10-Q 1 q10q206.txt QUARTERLY REPORT PERIOD ENDING 12/31/05 2ND QTR 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 December 31, 2005. |_| 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 000-22916 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) has 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 February 3, 2006: Class A Common Stock 17,404,020 Class B Common Stock 776,991 -- 1 -- PHC, Inc. PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited). Condensed Consolidated Balance Sheets - December 31, 2005 and June 30, 2005. Condensed Consolidated Statements of Operations - Three and six months ended December 31, 2005 and December 31, 2004. Condensed Consolidated Statements of Cash Flows - Six months ended December 31, 2005 and December 31, 2004. Notes to Condensed Consolidated Financial Statements - December 31, 2005. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits Signatures -- 2 -- PART I. FINANCIAL INFORMATION Item 1 Financial Statements PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS December 31, June 30, ASSETS 2005 2005 (unaudited) _____________ ___________ Current assets: Cash and cash equivalents $ 1,028,610 $ 917,630 Accounts receivable, net of allowance for doubtful accounts of $3,173,004 at December 31,2005 and $1,956,984 at June 30, 2005 6,673,756 6,265,381 Pharmaceutical receivables 1,361,227 1,414,340 Prepaid expenses 496,153 146,988 Other receivables and advances 561,959 638,654 Deferred income tax asset 1,415,344 1,375,800 ___________ ____________ Total current assets 11,537,049 10,758,793 Accounts receivable, non-current 50,000 65,000 Other receivable 120,213 84,422 Property and equipment, net 1,901,434 1,516,114 Deferred financing costs, net of amortization of $95,557 at December 31, 2005 and $76,234 June 30, 2005 126,615 145,938 Customer relationships, net of amortization of $200,000 at December 31, 2005 and $140,000 at June 30, 2005 2,200,000 2,260,000 Goodwill 2,704,389 2,648,209 Other assets 436,317 417,172 ___________ ____________ Total assets $19,076,017 $17,895,648 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,857,219 $ 907,569 Current maturities of long-term debt 843,409 769,599 Revolving credit note 2,523,035 2,385,629 Deferred revenue 80,479 85,061 Current portion of obligations under capital leases 46,312 29,777 Accrued payroll, payroll taxes and benefits 1,321,616 1,411,653 Accrued expenses and other liabilities 601,735 1,063,189 ___________ ____________ Total current liabilities 7,273,805 6,652,477 Long-term debt 1,505,567 1,900,022 Obligations under capital leases 55,304 12,210 Deferred tax liability 244,874 229,000 ___________ ____________ Total liabilities 9,079,550 8,793,709 ___________ ____________ 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, 17,603,118 and 17,490,818 shares issued at December 31, 2005 and June 30, 2005, respectively 176,031 174,908 Class B common stock, $.01 par value, 2,000,000 shares authorized, 776,991 issued and outstanding December 31, 2005 and June 30, 2005 each convertible into one share of Class A common Stock 7,770 7,770 Additional paid-in capital 23,576,088 23,377,059 Treasury stock, 191,098 shares and 181,738 shares of Class A common stock at December 31, 2005 and June 30, 2005 respectively, at cost (191,700) (155,087) Accumulated deficit (13,571,722) (14,302,711) ___________ ____________ Total stockholders' equity 9,996,467 9,101,939 ___________ ____________ Total liabilities and stockholders' equity $19,076,017 $17,895,648 =========== =========== See Notes to Condensed Consolidated Financial Statements -- 3 -- PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended December 31, December 31, 2005 2004 2005 2004 _____________________ _____________________ Revenues: Patient care, net $6,465,356 $5,951,326 $13,178,336 $12,160,825 Pharmaceutical studies 1,084,084 1,194,552 2,390,093 2,281,142 Contract support services 1,153,073 923,323 2,078,910 1,584,749 __________ __________ __________ __________ Total revenues 8,702,513 8,069,201 17,647,339 16,026,716 __________ __________ __________ __________ Operating expenses: Patient care expenses 3,292,393 2,967,320 6,554,304 6,008,302 Patient care expenses, pharmaceutical 510,834 412,144 1,073,988 802,107 Cost of contract support services 587,067 558,094 1,184,862 1,075,003 Provision for doubtful accounts 475,768 328,638 1,132,655 582,747 Administrative expenses 2,749,100 2,418,501 5,378,776 4,598,162 Administrative expenses, pharmaceutical 538,291 704,609 1,172,290 1,395,665 __________ __________ __________ __________ Total operating expenses 8,153,453 7,389,306 16,496,875 14,461,986 __________ __________ __________ __________ Income from operations 549,060 679,895 1,150,464 1,564,730 __________ __________ __________ __________ Other income (expense): Interest income 15,397 17,492 38,261 34,531 Other income 21,263 13,683 32,048 26,492 Interest expense (174,338) (229,797) (329,556) (342,852) __________ __________ __________ __________ Total other expenses, net (137,678) (198,622) (259,247) (281,829) __________ __________ __________ __________ Income before provision for taxes 411,382 481,273 891,217 1,282,901 Provision for income taxes 64,600 72,469 160,228 98,469 __________ __________ __________ __________ Net income $346,782 $408,804 $730,989 $1,184,432 ========== ========== ========== ========== Basic net income per common share $ 0.02 $ 0.02 $ 0.04 $ 0.07 ========== ========== ========== ========== Basic weighted average number of shares Outstanding 18,159,188 17,417,238 18,125,265 17,388,921 ========== ========== ========== ========== Fully diluted net income per common share $ 0.02 $ 0.02 $ 0.04 $ 0.06 ========== ========== ========== ========== Fully diluted weighted average number of shares outstanding 19,301,486 18,471,375 19,302,592 18,274,631 ========== ========== ========== ========== See Notes to Condensed Consolidated Financial Statements.
-- 4 -- PHC, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended December 31 2005 2004 _________________________ Cash flows from operating activities: Net income $ 730,989 $1,184,432 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 331,319 225,213 Non-cash interest expense 27,864 41,796 Deferred income tax provision (23,670) (94,600) Non-cash stock-based compensation 90,872 8,081 Changes in: Accounts receivable (299,358) (1,493,909) Prepaid expenses and other current assets (349,165) (300,324) Other assets (28,685) (42,420) Accounts payable 949,650 54,588 Accrued expenses and other liabilities (556,073) 280,554 ____________ ___________ Net cash provided by (used in) operating activities 873,743 (136,589) ____________ ___________ Cash flows from investing activities: Acquisition of property and equipment (627,776) (303,962) Costs related to business acquisition -- (62,258) ____________ ___________ Net cash used in investing activities (627,776) (366,220) ____________ ___________ Cash flows from financing activities: Revolving debt, net 137,406 527,054 Long-term debt, net (288,880) (312,615) Deferred financing costs -- (198,445) Costs related to issuance of capital stock -- (20,000) Issuance of common stock 53,100 107,105 Purchase of treasury stock (36,613) (13,880) ____________ ___________ Net cash provided by (used in) financing activities (134,987) 89,219 ____________ ___________ Net increase (decrease) in cash and cash equivalents 110,980 (413,590) Beginning cash and cash equivalents 917,630 594,823 ____________ ___________ Ending cash and cash equivalents $ 1,028,610 $181,233 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $329,566 $306,441 Income taxes 235,171 113,050 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Pivotal Acquisition Note A earn out consideration recorded $ -- $1,169,832 Issuance of common stock in cashless exercise of warrants 24,242 14,250 Issuance of common stock in cashless exercise of options 18,577 -- Value of warrants issued in connection with the Pivotal acquisition 51,860 -- See Notes to Condensed Consolidated Financial Statements. -- 5 -- PHC, INC. and Subsidiaries Notes to Condensed Consolidated Financial Statements December 31, 2005 Note A - The Company PHC, Inc. (the "Company") is a national health care 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: 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 eight psychiatric treatment locations which include Harbor Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 50-bed psychiatric facility dedicated to adjudicated juveniles located in Detroit, Michigan and six outpatient behavioral health locations (one in New Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, two in Las Vegas, Nevada operating as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area); Pharmaceutical study services, including four clinical study sites: two in Arizona, in Peoria and Mesa, one in Royal Oak, Michigan 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 Centers; 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, a smoking cessation contract with a major defense contractor and a call center contract with Wayne County Michigan. The call centers both operate as Wellplace; and 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 six months ended December 31, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. The accompanying financial statements should be read in conjunction with the June 30, 2005 consolidated financial statements and footnotes thereto included in the Company's 10-K filed on September 28, 2005. Note C- 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. Effective July 1, 2005, the Company adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), using the Statement's modified prospective application method. Prior to July 1, 2005, the Company followed Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock compensation. 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. -- 6 -- Note C- Stock Based Compensation (continued) At June 30, 2005, the Company accelerated the vesting on all previously granted options. Therefore, as of the date of adoption there is no unrecognized expense of these options and the expense recorded in the sic months ended December 31, 2005 is for options issued and vested during that period. The unrecognized expense of awards not yet vested will be recognized in net income in the periods in which they vest. Under the provisions of SFAS 123R, the Company recorded $15,375 of stock-based compensation on its consolidated condensed statement of operations for the three months ended December 31, 2005 and $85,212 for the six months ended December 31, 2005, which is included in administrative expenses as follows: Three Months Ended Six Months Ended December 31, 2005 December 31, 2005 __________________ _________________ Employee compensation $15,375 $85,212 _______ _______ Total $15,375 $85,212 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 three months and six months ended December 31, 2005 was $1.60 and $1.26, respectively using the following: Three Months Ended Six Months Ended December 31, 2005 December 31, 2005 _________________ _________________ Average risk-free interest rate 4.1% 4.3% Expected dividend yield None None Expected life 5 years 5 years Expected volatility 46% 45.5% 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 our 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 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. SFAS 123R requires the presentation of pro forma information for the comparative period prior to the adoption as if all of the Company's employee stock options had been accounted for under the fair value method of the original SFAS 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year period. -- 7 -- Note C- Stock Based Compensation (continued) Three Months Ended Six Months Ended December 31, 2004 December 31, 2004 __________________ _________________ Net income, as reported $ 408,804 $1,184,432 Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects (33,350) (82,650) __________________ _________________ Pro forma net income $ 375,454 $1,101,782 __________________ _________________ Net Income per share: Basic - as reported $ 0.02 $ 0.07 Basic - pro forma $ 0.02 $ 0.06 Diluted - as reported $ 0.02 $ 0.06 Diluted - pro forma $ 0.02 $ 0.06 Note D - 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 December 31, 2005 Revenues - external customers $6,465,356 $1,084,084 $1,153,073 $ -- $ -- $8,702,513 Revenues-intersegment 23,900 -- 21,265 816,000 (861,165) -- Net income (loss) 544,426 (2,356) 557,577 (752,865) -- 346,782 Capital expenditures 124,355 10,797 78,974 43,803 -- 257,929 Depreciation & amortization 123,698 40,947 16,943 12,842 -- 194,430 Interest expense 136,371 33,475 2,429 2,063 -- 174,338 Income tax expense 51,160 3,840 6,000 3,600 -- 64,600 December 31, 2004 Revenues-external customers $5,951,326 $1,194,552 $ 923,323 $ -- $ -- $8,069,201 Revenues-intersegment 7,500 -- 13,413 690,000 (710,913) -- Net income (loss) 715,446 92,495 359,229 (758,366) -- 408,804 Capital expenditures 36,424 1,048 -- 11,636 -- 49,108 Depreciation & amortization 62,435 34,944 966 12,153 -- 110,498 Interest expense 139,965 42,304 -- 37,528 -- 219,797 Income tax expense 64,000 -- 6,000 2,469 -- 72,469 -- 8 -- Note D - Business Segment Information (continued) Treatment Pharmaceutical Contract Administrative Services Study Services Services Services Eliminations Total ______________________________________________________________________ For the six months ended December 31, 2005 Revenues-external customers $13,178,336 $2,390,093 $2,078,910 $ -- $ -- $17,647,339 Revenues-intersegment 35,650 -- 44,280 1,632,000 (1,711,930) -- Net income (loss) 1,252,376 90,472 871,062 (1,482,921) -- 730,989 Capital expenditures 457,703 26,291 85,144 58,638 -- 627,776 Depreciation & amortization 191,791 80,810 19,247 20,148 -- 311,996 Interest expense 255,850 49,503 2,429 21,774 -- 329,556 Income tax expense 132,231 3,840 20,557 3,600 -- 160,228 Identifiable Assets 10,380,945 5,547,443 675,378 2,472,251 -- 19,076,017 Goodwill 969,099 1,735,290 -- -- -- 2,704,389 December 31, 2004 Revenues-external customer 12,160,825 $2,281,142 $1,584,749 $ -- $ -- $16,026,716 Revenues - intersegment 7,500 -- 24,695 1,344,000 (1,376,195) -- Net income (loss) 1,996,092 152,752 497,746 (1,462,158) -- 1,184,432 Capital expenditures 247,816 4,943 1,042 50,161 -- 303,962 Depreciation & amortization 104,059 69,806 1,863 33,797 -- 209,525 Interest expense 233,729 44,618 -- 64,505 -- 342,852 Income tax expense 84,000 -- 12,000 2,469 -- 98,469 For the period ended June 30, 2005: Identifiable Assets 9,333,260 5,596,917 669,229 2,296,242 -- 17,895,648 Goodwill 969,099 1,679,110 -- -- -- 2,648,209
Note E - Increase in Intangible Assets During the quarter ended December 31, 2005 intangible assets increased $56,180 as a result of the issuance of warrants related to the acquisition of Pivotal. These warrants were agreed upon with our investor relations company but not issued pending receipt of additional information. These warrants were valued using the Black-Scholes pricing model. Note F - Debt Covenants For the quarter ended December 31, 2005, the Company was not in compliance with its long term debt covenants primarily due to the software failure at the Harbor Oaks facility, which delayed billing and postponed collection effort while the system was being recovered. CapitalSource, the Company's lender, has provided the Company with a waiver of these covenants for the period. Note G - Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 (R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123 (R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro-forma disclosure is no longer an alternative. The Company implemented SFAS No. 123 (R) on July 1, 2005. As a result of it's implementation, the Company expensed $15,375 and $69,837 in compensation cost in the quarters ended December 31, 2005 and September 30, 2005, respectively, based on the Black-Scholes value of the 30,000 options issued in the quarter ended December 31, 2005 and 230,000 options issued in the quarter ended September 30, 2005. Transactions involving the employee stock purchse plan are not recorded until the stock is issued as they are immaterial. In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections," which replaces APB Opinion No. 20 "Accounting Changes," and FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS No. 154 shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS No. 154 was issued. At the present time, we do not believe that adoption of SFAS No. 154 will have a material effect on our financial position, results of operations or cash flows. -- 9 -- 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, two psychiatric hospitals and six 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. Although the Company has changed the focus and reduced expenses of its internet operation, Behavioral Health Online, Inc. continues to provide behavioral health information through its web site at Wellplace.com but its primary function is technology and internet support for the Company's other 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 illness through its clinics in Arizona, Michigan and Utah. 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. The extent of any future 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 will improve access to and reimbursement for 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. As part of the Government Medicare Program, reimbursement rates for behavioral health care have increased. When fully implemented, this increase may have a positive impact on performance at the Company's one Medicare facility, Harbor Oaks Hospital. The Company is exploring the possibility of becoming a Medicare provider at its other in-patient facilities. 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. -- 10 -- 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. Any amounts due as a result of cost report settlements are recorded and listed separately on the consolidated balance sheets as "Other receivables, third party". 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 one "at-risk" contract. The contract calls 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 this contract 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 contract is considered "at-risk" because the payments to third-party providers for services rendered could equal or exceed the total amount of the revenue recorded. 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. 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 reported by the Company are shown net of estimated allowances 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." 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. The Company considers estimated future taxable income or loss and other available evidence when assessing the need for its deferred tax valuation allowance. During the fiscal year ended June 30, 2005, the Company recognized a tax benefit of approximately $209,000, related to a decrease in its valuation allowance, based on budgeted taxable income for the next fiscal year. The Company's policy is to recognize tax benefit for only the next fiscal year based on the uncertainties surrounding the healthcare industry. -- 11 -- 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 represent fair values calculated by independent third-party appraisers. Such valuations require the Company to 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. The Company uses an outside valuation expert to assess the value of intangibles annually and will continue to do so unless circumstances require an earlier evaluation. Results of Operations The following table sets forth for the periods indicated, our operating results (dollars in thousands): Selected Statements of Income Data: For the three month period ended For the six month period ended December 31, December 31, 2005 2004 2005 2004 Amount % Amount % Amount % Amount % ____________________________________________________________________ Revenue $8,703 100.0% $8,069 100.0% $17,647 100.0% $16,027 100.0% Cost and Expenses: Patient care expenses 3,803 43.7% 3,379 41.9% 7,628 43.2% 6,810 42.5% Contract expenses 587 6.7% 558 6.9% 1,185 6.7% 1,075 6.7% Administrative expenses 3,287 37.8% 3,124 38.7% 6,551 37.1% 5,994 37.4% Provision for bad debts 476 5.5% 329 4.1% 1,133 6.4% 583 3.6% Interest expense 174 2.0% 230 2.9% 330 1.9% 343 2.1% Other (income) expenses, net (36) (0.4)% (31) (0.4)% (70) (0.4)% (61) (0.4)% Total Expenses 8,291 95.3% 7,589 94.1% 16,757 95.0% 14,744 92.0% Income before provision for taxes 412 4.7% 480 5.9% 890 5.0% 1,283 8.0% Provision for income taxes 65 0.7% 72 .9% 160 0.9% 99 .6% Net income 347 4.0% 408 5.1% 730 4.1% 1,184 7.4%
Results of Operations Total net revenue from operations increased 7.9% to $8,702,513 for the three months ended December 31, 2005 from $8,069,201 for the three months ended December 31, 2004 and 10.1% to $17,647,339 for the six months ended December 31, 2005 from $16,026,716 for the six months ended December 31, 2004. Net patient care revenue increased 8.6% to $6,465,356 for the three months ended December 31, 2005 from $5,951,326 for the three months ended December 31, 2004 and 8.4% to $13,178,336 for the six months ended December 31, 2005 from $12,160,825 for the six months ended December 31, 2004. This increase in revenue is due to a 24.7% increase in patient days primarily due to a 7.9% increase in patient days at our substance abuse facilities for the three months ended December 31, 2005 over the same period last year, the addition of the 20 new beds at our Detroit facility and the inclusion of the first 30 beds at that facility, opened in December of last year, for the whole quarter. Two of the 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 results in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) usually results in higher profitability. Therefore, patient census and payor mix are monitored very closely. -- 12 -- Revenue from pharmaceutical studies decreased 9.3% to $1,084,084 for the three months ended December 31, 2005 from $1,194,552 for the three months ended December 31, 2004 and increased 4.9% to $2,390,093 for the six months ended December 31, 2005 from $2,281,142 for the same period last year. These changes in revenue are changes in study start dates, not a lower number of studies. This kind of fluctuation in revenue is expected in the Pharmaceutical research business. We cannot always predict a delay and may not have other acceptable studies or resources to take the place of the delayed study. Contract support services revenue provided by Wellplace increased 24.9% to $1,153,073 for the three months ended December 31, 2005 from $923,323 for the three months ended December 31, 2004 and increased 31.2% to $2,078,910 for the six months ended December 31, 2005 from $1,584,749 for the six months ended December 31, 2004. This increase in revenue is primarily due to the start-up of a new smoking cessation contract in October 2005. Patient care expenses increased by 11.0% to $3,292,393 for the three months ended December 31, 2005 from $2,967,320 for the three months ended December 31, 2004 and 9.1% to $6,554,304 for the six months ended December 31, 2005 from $6,008,302 for the six months ended December 31, 2004. The increases in expenses for the quarter is due primarily to the increase in patient days noted above with the primary increases in expenses directly related to patient census such as payroll, food, hospital supplies and lab fees. During the quarter, the Company also opened the second phase of the new inpatient program, Detroit Behavioral Institute, at the Detroit Medical Center and has experienced increased patient care revenue and expected increased patient care and administrative expenses related to the start up while the unit census is growing. Patient care expenses related to our pharmaceutical research division increased 24.0% to $510,834 for the three months ended December 31, 2005 from $412,144 for the three months ended December 31, 2004 and 33.9% to $1,073,988 for the six months ended December 31, 2005 from $802,107 for the six months ended December 31, 2004. This is due to the increased number of study patients receiving stipends for participation in studies Contract support services expenses increased 5.2% to $587,067 for the three months ended December 31, 2005 from $558,094 for the three months ended December 31, 2004 and 10.2% to $1,184,862 for the six months ended December 31, 2005 from $1,075,003 for six months ended December 31, 2004. This increase is primarily due to the increase in the Michigan call center contract and the addition of a new call center contract, which required increased staff and improved technology to adequately support the services required by the contracts. This resulted in increased payroll, rent, telephone expenses and increased depreciation on new equipment and the build-out of the new space. Provision for doubtful accounts increased 44.8% to $475,768 for the three months ended December 31, 2005 from $328,638 for the three months ended December 31, 2004 and 94.4% to $1,132,655 for the six months ended December 31, 2005 from $582,747 for the six months ended December 31, 2004. The increase in the provision for doubtful accounts is attributable to the accounts receivable software failure at Harbor Oaks, which is our largest in-patient facility. The software conversion, required by this software crash, slowed the billing process and diverted staff attention from collections while we reentered the receivables into the new software. Since the Company's policy is to maintain reserves based on the age of its receivables, this delay in the billing and collection process increased the amount and age of the Company's receivables thereby, increasing the reserves required by formula and the provision for doubtful accounts. The system is now operating and we expect the reserve requirement will decrease in future quarters as collection activity has now returned to normal. Administrative expenses increased 13.7% to $2,749,100 for the quarter ended December 31, 2005 from $2,418,501 for the quarter ended December 31, 2004 and 17.0% to $5,378,776 for the six months ended December 31, 2005 from $4,598,162 for the six months ended December 31, 2004. These changes are a result of the increased administrative payroll and employee benefits partially related to the set up and opening of Detroit Behavioral Institute. Administrative payroll increased 2.7% and employee benefits increased 54.62% for the quarter ended December 31, 2005 and 10.6% and 48.5%, respectively for the six months ended December 31, 2005. Fees and licenses increased 681.81% or $47,522 for the quarter and 770.9% or $122,179 for the six months ended December 31, 2005, due to fees related to the JACAHO accreditation at Harbor Oaks and Highland Ridge and a the Quality Assurance fee assessed in Michigan. Consultant fees increased 103.5% and 161.6% for the quarter and six months ended December 31, 2005, respectively. The majority of the increase relates to an accounts receivable software failure at Harbor Oaks. The system is now operating but the Company continues to pursue a more stable platform for maintaining its receivables records. Insurance expense increased approximately 6.0% for the quarter ended December 31, 2005 and 12.8% for the six months ended December 31, 2005. Utilities increased approximately 56.8% for the quarter ended December 31, 2005 and 32.5% for the six months ended December 31, 2005. Administrative expenses related to the research division decreased 23.6% to $538,291 for the three months ended December 31, 2005 from $704,609 for the three months ended December 31, 2004 and 16.0% to 1,172,290 for the six months ended December 31, 2005 from $1,395,665 for the six months ended December 31, 2004. This decrease is primarily due to the reduction in salaries expenses related to the elimination of the Nevada location and the reduction in the accrued bonuses. -- 13 -- 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. During the current quarter, the previously mentioned receivables software and hardware failure at our largest facility resulted in a delay of billing and collections while the systems were restored. Largely as a result of this delay and increased revenue, the Company's gross accounts receivable from patient care have increased 19.4% over the past six months with equivalent increases in aging. Interest income decreased 12.0% to $15,397 for the three months ended December 31, 2005 from $17,492 for the three months ended December 31, 2004 and increased 10.8% to 38,261 for the six months ended December 31, 2005 from $34,531 for the six months ended December 31, 2004. This decrease is a result of increased collections at the time of admission leaving fewer accounts on payment plans and lower interest income. Although patients requiring credit to pay for services have always signed an agreement to pay finance charges, in an effort to encourage payment at the time of service, the Company recently implemented the policy to charge interest on patient accounts to discourage long term credit for services. Other income increased 55.4% to $21,263 for the three months ended December 31, 2005 from $13,683 for the three months ended December 31, 2004 and 21.0% to $32,048 for the six months ended December 31, 2005 from $26,492 for the six months ended December 31, 2004. This change is due to a reduced number of requests for medical records which makes up the majority of other income. Interest expense decreased 24.1% to $174,338 for the three months ended December 31, 2005 from $229,797 for the three months ended December 31, 2004 and 3.9% to $329,556 for the six months ended December 31, 2005 from $342,852 for the same period last year. This decrease is primarily due to the booking of the interest on Note A of the Pivotal acquisition during the quarter ended December 31, 2004. The Note was contingent on the profitable operations of Pivotal from the acquisition through December 31, 2004; therefore, the Note was not recorded and no interest was accrued until the certainty of profitability could be determined. Acquisition earnings for the year ended December 31, 2005 resulted in a negative adjustment of approximately $320,000, which was recorded on January 31, 2006 as required by the Note. The Company's provision for income taxes of $160,228 for the six month period ended December 31, 2005 is significantly below the Federal statutory rate of 34% primarily due to the availability of net operating loss carry-forwards. Total income tax expense for the quarter represents state income taxes for certain subsidiaries with no available net operating loss carry-forwards. The Company has provided a significant valuation allowance against its deferred tax asset due to the volatility of the healthcare industry. Liquidity and Capital Resources The Company's net cash provided by operating activities was $873,743 for the six months ended December 31, 2005 compared to $136,589 used in operations for the same period last year. Cash flow from operations in the six months ended December 31, 2005 consists of net income of $730,989 plus depreciation and amortization of $331,319, non cash interest expense of $27,864, non cash stock based compensation of $90,872 and a $949,650 increase in accounts payable, offset by a $23,670 increase in deferred tax asset, a $299,358 increase in accounts receivable, $349,165 increase in prepaid expenses, $28,685 increase in other assets and a $556,073 decrease in accrued expenses and other liabilities. Cash used in investing activities in the six months ended December 31, 2005 consisted of $627,776 in capital expenditures compared to $303,962 in capital expenditures and $62,258 in business acquisitions in the same period last year. Cash used in financing activities in the six months ended December 31, 2005 primarily consisted of $151,474 in net debt repayment and $36,613 used to purchase treasury stock, offset by $53,100 from the issuance of common stock. -- 14 -- A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of December 31, 2005, accounts receivable from patient care, net of allowance for doubtful accounts, increased 6.2% to $6,723,756 on December 31, 2005 from $6,330,381 on June 30, 2005. This increase is primarily due to the previously mentioned system failure at our largest facility, which delayed billing and collections for several months. New systems are in place at this time and we expect increased collections on the recent billings to reduce the allowance considerably in future months. 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 of 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. Our collectors also focus on collecting required patient co-payments at the time of admission. 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 December 31, 2005 are as follows: Year Ending Term Capital Operating December 31, 2005 Notes Leases Leases Total ___________________________________________________________________________ 2006 $843,409 $46,313 $1,408,839 $2,298,561 2007 732,188 41,490 1,117,397 1,891,075 2008 362,276 13,813 1,045,559 1,421,648 2009 67,206 -- 971,716 1,038,922 2010 212,801 -- 103,636 316,437 Thereafter 131,096 -- -- 131,096 _________ ________ _________ __________ Total minimum payments $2,348,976 $101,616 4,647,147 $7,097,739 ========== ========= ========= ========== 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, two totaling $1,500,000, 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 only one of these notes was recorded as of December 31, 2005. 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 $929,604 which represents the earn out for the Pivotal acquisition through December 31, 2004 net of payments made through December 31, 2005. No payment is due on the $500,000 note as earn-out requirements have not been attained. 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 $164,647 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. The agreement includes a term loan in the amount of $1,400,000 and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000, including $900,000 available as an overline for growth. The term loan note carries interest at prime plus 3.5%, but not less than 9%, with twelve monthly principal payments of $25,000, 12 monthly principal payments of $37,500, and eleven monthly principal payments of $50,000 beginning November 1, 2004 with balance due at maturity, on October 1, 2007 and is included in the above table at its December 31, 2005 balance of $957,500. -- 15 -- The revolving credit note carries interest at prime plus 2.25%, but not less than 6.75% 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 December 31, 2005 was $2,523,035. For additional information regarding this transaction, see the Company's report on form 8-K filed with the Securities and Exchange Commission on October 22, 2004. On the term loan and the revolving credit note, each 25 basis point increase in the prime rate will affect an annual increase in interest expense of approximately $8,700. For the quarter ended December 31, 2005, the Company was not in compliance with financial covenants of this agreement primarily due to the software failure at the Harbor Oaks facility, which delayed billing and postponed collection effort while the system was being recovered. CapitalSource, the Company's lender, has provided the Company with a waiver of these covenants for the period. The Company has operated ongoing operations profitably for twenty consecutive quarters with the exception of the litigation settlement and related legal costs incurred in the third quarter of fiscal year 2004. While it is difficult to project, if the current positive business environment towards behavioral health treatment and new business opportunities continue, we are confident that we will see continued improved results. 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. 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. 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 2.25% and prime plus 3.5%, which makes interest expense increase with changes in the prime rate. Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements. (For additional information see Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations"). Item 4. 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 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. -- 16 -- Change in Internal Controls There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. -- 17 -- PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of stockholders was held on December 20, 2005. In regards to the election of class B directors, with regards to which (i) proxies were solicited pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, (ii) there was no solicitation in opposition to the management's nominees as listed on the proxy statement. Because sufficient proxies related to class A shares were not received to hold the vote on the election of the class A directors and the approval of the new employee stock plan to replace the plan which expired in October 2005 and the increase in the annual grant of options to board members, the meeting was adjourned and re-convened on January 31, 2006 at which time the nominated class A directors were elected, the 2005 Employee Stock Purchase Plan and the change in the 2005 Non-Employee Director Stock Option Plan (the "Plan") were approved. Under the new Employee Stock Purchase Plan 500,000 shares of Class A Common Stock are available for issuance to eligible employees. Item 6. Exhibits Exhibit List Exhibit No. Description 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. 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. -- 18 -- PHC, Inc. Registrant Date: February 14, 2006 /s/ Bruce A. Shear Bruce A. Shear President Chief Executive Officer Date: February 14, 2006 /s/ Paula C. Wurts Paula C. Wurts Controller Treasurer -- 19 --