Any income tax benefit related to stock compensation will be shown under the financing section of the Cash Flow Statement. Based on the Company's historical voluntary turnover rates for individuals in the positions who received options in the period, 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 is higher than estimated. Under the provisions of SFAS 123R, the Company recorded $55,305 and $70,781 of stock-based compensation on its consolidated condensed statement of operations for the three months ended September 30, 2007 and 2006, respectively, which is included in administrative expenses as follows: Three Months Ended Three Months Ended September 30, 2007 September 30, 2006 Director compensation $ 17.944 $ -- Employee compensation 37,361 70,781 __________ _________ Total $ 55,305 $ 70,781 ========== ========== The Company had the following activity in its stock option plans for the three months ended September 30, 2007: Number Weighted-Average Intrinsic Value Of Exercise Price At Shares Per Share September 30, 2007 ______ ________________ __________________ Balance - June 30, 2007 1,096,000 $1.76 Granted -- $ -- Exercised -- $ -- Expired -- $ -- Balance - September 30, 2007 1,096,000 $1.76 $ 1,188,207 _________ _____ ___________ Exercisable 843,500 $1.53 $ 1,089,607 ========= ===== =========== No options were exercised during the three-months ended September 30, 2007. The following summarizes the activity of the Company's stock options that have not vested for the three months ended September 30, 2007. 8 Number Weighted- of Average Shares Fair Value Nonvested at July 1, 2007 304,374 $1.33 Granted 0 -- Expired 0 -- Vested 51,874 $1.22 ______ _____ Nonvested at September 30, 2007 252,500 $1.35 ======= ======= The compensation cost related to the fair value of these shares of $341,138 will be recognized when these options vest over the next three years. Note D- Reclassifications Certain September 30, 2006 amounts have been reclassified to be consistent with the September 30, 2007 presentation. Note E - 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: Treatment Pharmaceutical Contract Administrative Services Study Services Services Services Eliminations Total For the three months ended: September 30, 2007 Revenues - external customers $10,143,435 $1,420,965 $1,139,766 $ -- $ -- $12,704,166 Revenues - intersegment 86,900 -- -- 1,044,600 (1,131,500) -- Segment net income (loss) 1,495,318 176,216 303,463 (1,174,986) -- 800,011 Capital Expenditures 224,089 11,467 2,800 59,462 -- 297,818 Depreciation & Amortization 128,208 40,519 28,574 42,786 -- 240,087 Interest Expense 64,107 17,482 1,144 48,648 -- 131,381 Income tax expense 390,295 45,619 35,481 35,481 -- 506,876 Identifiable assets 11,138,683 6,486,105 882,575 7,788,508 -- 26,295,871 Goodwill and Intangible Assets 969,099 4,529,477 -- -- -- 5,498,576 9 Note E - Business Segment Information (continued) Treatment Pharmaceutical Contract Administrative Services Study Services Services Services Eliminations Total September 30, 2006 Revenues - external customers $ 7,876,432 $1,051,383 $1,134,391 $ -- $ -- $10,062,206 Revenues - intersegment 4,500 -- 21,640 924,000 (950,140) -- Segment net income (loss) 1,073,638 (126,767) 255,565 (919,153) -- 283,283 Capital Expenditures 105,468 21,268 1,565 21,268 -- 149,569 Depreciation & Amortization 88,764 37,367 13,444 11,309 -- 150,884 Interest Expense 87,397 16,605 1,278 14,550 -- 119,830 Income tax expense 138,498 -- 40,343 3,926 -- 182,767 Identifiable assets 11,163,908 5,594,180 1,006,661 4,932,299 -- 22,697,048 Goodwill and Intangible Assets 969,099 3,805,544 -- -- -- 4,774,643 Note F - Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109, (FIN 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on July 1, 2007. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized tax benefits. We recognize interest and penalties related to uncertain tax positions in general and administrative expense. As of September 30, 2007, we have 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 2000-2006 remain open to examination by the major taxing authorities to which we are subject. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 will be effective for fiscal years beginning after November 15, 2007, the beginning of the Company's 2009 fiscal year. The Company is assessing the impact the adoption of SFAS No. 157 will have on the Company's financial position and results of operations. In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"), including an amendment of FASB Statement No. 115. SFAS No. 159 allows companies to choose to elect to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. SFAS No. 159 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company beginning in the first quarter of fiscal 2009. The Company is assessing the impact the adoption of SFAS No. 159 will have on the Company's financial position and results of operations. 10 Note G - 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 three months ended September 30, 2007 and 2006 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: Three months ended September 30, 2007 2006 _______________________________ Weighted average shares outstanding - basic 20,136,781 18,514,142 Employee stock options 444,603 430,050 Warrants 20,444 352,446 __________ __________ Weighted average shares outstanding - fully diluted 20,601,828 19,296,638 ========== ========== 11 Item 2. 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. Overview The Company presently provides behavioral health care services through two substance abuse treatment centers, a psychiatric hospital, 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 payor 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. The Company's internet operation, Behavioral Health Online, Inc., continues to provide behavioral health information through its web site at Wellplace.com but its primary function is Internet technology support for the subsidiaries and their contracts. As such, the expenses related to Behavioral Health Online, Inc. are included as corporate expenses. The Company's research division, Pivotal Research Centers, Inc., contracts with major manufacturers of pharmaceuticals to assist in the study of the effects of certain pharmaceuticals in the treatment of specific illnesses through its clinics in Utah and Arizona. 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 current administration has put forth proposals to mandate equality in the benefits available to those individuals suffering from mental illness (The Parity Act). If passed, this legislation may improve access to the Company's programs. 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. 12 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 year of settlement. Amounts due as a result of cost report settlements is recorded and listed separately on the consolidated balance sheets as "Other receivables". 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 Nevada 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 most of the outpatient care directly and, through utilization review, monitors closely, and pre-approves all inpatient and outpatient services not provided directly. The contracts are considered "at-risk" because the 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 the quarter ended September 30, 2007 for revenue booked in prior years resulted in an decrease in net revenue of approximately $30,914. Net contractual adjustments recorded in fiscal 2007 for revenue booked in prior years resulted in an increase in net revenue for the year of approximately $26,430. During the fiscal year ended June 30, 2007, a Medicare cost report settlement of $255,600 was received. No cost report settlements were received or recorded during the three months ended September 30, 2007. Our accounts receivable systems are capable of providing an aging based on responsible party or payor. This information is critical in estimating our required allowance for bad debts. Below is revenue by payor and the accounts receivable aging information as of September 30, 2007, 2006 and June 30, 2007, for our treatment services segment. Net Revenue by Payor (in thousands) For the Three For the Three For the Twelve Months Ended Months Ended Months Ended September 30, 2007 September 30, 2006 June 30, 2007 Amount Percentage Amount Percentage Amount Percentage ______ __________ ______ __________ ______ __________ Private Pay $ 468 5% $ 340 4% $ 1,632 5% Commercial 6,742 66% 4,881 62% 23,477 65% Medicare * 373 4% 359 5% 1,379 4% Medicaid 2,560 25% 2,296 29% 9,535 26% Net Revenue $10,143 $7,876 $36,023 * includes Medicare settlement revenue as noted above 13 Accounts Receivable Aging (Net of allowance for bad debts- in thousands) Quarter Ended September 30, 2007 Over Over Over Over Over Over Over Payor Current 30 60 90 120 150 270 360 Total _____________________________________________________________________________________ Private Pay $ 79 $ 164 $156 $ 67 $132 $554 $ 59 $ 50 $1,261 Commercial 1,763 1,053 652 154 81 114 26 93 3,936 Medicare 113 5 14 - 8 12 -- -- 152 Medicaid 1,048 133 74 46 22 57 -- -- 1,380 ______ ______ _____ ____ ____ ____ _____ ____ ______ Total $3,003 $1,355 $896 $267 $243 $737 $ 85 $143 $6,729 Fiscal Year Ended June 30, 2007 ______________________________ Over Over Over Over Over Over Over Payor Current 30 60 90 120 150 270 360 Total _____________________________________________________________________________________ Private Pay $ 102 $ 119 $151 $108 $121 $ 77 $178 $ 36 $ 892 Commercial 1,608 974 616 197 105 100 160 96 3,856 Medicare 134 69 4 15 24 28 -- -- 274 Medicaid 1,030 143 68 42 24 230 -- -- 1,537 ______ ______ _____ ____ ____ _____ _____ ____ ______ Total $2,874 $1,305 $839 $362 $274 $ 435 $338 $132 $6,559 ====== ====== ==== ==== ==== ==== ==== ==== ====== Pharmaceutical study revenue is recognized only after a pharmaceutical study contract has been awarded and the patient has been selected and accepted based on study criteria and billable units of service are provided. Where a contract requires completion of the study by the patient, no revenue is recognized until the patient completes the study program. All revenues and receivables from our research division are derived from pharmaceutical companies with no related bad debt allowance. 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. 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. 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. 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. There has been no valuation allowance provided on the Company's deferred tax assets since the fourth quarter of fiscal year ended June 30, 2006. Valuation of Goodwill and Other Intangible Assets Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. The values the Company records for goodwill and other intangible assets are reviewed by the Company, at least annually, and represent fair values. Such valuations require the Company to 14 provide 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. 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. Results of Operations The following table illustrates our consolidated results of operations for the quarters ended September 30, 2007 and 2006 (in thousands): 2007 2006 ____ ____ (in thousands) Statements of Operations Data: Amount % Amount % Revenue $12,704 100.0% $10,062 100.0%- Cost and Expenses: Patient care expenses 5,906 46.5% 4,442 44.2% Contract expenses 803 6.3% 839 8.3% Administrative expenses 4,182 32.9% 3,774 37.5% Provision for bad debts 422 3.3% 453 4.5% Interest expense 131 1.0% 120 1.2% Other (income) expenses, net (47) -0.4% (32) -0.3% _______ _____ ______ ______ Total expenses 11,397 89.7% 9,596 95.4% _______ _____ ______ ______ Income before income taxes 1,307 10.3% 466 4.6% Provision for income taxes 507 4.0% 183 1.8% _______ _____ ______ ______ Net income $ 800 6.3% $ 283 2.8% ======= ===== ======= ====== Results of Operations Total net revenue from operations increased 26.3% to $12,704,166 for the three months ended September 30, 2007 from $10,062,206 for the three months ended September 30, 2006. Net patient care revenue increased 28.8% to $10,143,435 for the three months ended September 30, 2007 from $7,876,432 for the three months ended September 30, 2006. This increase in revenue is due primarily to the new capitated contract signed by the Company in January 2007 and a 5.5% increase in census at our inpatient facilities. Two key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay. Increases in the number of patient days result in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) will usually result in higher profitability. Therefore, patient census and payor mix are monitored very closely. Revenue from pharmaceutical studies increased 35.2% to $1,420,965 for the three months ended September 30, 2007 from $1,051,383 for the three months ended September 30, 2006. This increase is due to the start of a large study in the last quarter of fiscal 2007 after being delayed for a significant period. The cyclical nature of the pharmaceutical research business, where the size and number of clinical trial starts and stops changes daily, makes revenue projections difficult and revenues vary greatly from period to period. Contract support services revenue provided by Wellplace remained relatively stable at $1,139,766 for the three months ended September 30, 2007 compared to 15 $1,134,391 for the three months ended September 30, 2006. The Company expects to increase this revenue through new contracts for EAP (Employee Assistance Programs) and Smoking Cessation programs. Patient care expenses in our treatment centers increased 30.6% to $5,296,074 for the three months ended September 30, 2007 from $4,054,966 for the three months ended September 30, 2006. This increase in expenses is due to the new capitated contract mentioned above with the majority of the increases in expenses directly related to the patient care expenses related to the contract such as payroll, taxes, consultant services and contract expenses which includes payment for bed days under the contract. There were also some increases in other hospital related expenses such as food and pharmacy as a result of the higher census. Patient care expenses related to our pharmaceutical or research division increased 25.2% to $609,792 for the three months ended September 30, 2007 from $486,937 for the three months ended September 30, 2006. This increase is due to the increase in the number of studies and study participants. Contract support services expenses decreased 4.3% to $802,648 for the three months ended September 30, 2007 from $838,555 for the three months ended September 30, 2006. This decrease is marginal and is a result of designed efficiencies in operating our older contracts. We don't anticipate this trend to continue as we expect it will fluctuate with new contracts. Administrative expenses increased 20.5% to $3,609,936 for the quarter ended September 30, 2007 from $2,996,141 for the quarter ended September 30, 2006. These changes are a result of the increased administrative payroll and employee benefits related to new capitated contract and the increase in staff as we ramp up for the opening of the Seven Hills Hospital. Administrative payroll increased 19.1%. In addition depreciation increased 61.2% as we began using the Meditech software and related equipment in the current quarter. Rent expense increased 41.2% due to the additional offices opened to service the clients covered by the new capitated contract. Utilities increased approximately 25.9% which was also related to the opening of the new offices. Administrative expenses related to the research division decreased 15.8% to $571,856 for the three months ended September 30, 2007 from $679,108 for the three months ended September 30, 2006. This is the result of the closing of the Michigan office in October of last year. Provision for doubtful accounts decreased 6.7% to $422,226 for the three months ended September 30, 2007 from $452,525 for the three months ended September 30, 2006. The Company's policy is to maintain reserves based on the age of its receivables. This decrease in the provision for doubtful accounts is largely attributable to the change in age of the receivables. Interest income remained relatively stable at $32,535 for the three months ended September 30, 2007 from $32,849 for the three months ended September 30, 2006. This slight decrease is a result of changes in the overall interest rate on our investment accounts. Other income / expense changed to an income of $14,099 for the three months ended September 30, 2007 from an expense of $943 for the three months ended September 30, 2006. This change is due to the processing of an insurance settlement of $10,000 in the quarter. Interest expense increased 9.6% to $131,381 for the three months ended September 30, 2007 from $119,830 for the three months ended September 30, 2006. This increase is primarily the result of the treatment of the new warrant issued when the Company's long term debt was restructured as interest expense. The Company's provision for income taxes of $506,876 for the three month period ended September 30, 2007 is based on an estimated combined tax rate of approximately 39% for both Federal and State taxes based on Company earnings projections. If this estimate is found to be high or low, adjustments will be made in the period of the determination. This will most likely be at year end when tax estimates can be more accurately made. Liquidity and Capital Resources The Company`s net cash provided by operating activities was $1,287,473 for the three months ended September 30, 2007 compared to $91,424 for the three months ended September 30, 2006. Cash flow provided by operations in the three months ended September 30, 2007 consists of net income of $800,011 plus depreciation and amortization of $240,087, non-cash interest expense $38,480, non-cash equity based charges of $62,705, an increase in net accounts payable of 16 $60,983, a decrease in deferred tax expense of $418,204, a decrease in prepaid expenses of $1,210 and a decrease in net receivables of $36,737 less cash used for an increase in other assets of $2,712 and a decrease in accrued expenses of $294,758. Cash used in investing activities in the three months ended September 30, 2007 consisted of $297,816 in capital expenditures including construction in progress, compared to $152,959 in capital expenditures during the same period last year. Cash used in financing activities of $1,625,527 in the three months ended September 30, 2007 was the result of the purchase of 150,000 shares of treasury stock and a decrease in the Company's revolving credit line of $956,246 and repayment of $274,766 on the Company's long-term debt. A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of September 30, 2007, accounts receivable from patient care, net of allowance for doubtful accounts, increased 3% to $6,729,412 from $6,559,387 on June 30, 2007. This minimal increase is a result of increased revenue. The Company monitors increases in accounts receivable closely and, based on the aging of the receivables outstanding, is confident that the increase is not indicative of a payor problem. Over the years, we have increased staff, standardized some procedures for determining insurance eligibility and collecting receivables and established a more aggressive collection policy. The increased staff has allowed the Company to concentrate on current accounts receivable and resolve any issues before they become uncollectible. The Company's collection policy calls for earlier 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. Our collectors will also seek assistance through every legal means, including the State Insurance Commissioner's office, when appropriate, to collect claims. The Company has begun the process of changing its software related to the recording, billing and collecting of Accounts Receivable. The first facility went live on the system July 1, 2007. Three additional facilities converted on October 1, 2007. This system will assist staff in the timely billing and collection of receivables. At the same time, the Company continues to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections. Contractual Obligations The Company's future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of September 30, 2007 are as follows (in thousands): YEAR ENDING September 30, TERM NOTES CAPITAL LEASES * OPERATING Principal Interest Principal Interest LEASES TOTAL** _______________________________________________________________________________ 2008 $1,120 $ 23 $ 195 $36 $2,103 $3,477 2009 430 19 162 22 2,066 2,699 2010 50 15 20 12 1,510 1,607 2011 47 11 6 4 582 650 2012 52 6 -- -- 252 310 2013 44 2 -- -- 193 239 Thereafter -- -- -- -- -- -- ______ ___ ______ ___ ______ ______ Total $1,743 $ 76 $ 383 $74 $6,706 $8,982 * The Meditech Lease - The total Capital Lease amount above includes the Meditech Lease, which was previously listed separately since almost the total amount on the lease has been advanced and we have begun the implementation process as of July 1, 2007. ** Total does not include the amount due under the revolving credit note of $562,496. This amount represents an accounts receivable funding described below and is shown as a current note payable in the accompanying Financial Statements. In addition to the above, the Company is also subject to three contingent notes with a total face value of $2,500,000 as part of the Pivotal acquisition. Of these notes, one for $1,000,000 and one for $500,000, bear interest at 6% per annum. These notes are subject to additional adjustment based on the earnings of the acquired operations. Since adjustment can be positive or negative based on earnings, with no ceiling or floor, the liability for these notes was only recorded after the required revenue targets were met. This treatment is in accordance with SFAS No. 141, "Business Combinations", which states that contingent consideration should be recognized only when determinable beyond a reasonable doubt. Payments on the $1,000,000 note began on January 1, 2005. The above table includes the outstanding balance on this note of $367,591 which represents the earn-out for the Pivotal acquisition through December 31, 2005 net of payments made through September 30, 2007. Additional earn-out requirements have been met on the $500,000 note which resulted in the recording of this earn-out note in the amount of $923,934 which includes $80,000 in accrued interest. The above table includes the outstanding balance on this note 17 of $608,168. The final note for $1,000,000 does not bear interest, is also subject to adjustment based on earnings but has a minimum value of $200,000 to be paid in PHC, Inc. Class A common stock on March 31, 2009. This minimum liability has been recorded with imputed interest of 6% and $182,828 is included in the schedule above. 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, other than Pivotal Research Centers, Inc, 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 $287,143 at September 30, 2007, and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000. 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 September 30, 2007 the Company had $2,562,857 available under the term loan. The revolving credit note carries interest at prime plus .25%, but not less than 4.75% paid through lock box 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 September 30, 2007 was $562,496. 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 September 30, 2007 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 22.24%. 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. Litigation 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 affect on its financial condition or results of operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk The market price of our common stock could be volatile and fluctuate significantly in response to various factors, including: o Differences in actual and estimated earnings and cash flows; o Operating results differing from analysts' estimates; o Changes in analysts' earnings estimates; o Quarter-to-quarter variations in operating results; o Changes in market conditions in the behavioral health care industry; o Changes in market conditions in the research industry; o Changes in general economic conditions; and o Fluctuations in securities markets in general. 18 Financial Risk o Our interest expense is sensitive to changes in the general level of interest rates. With respect to our interest-bearing liabilities, all of our long-term debt outstanding is subject to rates at prime plus .25% and prime plus .75%, which makes interest expense increase with changes in the prime rate. On this debt, each 25 basis point increase in the prime rate will affect an annual increase in interest expense of approximately $5,850. o Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements requiring a waiver from our lender. A waiver of the covenants may require our lender to perform additional audit procedures to assure the stability of their security which could require additional fees. Operating Risk o Aging of accounts receivables 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 $6,729,472 at September 30, 2007, $6,559,387 at June 30, 2007 and $6,995,475 at June 30, 2006. 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, standard 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 conservative 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 September 30, 2007 and June 30, 2007, respectively, and Bad Debt Expense for the quarter ended September 30, 2007 and the year ended June 30, 2007: Accounts Allowance for Bad Debt Receivable doubtful accounts Expense __________ _________________ _________ September 30, 2007 $9,608,314 $ 2,878,902 $ 422,226 June 30, 2007 10,323,972 3,764,585 1,933,499 o 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 30% 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. Item 4T. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the SEC's Rules and Forms and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As reported in the Company's 10-K for the year ended June 30, 2007, during the preparation of the financial statements to be included in the 2007 Form 10-K, a material weakness in internal control over financial reporting was 19 identified relating to timely reconciliation of certain balance sheet items, primarily cash, accrued expenses and other accounts receivable, resulting from staffing turnover in the accounting area. As a result, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2007, the Company's disclosure controls and procedures were ineffective due solely to, and only to the extent of, the identified material weakness. During the current quarter the Company put into effect the comprehensive plan to remediate the material weakness which, based on the monthly review of account reconciliations, has been determined to be an effective method to assure timely reconciliation and adequate control over financial reporting. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures to meet the criteria referred to above. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective. Change in Internal Controls There were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 20 PART II OTHER INFORMATION Item 6. Exhibits Exhibit List Exhibit No. Description 10.49 Change-in-control supplemental benefit plan for certain executive employees. 31.1 Certification of 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. 21 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHC, Inc. Registrant Date: November 9, 2007 /s/ Bruce A. Shear ___________________ Bruce A. Shear President Chief Executive Officer Date: November 9, 2007 /s/ Paula C. Wurts ___________________ Paula C. Wurts Treasurer Chief Financial Officer 22