-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VS1wlLFOLck9xEe4Vtr0OXDEN8zYMYXW3QpQ+nEx6faiD3Z/t4gWxzIij6AiQyN1 zwPAGLDrRwNdSt8zBQKkMg== 0000915127-07-000092.txt : 20071005 0000915127-07-000092.hdr.sgml : 20071005 20071004175344 ACCESSION NUMBER: 0000915127-07-000092 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20071005 DATE AS OF CHANGE: 20071004 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHC INC /MA/ CENTRAL INDEX KEY: 0000915127 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 042601571 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-33323 FILM NUMBER: 071157549 BUSINESS ADDRESS: STREET 1: 200 LAKE ST STE 102 CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 9785362777 MAIL ADDRESS: STREET 1: 200 LAKE ST STREET 2: STE 102 CITY: PEABODY STATE: MA ZIP: 01960 10-K/A 1 k10a_1007.txt ADMENDMENT TO 10K FILED 0*-28-07 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2007 [ ] Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to Commission file number: 1-33323 PHC, INC. (Exact Name of Registrant as Specified in Its Charter) MASSACHUSETTS 04-2601571 (State or other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 200 LAKE STREET, SUITE 102, PEABODY, MA 01960 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (978) 536-2777 Securities registered under Section 12(b) of the Act: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE Securities registered under Section 12(g) of the Act: NONE (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ___ No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ___ No X Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ __ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one) Large Accelerated Filer ___ Accelerated Filer ___ Non-Accelerated Filer X ___ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X As of December 31, 2006 the aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant was approximately $57.2 million. As of September 24, 2007, 19,272,978 shares of the registrant's Class A Common Stock and 775,760 shares of the issuer's Class B Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 2007 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. 1 Table of Contents Index Page Explanatory Note 3 10-K Table of Contents 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8. Financial Statements and Supplementary Data 22 Index to financial statements F-1 PART III Item 10. Directors, Executive Officers and Corporate Governance 54 Item 11. Executive Compensation 57 PART IV Item 15. Exhibits and Financial Statement Schedules 66 List of Exhibits included in this report on form 10-K/A 66 Signatures 67 2 Explanatory Note This amendment to the Company's report on Form 10-K, filed with the Commission on September 28, 2007, is being filed to correct information in the original filing as follows: Table of Contents The original table of contents is being corrected to show the correct page numbers for the report on Form 10-K as originally filed. PART II Item 5, Market for Registrant's Common Equity and related Stockholder Matters, is being amended to correct the date of the referenced 8-K filing from December 20, 2007 to December 20, 2006 and to include the market performance graph as required in the annual report to shareholders. Item 6, Selected Financial Data, is being amended to correct a typographical error in the amount shown as Administrative Expenses for 2006 from $13,727 to $13,728. Item 7, Management's Discussion and analysis of Financial Condition and Results of Operations: Results of Operations, Statements of Operations Data table to correct the 2007 percentages of Income before income taxes, Benefit from (provision for) income taxes, and Net Income; to correct the amount of total patient care and administrative expenses and related percentages; and, to change the footnote reference from Note I to Note K - Segment Information. Year ended June 30, 2007 compared to June 30, 2006 to correct comparisons of patient care expenses to more accurately reflect the accounts included; to correct the patient care and administive expense comparisons to reflect the reallocation of these expenses in the Income Statement; and, to change the footnote reference from Note I to Note K - Segment Information. Liquidity and Capital Resources is being amended to correct the amount shown as capital expenditures and net debt repayments to reflect the correct amounts as shown in the Statement of Cash flows; to correct the name of the LLC the Company invested in, to Seven Hills Psych Center, LLC; to correct the filing date of the referenced 8-K filing from December 20, 2007 to December 20, 2006; to include the average interest rate paid on our revolving credit line of credit and additional information regarding the refinancing of our long term debt in June 2007 and to correct the precentage of revenue derived from a single client from 15% to 10%. Item 8, Financial Statements and Supplementary Data, is being amended to correct the page numbers of the financial reports from F-27 through F-31; to correct a typographical error on the balance sheet under the heading Other receivables 2007 which was filed as $93,697 but should be $91,697; to reclassify amounts on the income statement under the heading Patient care expenses 2007 to Administrative Expenses 2007; to correct the name of the LLC the Company invested in, to Seven Hills Psych Center, LLC: to eliminate information duplicated in NOTE E which includes the information on the Pivotal acquisition note (Note B) at $729,801 and the information regarding the Company's compliance with its financial covenants and to correct the segment net income allocation for the year ended June 30, 2007 and the total assets from $21,984,987 to $21,715,987 for the year ended June 30, 2006 in Note K. PART III Item 10, Directors, Executive Officers, Promoters and Control Persons, is being amended to correct the number of meetings of the Compensation Committee held during 2007 to include telephonic meetings. Item 11, Executive Compensation, is being amended to correct the compensation to directors previously reported incorrectly. PART IV 3 Item 15, Exhibits and Financial Statement Schedules, is being amended to correct the final page number of the Notes to the consolidated financial statements. This Form 10-K/A does not amend, update or change any other items or any other disclosure in the Original Report or reflect events that occurred after the date of the Original Report. Therefore, this Amendment should be read in conjunction with our Original Report and our other filings made with the Securities and Exchange Commission subsequent to the filing of the Original Report. Table of Contents Index Page PART I Item 1. Description of Business 2 Item 1A. Risk Factors 16 Item 2. Description of Property 20 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 22 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36 Item 8. Financial Statements and Supplementary Data 37 Index to financial statements F-1 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 70 Item 9A. Controls and Procedures 70 PART III Item 10. Directors, Executive Officers and Corporate Governance 71 Item 11. Executive Compensation 74 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 79 Item 13. Certain Relationships and Related Transactions and Director Independence 81 Item 14. Principal Accountant Fees and Services 81 PART IV Item 15. Exhibits and Financial Statement Schedules 83 Signatures 87 4 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Class A Common Stock has been listed on the American Stock Exchange since February 2007 under the symbol "PHC". Prior to that date it was quoted on the Over-the-Counter Bulletin Board under the symbol "PIHC-BB." The following table sets forth the high and low sales price of the Company's Class A Common Stock, as reported. HIGH LOW ____ ___ 2006 First Quarter (July 1, 2005 - September 30, 2005) $2.95 $2.26 Second Quarter (October 1, 2005 - December 31, 2005) $2.90 $1.90 Third Quarter (January 1, 2006 - March 31, 2006) $2.40 $1.75 Fourth Quarter (April 1, 2006 - June 30, 2006) $2.39 $1.95 2007 First Quarter (July 1, 2006 - September 30, 2006) $2.39 $2.00 Second Quarter (October 1, 2006 - December 31, 2006) $3.18 $2.00 Third Quarter (January 1, 2007 - March 31, 2007) $3.78 $2.76 Fourth Quarter (April 1, 2007 - June 30, 2007) $3.32 $2.77 On August 15, 2007, there were 683 holders of record of the Company's Class A Common Stock and 300 holders of record of the Company's Class B Common Stock. The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during fiscal 2007. DIVIDEND POLICY Although the Company has no current restrictions on the issuance of dividends, the Company has never paid any cash dividends on its common stock. The Company anticipates that, in the future, earnings will be retained for use in the business or for other corporate purposes, and it is not anticipated that cash dividends in respect to common stock will be paid in the foreseeable future. Any decision as to the future payment of dividends will depend on the results of operations, the financial position of the Company and such other factors, as the Company's board of directors, in its discretion, deems relevant. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS Information required with respect to "Securities Authorized for Issuance Under Equity Compensation Plans" is included in Part III, Item 12 in this Annual Report on Form 10-K. MARKET RISKS The market price of the Company's common stock has been volatile in the past. The shares have sold at prices varying between a low of $1.75 and a high of $3.78 from July 2005 through June 2007. Trading prices may continue to fluctuate in response to changes in the Company's results of operations from quarter. Our right to issue convertible preferred stock may adversely affect the rights of the common stock. Our Board of Directors has the right to establish the preferences for and issue up to 1,000,000 shares of preferred stock without further stockholder action. The terms of any series of preferred stock, which may include priority claims to assets and dividends and special voting rights, could adversely affect the market price of and the ability to sell common stock. During the twelve month period ended June 30, 2007, the Company did not issue any preferred stock; however, it did issue 961,539 shares of unregistered Class A common stock in a private placement with the requirement to register the common stock which was done in February 2007. (See the Company's report on form 8-K filed with the Securities and Exchange Commission on December 20, 2006 for additional details regarding this transaction). 5 STOCK PERFORMANCE GRAPH The following table depicts the cumulative total return on the Company's common stock compared to the cumulative total return for the Nasdaq Composite-US Index and the Nasdaq Health Services Index (which includes both U.S. and foreign companies), an index published by the University of Chicago's Center for Research in Security Prices. The table assumes the investment of $100 on June 30, 2002. Comparison of Five-Year Cumulative Total Returns Performance Report for PHC, Inc. Prepared by the Center for Research in Security Prices Produced on 09/27/2007 including data to 06/29/2007 Company Index: CUSIP Ticker Class Sic Exchange 69331510 PHC A 8082 AMEX Fiscal Year-end is 06/30/2007 Market Index: Nasdaq Stock Market (US Companies) Peer Index: Nasdaq Health Services Stocks SIC 8000-8099 US & Foreign Date Company Index Market Index Peer Index 06/28/2002 100.000 100.000 100.000 07/31/2002 83.544 90.869 90.624 08/30/2002 96.203 89.904 88.230 09/30/2002 94.937 80.235 87.980 10/31/2002 94.937 91.195 89.481 11/29/2002 87.342 101.362 89.865 12/31/2002 103.797 91.534 85.991 01/31/2003 101.266 90.545 88.801 02/28/2003 100.000 91.817 82.374 03/31/2003 117.722 92.081 85.353 04/30/2003 106.329 100.450 87.320 05/30/2003 94.937 109.270 98.341 06/30/2003 97.468 111.023 105.272 07/31/2003 106.329 118.673 112.688 08/29/2003 102.532 123.849 114.804 09/30/2003 108.861 122.239 118.153 10/31/2003 111.392 132.080 125.005 11/28/2003 156.962 134.038 131.553 12/31/2003 175.949 136.863 131.497 01/30/2004 193.671 140.920 141.880 02/27/2004 158.228 138.268 146.977 03/31/2004 170.886 135.913 146.220 04/30/2004 145.570 131.409 150.293 05/28/2004 130.380 135.773 150.496 06/30/2004 140.506 139.945 156.311 07/30/2004 146.835 129.263 142.018 08/31/2004 132.911 126.099 136.695 09/30/2004 153.165 129.860 138.118 10/29/2004 172.152 135.125 141.260 11/30/2004 192.405 143.451 156.938 12/31/2004 182.278 148.944 165.721 01/31/2005 206.329 141.194 162.956 02/28/2005 232.911 140.391 170.209 03/31/2005 254.430 136.821 180.643 04/29/2005 253.165 131.844 181.097 05/31/2005 251.899 142.037 186.528 06/30/2005 320.253 141.461 197.526 07/29/2005 367.089 150.488 202.057 08/31/2005 306.329 148.101 206.869 09/30/2005 360.759 148.219 209.084 10/31/2005 322.785 146.315 212.473 11/30/2005 302.532 154.296 230.843 12/30/2005 263.291 152.110 227.863 01/31/2006 278.481 158.826 242.328 02/28/2006 272.152 157.247 235.339 03/31/2006 291.139 161.346 238.946 04/28/2006 275.949 160.077 229.412 05/31/2006 278.481 150.420 227.725 06/30/2006 278.481 150.417 226.575 07/31/2006 298.734 144.682 227.431 08/31/2006 265.823 151.106 229.161 09/29/2006 272.152 156.308 219.257 10/31/2006 259.494 163.962 209.430 11/30/2006 282.278 168.248 216.406 12/29/2006 402.532 167.115 227.554 01/31/2007 392.405 170.371 230.059 02/28/2007 474.684 166.886 233.926 03/30/2007 411.392 167.357 239.310 04/30/2007 398.734 174.615 251.628 05/31/2007 417.722 179.974 267.219 06/29/2007 386.076 179.305 265.692 The index level for all series was set to 100.0 on 06/28/2002 6 Item 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data of our Company. The selected consolidated financial data as of June 30, 2007 and 2006 and for each of the three years in the period ended June 30, 2007 should be read with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and have been derived from our consolidated financial statements which are included elsewhere in this annual report on Form 10-K and were audited by Eisner LLP, with respect to the period ended June 30, 2007 and 2006 and BDO Seidman, LLP, with respect to June 30, 2005. Each of these firms is an independent registered public accounting firm. The selected consolidated financial data as of and for the years ended June 30, 2004 and 2003 have been derived from our consolidated financial statements not included herein, which were audited by BDO Seidman, LLP, independent registered public accounting firm. The historical results are not necessarily indicative of the results to be expected for any future period. PHC, Inc. Selected Financial Data As of and for the Years Ended June 30, 2007 2006 2005 2004 2003 ____ ____ ____ ____ ____ (in thousands, except share and per share data) Statements of Operations Data: Revenues $ 45,127 $ 38,013 $ 34,063 $ 26,649 $ 23,833 Cost and Expenses: Patient care expenses 21,965 16,512 14,582 12,422 11,676 Contract expenses 3,103 2,676 2,198 2,392 1,399 Administrative expenses 15,116 13,728 12,424 10,333 8,204 Provision for doubtful accounts 1,934 1,913 1,272 1,356 1,108 Interest expense 649 607 655 532 542 Other (income) expenses including interest income, net (469) (158) (150) (140) (129) ____________ ___________ __________ ____________ ____________ Total expenses 42,298 35,278 30,981 26,895 22,801 ____________ ___________ __________ ____________ ____________ Income (loss) before income taxes 2,829 2,735 3,082 (246) 1,032 Provision for (benefit from) income 1,147 (1,310) (74) 11 54 taxes ____________ ___________ __________ ____________ ___________ Net income (loss) 1,682 4,045 3,156 (257) 978 ____________ ___________ __________ ____________ ___________ Net income (loss) applicable to common shareholders $ 1,682 $ 4,045 $ 3,156 $ (257) $ 978 =========== =========== =========== ============ =========== Basic income (loss) per common share $ 0.09 $ 0.22 $ 0.18 $ (0.02) $ 0.07 =========== =========== =========== ============ ========== Basic weighted average number of shares outstanding 19,287,665 18,213,901 17,574,678 14,731,395 13,944,047 ========== =========== ========== =========== ========== Diluted income (loss) per common share $ 0.09 $ 0.21 $ 0.17 $ (0.02) $ 0.07 =========== =========== ========== =========== =========== Diluted weighted average number of shares outstanding 19,704,697 19,105,193 18,364,076 14,731,395 14,564,078 ========== ========== =========== =========== ========== 7 2007 2006 2005 2004 2003 ____ ____ ____ ____ ____ Balance Sheet Data: Cash and cash equivalents $ 3,395 $ 1,820 $ 918 $ 595 $ 495 Working capital 7,546 7,208 4,106 241 736 Long-term debt and obligations under capital leases 2,398 2,059 2,712 2,285 3,002 Total stockholders' equity 18,250 13,455 9,102 5,367 1,935 Total assets 27,290 21,715 17,896 13,312 9,412
8 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act") and are subject to the Safe Harbor provisions created by the statute. Generally words such as "may", "will", "should", "could", "anticipate", "expect", "intend", "estimate", "plan", "continue", and "believe" or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements. The following is a discussion and analysis of the financial condition and results of operations of the Company for the years ended June 30, 2007, 2006 and 2005. It should be read in conjunction with the operating statistics (Part I, Item 1) and selected financial data (Part II, Item 6) and the accompanying consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K. Overview The Company presently provides behavioral health care services through two substance abuse treatment centers, a psychiatric hospital, a residential treatment facility and nine outpatient psychiatric centers (collectively called "treatment facilities"). The Company's revenue for providing behavioral health services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients. The profitability of the Company is largely dependent on the level of patient census and the payer mix at these treatment facilities. Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics. Payor mix is determined by the source of payment to be received for each client being provided billable services. The Company's administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases. 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, Michigan 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 9 basis, we evaluate our estimates and assumptions, including but not limited to those related to revenue recognition, accounts receivable reserves, income tax valuation allowances, and the impairment of goodwill and other intangible assets. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Revenue recognition and accounts receivable: Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the period of settlement. Amounts due as a result of cost report settlements 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 a specified area for a fixed monthly fee per member per month. Revenues are recorded monthly based on this formula and the expenses related to providing the services under these contracts are recorded as incurred. The Company provides as much of the outpatient care directly and, through utilization review, monitors closely, 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 fiscal 2007 for revenue booked in prior years resulted in an increase in net revenue of approximately $26,430. Net contractual adjustments recorded in fiscal 2006 for revenue booked in prior years resulted in an increase in net revenue of approximately $343,700. During the fiscal year ended June 30, 2007, a Medicare cost report settlement of $255,600 was received and in the fiscal year ended June 30, 2006, a Medicare cost report settlement of approximately $158,100 was received. No cost report settlements were received during the fiscal year ended June 30, 2005. For the fiscal years ended June 30, 2007, 2006 and 2005, no third party cost report settlements were expected or recorded. 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 June 30, 2007, June 30, 2006 and June 30, 2005 for our treatment services segment. Net Patient Care Revenue by Payor (in thousands) For the Twelve Months Ended June 30, 2007 June 30, 2006 June 30, 2005 _____________ _____________ _____________ Amount Percent Amount Percent Amount Percent ______ _______ ______ _______ ______ _______ Private Pay $ 1,632 5% $ 1,207 5% $ 1,212 5% Commercial 23,477 65% 17,572 63% 17,608 67% Medicare* 1,379 4% 946 3% 999 4% Medicaid 9,535 26% 8,137 29% 6,268 24% _______ _______ _______ Net Revenue $36,023 $27,862 $26,087 ======== ======== ======== 10 * includes Medicare cost report settlement revenue as noted above Accounts Receivable Aging (Net of allowance for bad debts- in thousands) 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 ====== ======= ==== ==== ==== ======= ==== ==== ====== Fiscal Year Ended June 30, 2006 Over Over Over Over Over Over Over Payor Current 30 60 90 120 150 270 360 Total _____ ______ ______ ____ ____ ____ ______ ____ ____ ______ Private Pay $ 113 $ 119 $106 $113 $ 84 $ 593 $ 33 $ 23 $1,184 Commercial 1,499 595 364 284 229 836 126 92 4,025 Medicare 133 38 6 17 18 73 -- -- 285 Medicaid 971 152 69 32 34 243 -- -- 1,501 ______ ______ ____ ____ ____ ______ ____ ____ ______ Total $2,716 $ 904 $545 $446 $365 $1,745 $159 $115 $6,995 ====== ====== ==== ==== ==== ======= ==== ==== ======= Fiscal Year Ended June 30, 2005 Over Over Over Over Over Over Over Payor Current 30 60 90 120 150 270 360 Total _____ ______ ______ ____ ____ ____ ______ ____ ____ _____ Private Pay $ 247 $ 139 $ 98 $ 64 $ 75 $ 154 $127 $ 32 $ 936 Commercial 1,708 645 389 239 216 379 208 26 3,810 Medicare 121 16 7 -- -- 1 -- -- 145 Medicaid 556 277 94 74 96 342 -- -- 1,439 ______ ______ ____ ____ ____ ______ ____ ____ ______ Total $2,632 $1,077 $588 $377 $387 $ 876 $335 $ 58 $6,330 ====== ====== ==== ==== ==== ====== ==== ==== ======
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. 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. 11 Income Taxes: The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. The Company's policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods. During the fourth quarter of fiscal year ended June 30, 2006, the Company recognized 100% of its federal deferred tax benefit based on past profitability and future projections. The total tax benefit recorded was $1,638,713. During fiscal 2007 the company recorded a provision for tax expense of $1,147,000 a blended state and federal tax rate of approximately 40.5%. Valuation of Goodwill and Other Intangible Assets Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. The Company makes significant estimates and assumptions, which are derived from information obtained from the management of the acquired businesses and the Company's business plans for the acquired businesses in determining the value ascribed to the assets acquired. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from services to be provided, customer contracts and relationships, and (ii) the acquired market position. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment. Investment in Seven Hills Included in other assets as of June 30, 2007 is the Company's investment in Seven Hills Psych Center, LLC of $400,000. This LLC holds the assets of the Seven Hospital currently being built and expected to be complete in the early part of calendar year 2008. Also included is the escrow deposit of $1,362,000 the Company has made toward the leasehold improvements for the anticipated leasing arrangement upon completion of the construction of the building. Results of Operations During the fiscal year ended June 30, 2007 the Company experienced a significant decrease in the revenues in the research division due to delays in study starts. This change in the research division is not evident in the table below because of large increases in the Company's core business. The decrease in the research division results are outlined below and detailed in Note K to the financial statements accompanying this report under the heading "Pharmaceutical Study Services". The following table illustrates our consolidated results of operations for the years ended June 30, 2007, 2006 and 2005 (in thousands): 2007 2006 2005 ____ ____ ____ Statements of Operations Data: (in thousands) Amount % Amount % Amount % Revenue $45,127 100.0% $38,013 100.0% $34,063 100.0% _______ ______ _______ ______ _______ ______ Costs and expenses: Patient care expenses 21,921 48.6% 16,512 43.5% 14,582 42.8% Contract expenses 3,103 6.9% 2,676 7.0% 2,198 6.5% Administrative expenses 15,161 33.6% 13,727 36.1% 12,424 36.5% Provision for bad debts 1,933 4.3% 1,913 5.0% 1,272 3.7% Interest expense 649 1.4% 607 1.6% 655 1.9% 12 Other (income)expenses, net (469) -1.0% (158) -0.4% (150) -0.4% _______ ______ _______ ______ _______ ______ Total expenses 42,298 93.7% 35,278 92.8% 30,981 91.0% _______ ______ _______ ______ _______ ______ Income before income taxes 2,829 6.3% 2,735 7.2% 3,082 9.0% Benefit from (provision for) income taxes (1,147) -2.5% 1,310 3.4% 74 0.2% _______ ______ _______ ______ _______ ______ Net income $ 1,682 3.8% $ 4,045 10.6% $3,156 9.3% ======= ==== ======= ===== ======= =====
Year ended June 30, 2007 as compared to year ended June 30, 2006 The Company's income from its operations decreased 5.48% to $3,009,904 for the fiscal year ended June 30, 2007 from $3,184,426 for the fiscal year ended June 30, 2006. Net income, decreased 58.4% to $1,682,283 for the fiscal year ended June 30, 2007 from $4,045,482 for the fiscal year ended June 30, 2006. This decrease is the result of $1,147,000 in provision for tax expense recorded in fiscal 2007 as compared to $1,310,103 in net income tax benefit recorded in fiscal 2006. Income before taxes increased 3.43% to $2,829,283 for the fiscal year ended June 30, 2007 from $2,735,379 for the fiscal year ended June 30, 2006. This increase was primarily due to the two new contracts added during the year that are projected to increase gross revenues by $10,000,000 annually, once fully implemented, and increased patient census . This increase is significant since it includes start-up costs of these contracts of approximately $100,000 and uncapitalizable costs of the Meditech software implementation in progress and the construction in progress of the Seven Hills Hospital. We also experienced a down-turn in the pharmaceutical revenue as it is dependent on unpredictable study starts and largely volatile as shown in "Note K - Segment Information" in the accompanying financial statements for the period ended June 30, 2007, 2006 and 2005. Total revenues increased 18.72% to $45,127,477 for the year ended June 30, 2007 from $38,013,092 for the year ended June 30, 2006. Total net patient care revenue from all facilities increased 29.29% to $36,022,529 for the year ended June 30, 2007 as compared to $27,861,701 for the year ended June 30, 2006. Patient days increased over 5,291 days for the fiscal year ending June 30, 2007 over the fiscal year ended June 30, 2006. In October 2005 the Company opened 20 additional residential beds, increasing our available beds from 160 to 180. These additional available beds accounted for approximately 74% of the increase in patient days for the fiscal year ended June 30, 2007. The contracted rate for these residential beds is lower than that of our other facilities, which negatively impacts our revenue per patient day without positive changes in our census and payor mix at our other facilities. Net inpatient care revenue from inpatient psychiatric services increased 14.56% to $21,508,417 for the year ended June 30, 2007 from $18,775,198 the fiscal year ended June 30, 2006. This increase is due to a change in payor mix to payors with more favorable approved rates and from the increase in residential treatment beds. Net partial hospitalization and outpatient care revenue increased 59.7% to $14,514,112 for the year ended June 30, 2007 from $9,086,503 for the year ended June 30, 2006. This increase is primarily due to the new capitated contract and high usage of these step-down programs by managed care as a treatment alternative to inpatient care. Pharmaceutical study revenue decreased 21.3% to $4,564,314 for the year ended June 30, 2007 from $5,799,815 for the year ended June 30, 2006. This decrease is largely due to the delay in the start of some significant studies that were expected to start in the first quarter of the year but did not start until the fourth quarter of fiscal 2007 and a large study that ran in the last half of fiscal 2006. Revenues increased in our contract support services division, Wellplace. Wellplace revenues increased 4.3% to $4,540,634 for the year ended June 30, 2007 from $4,351,576 for the year ended June 30, 2006. This increase in revenue is primarily due to increases in contract rates. All revenues reported in the accompanying consolidated statements of operations are shown net of estimated contractual adjustments and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA Audit and Accounting Guide for Health Care Organizations. Patient care expenses, excluding research, increased by $5,468,817, or 38.3%, to $19,738,357 for the year ended June 30, 2007 from $14,269,540 for the year ended June 30, 2006 due to the increase in available beds contributing to the increase in patient census at our inpatient facilities and the increased utilization of our out-patient services as a result of the new capitated rate contract. Inpatient census increased by 5,291 patient days, 10.7%, for the year ended June 30, 2007 compared to the year ended June 30, 2006. Contract expense, which includes the cost of outside service providers for our capitated contracts 13 increased 650.6% to $1,785,697 for the year ended June 30, 2007 from $237,899 for the year ended June 30, 2006 due to the new capitated rate contract effective January 1, 2007. This contract has an expected annual gross revenue of approximately $8,000,000 and calls for the Company to provide behavioral health care for approximately 325,000 members. Payroll and service related consultant including agency nursing increased 31.6% to $14,579,031 for the year ended June 30, 2007 from $11,075,774 for the year ended June 30, 2006, Food and dietary expense increased 1.0% to $776,796 for the year ended June 30, 2007 from $769,367 for the year ended June 30, 2006, hospital supplies expense increased 30.3% to $93,204 for the year ended June 30, 2007 from $71,539 for the year ended June 30, 2006, and other patient related expenses increased to 7.5% to $101,277 for the year ended June 30, 2007 from $94,218 for the year ended June 30, 2006. All of these increases were a result of increased patient census and increased utilization of our out patient services. We continue to closely monitor the ordering of all hospital supplies, food and pharmaceutical supplies but these expenses all relate directly to the number of days of inpatient services we provide and are expected to increase with higher patient census and out patient visits. (see "Operating Statistics" Part I, Item 1). Patient care expenses for the research division decreased 2.7% to $2,182,357 for the year ended June 30, 2007 from $2,242,900 for the year ended June 30, 2006. This decrease is due to the delay in the start of studies. Payroll and related direct care expenses decreased 17.0% to $1,463,009 for the year ended June 30, 2007 from $1,763,308 for the year ended June 30, 2006. Patient supplies expense decreased 36.0% to $24,830 for the year ended June 30, 2007 from $38,770 for the year ended June 30, 2006. Other patient related expenses increased 53.0% to $694,518 for the year ended June 30, 2007 from $453,822 for the year ended June 30, 2006. This increase is primarily due to the increased advertising to gear up for the new studies started in the fourth quarter of the 2007 fiscal year. Cost of contract support services related to Wellplace increased 15.9% to $3,102,551 for the year ended June 30, 2007 from $2,676,340 for the year ended June 30, 2006. This increase is due to the increased staffing to support the smoking cessation contract which started in November 2005 and increases in related employee expenses and the increased cost related to the smoking cessation software maintenance. Payroll and payroll related expenses increased 23.6% to $1,576,061 for the year ended June 30, 2007 from $1,274,937 for the year ended June 30, 2006. Provision for doubtful accounts increased 1.1% to $1,933,499 for the fiscal year ended June 30, 2007 from $1,912,516 for the fiscal year ended June 30, 2006. This increase is a result of increases in accounts receivable in line with increases in revenue. The policy of the Company is to provide an allowance for doubtful accounts based on the age of receivables resulting in higher bad debt expense as receivables age. The goal of the Company, given this policy, is to keep any increase in the provision for doubtful accounts in line with increases in revenue. The environment the Company operates in today makes collection of receivables, particularly older receivables, more difficult than in previous years. Accordingly, the Company has increased staff, standardized some procedures for collecting receivables and instituted a more aggressive collection policy, which has for the most part resulted in an overall decrease in the age of its accounts receivable. The Company's gross receivables from direct patient care has increased 2.3% to $10,323,972 for the year ended June 30, 2007 from $10,096,061 for the year ended June 30, 2006, the Company believes its reserve of approximately 36% is sufficient based on the age of the receivables. We continue to reserve for bad debt based on managed care denials and past difficulty in collections. The growth of managed care has negatively impacted reimbursement for behavioral health services with higher contractual adjustments and a higher rate of denials requiring and higher reserves. Total administrative expenses, excluding research, increased 13.5% to $12,722,007 for the year ended June 30, 2007 from $11,210,296 for the year ended June 30, 2006. Administrative salaries increased 20.6% to $4,232,863 for the year ended June 30, 2007 from $3,508,980 for the year ended June 30, 2006. Payroll tax expense increased 16.9% to $354,229 for the year ended June 30, 2007 from $302,932 for the year ended June 30, 2006. Employee benefits increased 16.1% to $676,464 for the year ended June 30, 2007 from $582,785 for the year ended June 30, 2006. Other employee benefits increased 93.1% to $239,555 for the year ended June 30, 2007 from $124,035 for the year ended June 30, 2006. All of these increases in payroll and employee related expenses are a result of an increase of approximately 200% in the staff at our Las Vegas out patient location to service the new capitated rate contract and greater competition for experienced health care administrative staff resulted in these increased salaries. General insurance expense increased 17.9% to $760,338 for the year ended June 30, 2007 from $644,882 for the year ended June 30, 2006 due to general increases in property and liability insurance and the addition of three additional out patient sites, two in Las Vegas and one in Arizona. Rent expense 14 increased 28.9% to $1,440,342 for the year ended June 30, 2007 from $1,117,098 for the year ended June 30, 2006. This increase is due to the three additional clinics opened this year and normal CPI increases included in our property leases. Transfer fee expense increased 255.6% to $91,932 for the year ended June 30, 2007 from $25,856 for the year ended June 30, 2006 as a result of the initial American Stock Exchange listing fee. Total administrative expenses for the research division decreased 3.1% to $2,438,802 for the year ended June 30, 2007 from $2,517,074 for the year ended June 30, 2006. Administrative payroll and taxes was the most significant of the change as it decreased 5.7% to $974,695 for the year ended June 30, 2007 from $1,033,160 for the year ended June 30, 2006 due to the closing of the Michigan office and the decrease in study activity. Advertising expense decreased 25.4% to $216,953 for the year ended June 30, 2007 from $290,673 for the year ended June 30, 2006. This decrease was also a result of the decrease in study activity. Interest expense increased 7.0% to $649,166 for the year ended June 30, 2007 from $606,893 for the year ended June 30, 2006. This increase is due to the amortization of $55,728 and the write off of $13,932 debt discount on the old debt to interest and amortization of $4,868 on the new debt discount as a part of the debt refinancing in June 2007. The Company's provision for income taxes of $1,147,000 for the year ended June 30, 2007 represents a blended state and federal tax rate of approximately 40.5% compared to the prior years tax provision excluding the tax benefit of $328,610 for the year ended June 30, 2006, which was significantly below the Federal statutory rate of 34% primarily due to the utilization of net operating loss carry-forwards. In the fiscal year ended June 30, 2006, the Company reduced the valuation allowance due to its evaluation of the future likelihood of realization based on past profitability and future expectations of profitability, and recognized 100% of its available federal tax benefit of $1,638,713 and eliminated the valuation allowance against the deferred tax asset for federal purposes. Year ended June 30, 2006 as compared to year ended June 30, 2005 The Company's income from its operations decreased 11.2% to $3,184,426 for the fiscal year ended June 30, 2006 from $3,587,412 the fiscal year ended June 30, 2005. Net income, increased 28.2% to $4,045,482 for the fiscal year ended June 30, 2006 from $3,155,900 for the fiscal year ended June 30, 2005. This increase is primarily the result of $1,638,713 in income tax benefit recorded in fiscal 2006 as compared to $209,000 tax benefit recorded in fiscal 2005, start-up costs experienced in fiscal 2006 for a major contract at our Las Vegas location, start-up costs incurred as a result of the addition of 20 beds at the Detroit Behavioral Institute facility and increased bad debt and professional fees related to the system crash at our Harbor Oaks facility. Total revenues increased 11.6% to $38,013,092 for the year ended June 30, 2006 from $34,063,258 for the year ended June 30, 2005. Total net patient care revenue from all facilities increased 6.8% to $27,861,701 for the year ended June 30, 2006 as compared to $26,087,088 for the year ended June 30, 2005. Patient days increased over 6,861 days for the fiscal year ending June 30, 2006 over the fiscal year ended June 30, 2005. In December 2004, the Company opened 30 residential beds increasing our available beds from 130 to 160 and in October 2005 the Company opened 20 additional residential beds, increasing our available beds from 160 to 180. These additional available beds accounted for the increase in patient days for the fiscal year ended June 30, 2006. The contracted rate for these residential beds is lower than that of our other facilities, which negatively impacts our revenue per patient day. Net inpatient care revenue from inpatient psychiatric services increased 1.7% to $18,775,198 for the year ended June 30, 2006 from $18,469,578 the fiscal year ended June 30, 2005. This increase is due to a change in payor mix resulting in part from the increased residential treatment beds. Net partial hospitalization and outpatient care revenue increased 19.3% to $9,086,503 for the year ended June 30, 2006 from $7,617,510 for the year ended June 30, 2005. This increase is partially due to increased outpatient contracts and high usage of these step-down programs by managed care as a treatment alternative to inpatient care. Pharmaceutical study revenue increased 28.6% to $5,799,815 for the year ended June 30, 2006 from $4,509,338 for the year ended June 30, 2005. This increase is due in part to a large study started in the third quarter of this fiscal year. Revenues also increased in our contract support services division, Wellplace. Wellplace revenues increased 25.5% to $4,351,576 for the year ended June 30, 2006 from $3,466,832 for the year ended June 30, 2005. This increase in revenue is primarily due to the start of a new smoking cessation contract with a major government contractor in November 2005. All revenues reported in the accompanying consolidated statements of operations are shown net of estimated 15 contractual adjustments and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA Audit and Accounting Guide for Health Care Organizations. Patient care expenses, excluding research, increased by $1,364,254, or 10.6%, to $14,269,540 for the year ended June 30, 2006 from $12,905,286 for the year ended June 30, 2005 due to the increase in available beds and resulting increase in patient census at our inpatient facilities. Inpatient census increased by 6,861 patient days, 16%, for the year ended June 30, 2006 compared to the year ended June 30, 2005. Direct patient care payroll and payroll related expenses increased 9.7% to $11,764,978 for the year ended June 30, 2006 from $10,727,317 for the year ended June 30, 2005, food and dietary expense increased 21.4% to $769,367 for the year ended June 30, 2006 from $633,869 for the year ended June 30, 2005, hospital supplies expense increased 37.9% to $71,539 for the year ended June 30, 2006 from $51,863 for the year ended June 30, 2005, laboratory fees increased 36.4% to $219,063 for the year ended June 30, 2006 from $160,603 for the year ended June 30, 2005, agency nursing expense increased 38.8% to $166,047 for the year ended June 30, 2006 from $119,672 for the year ended June 30, 2005 and other patient related expenses increased to $94,218 for the year ended June 30, 2006 from $45,481 for the year ended June 30, 2005. All of these increases were a result of increased patient census and increased needs of the patients based on the severity of their illness and the start up of the additional 20 bed residential unit in October 2005. We continue to closely monitor the ordering of all hospital supplies, food and pharmaceutical supplies but these expenses all relate directly to the number of days of inpatient services we provide and are expected to increase with higher patient census. (see "Operating Statistics" Part I, Item 1). Patient care expenses for the research division increased 33.8% to $2,242,900 for the year ended June 30, 2006 from $1,676,749 for the year ended June 30, 2005. This increase is due to increased study activity. Payroll and related direct care expenses increased 37.0% to $1,763,308 for the year ended June 30, 2006 from $1,287,038 for the year ended June 30, 2005. Patient supplies expense increased 68.3% to $38,770 for the year ended June 30, 2006 from $23,040 for the year ended June 30, 2005. Patient stipends and other patient related expenses increased 23.9% to $453,822 for the year ended June 30, 2006 from $366,671 for the year ended June 30, 2005. These expenses are expected to increase in a direct relationship with the increases in related revenue. Cost of contract support services related to Wellplace increased 21.8% to $2,676,340 for the year ended June 30, 2006 from $2,197,518 for the year ended June 30, 2005. This increase is due to the start up costs related to the smoking cessation contract with a major government contractor which started in November 2005. Expenses are expected to increase as new contracts are added. With the exception of depreciation and legal fees, all expenses for Wellplace increased as a result of this contract. Payroll and payroll related expenses increased 27.0% to $1,274,937 for the year ended June 30, 2006 from $1,003,988 for the year ended June 30, 2005. Provision for doubtful accounts increased 50.4% to $1,912,516 for the fiscal year ended June 30, 2006 from $1,272,037 for the fiscal year ended June 30, 2005. This increase is primarily the result of the system crash at Harbor Oaks which delayed billing and the processing of payments for more than four months, creating a delay in payments and in appeals processing. The facility continues to collect on these old accounts, which is evident by the lower expense for the facility in the last half of the fiscal year; however, the policy of the Company is to provide an allowance for doubtful accounts based on the age of receivables resulting in higher bad debt expense and a significant increase in the allowance for doubtful accounts. The environment the Company operates in today makes collection of receivables, particularly older receivables, more difficult than in previous years. Accordingly, the Company has increased staff, standardized some procedures for collecting receivables and instituted a more aggressive collection policy, which has for the most part resulted in an overall decrease in the age of its accounts receivable. The Company's gross receivables from direct patient care has increased 21.8% to $10,096,061 for the year ended June 30, 2006 from $8,287,365 for the year ended June 30, 2005. The Company believes its reserve of approximately 31% is sufficient based on the age of the receivables. We continue to reserve for bad debt based on managed care denials and past difficulty in collections. The growth of managed care has negatively impacted reimbursement for behavioral health services with a higher rate of denials requiring higher contractual adjustments and higher reserves. Total administrative expenses, excluding research, increased 16.0% to $11,210,296 for the year ended June 30, 2006 from $9,667,138 for the year ended June 30, 2005. Legal expense decreased 39.0% to $156,054 for the year ended June 16 30, 2006 from $255,794 for the year ended June 30, 2005, due to the booking of some residual legal fees last year for the North Point litigation settled in fiscal 2004 and legal fees associated with finalizing the collective bargaining agreement for Harbor Oaks Hospital. Administrative salaries increased 14.9% to $3,508,980 for the year ended June 30, 2006 from $3,054,294 for the year ended June 30, 2005. Greater competition for experienced health care administrative staff resulted in these increased salaries. Insurance expense increased 9.7% to $644,882 for the year ended June 30, 2006 from $587,751 for the year ended June 30, 2005 due to general increases in property and liability insurance. Accounting fees, which includes non-audit accounting services, including but not limited to taxes, cost reports and individual contract audits, provided by firms other than our principal audit firm, increased 45.8% to $336,425 for the year ended June 30, 2006 from $230,791 for the year ended June 30, 2005. Fees and licenses expense increased 19.1% to $294,165 for the year ended June 30, 2006 from $247,076 for the year ended June 30, 2005. This increase is due to the Michigan quality assurance assessment fee, which accounted for the majority of the increase. Rent expense increased 17.1% to $1,117,098 for the year ended June 30, 2006 from $953,667 for the year ended June 30, 2005. This increase is due to the opening of the additional 20 residential bed unit at Detroit Behavioral Institute. Total administrative expenses for the research division decreased 8.7% to $2,517,074 for the year ended June 30, 2006 from $2,757,118 for the year ended June 30, 2005. This decrease is due to a decrease in legal expenses, decrease in administrative salaries and a decrease in general insurance costs. Administrative payroll and taxes was the most significant of these changes as it decreased 10.8% to $1,033,160 for the year ended June 30, 2006 from $1,158,394 for the year ended June 30, 2005 due to the closing of the Las Vegas office and a decrease in accrued bonuses. Interest expense decreased 7.3% to $606,893 for the year ended June 30, 2006 from $654,871 for the year ended June 30, 2005. This decrease is due to the decrease in outstanding debt of the Company. The prime rate, which remained relatively stable over the last fiscal year, dictates the interest rate on the majority of the Company's long-term debt, therefore, the reduction of interest is only a result of the decrease in outstanding debt. The Company's provision for income taxes exclusive of deferred income tax benefits of $328,610 and $135,969 for the years ended June 30, 2006 and June 30, 2005, respectively, are significantly below the Federal statutory rate of 34% primarily due to the utilization of net operating loss carry-forwards. Total provision for income tax expense for fiscal 2006 and 2005 represents state income taxes for certain subsidiaries with no available net operating loss carry-forwards. In the past, the Company has provided a significant valuation allowance against its deferred tax asset and recognized a tax benefit of $209,392 in the fiscal year ended June 30, 2005, based on the estimated taxable income for the fiscal year ended June 30, 2006. In the fiscal year ended June 30, 2006, the Company reduced the valuation allowance due to its evaluation of the future likelihood of realization based on past profitability and future expectations of profitability, and recognized 100% of its available tax benefit and eliminated the valuation allowance against the deferred tax asset for federal purposes. Liquidity and Capital Resources As of June 30, 2007, the Company had working capital of $7,545,549, including cash and cash equivalents of $3,395,173, compared to working capital of $7,208,291, including cash and cash equivalents of $1,820,105 at June 30, 2006. Cash provided by operating activities was $3,543,597 for the year ended June 30, 2007, compared to $3,134,306 for the year ended June 30, 2006. Cash provided by operations in fiscal 2007 consists of the net income of $1,682,283, offset by an increase in total increase in accounts receivable of $855,237, an increase in prepaid expenses of $197,945, an increase in other assets of $229,885 and a decrease in accounts payable of $247,818. These uses of cash from operations were offset by a $735,933 increase in accrued expenses and other liabilities and further offset by non-cash items including depreciation and amortization of $744,206, non-cash interest expense of $164,994, change in deferred tax expense asset of $863,000, a change in allowance for bad debt of $663,999 and stock based compensation of $220,067. Cash used in investing activities in fiscal 2007 consisted of $955,459 in capital expenditures for the acquisition of property and equipment, $400,000 investment in the Seven Hills Psych Center, LLC and $1,719,623 in advances on the construction in progress for the Seven Hills Hospital compared to $710,638 in 17 capital expenditures for property and equipment in the fiscal year ended June 30, 2006. Other than Seven Hills related investments, the increase was primarily due the purchase and implementation of the Meditech software and the upgrade of hardware to accommodate the software Company wide. Cash provided by financing activities in fiscal 2007 consisted of $1,246,798 in net debt repayments, $83,664 in deferred financing costs, and $64,783 in private placement costs offset by $2,501,798 received from the issuance of common stock. A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of June 30, 2007 accounts receivable from patient care, net of allowance for doubtful accounts, decreased approximately 6% to $6,559,387 on June 30, 2007 from $6,995,475 on June 30, 2006. This decrease is due to an increase in the allowance for bad debt and the faster turn around of receivables related to the new capitatated contract. The Company's goal is to reduce receivables or to have any increases result from higher revenues and timing of receivables collection. Better accounts receivable management due to increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy has made this possible in behavioral health, which is typically a difficult collection environment. Increased staff has allowed the Company to concentrate on current accounts receivable and resolve any problem issues before they become uncollectible. The Company's collection policy calls for early contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. The Company's collectors will also seek assistance through every legal means, including the State Insurance Commissioner's office, when appropriate, to collect claims. At the same time, the Company continues to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections. In order to facilitate the equity component for the build-out of the Company's Las Vegas hospital project, Seven Hills, on December 19, 2006, the Company entered into an agreement pursuant to which the Company sold $2,000,000 in unregistered Class A Common Stock to a single investor. The agreement allowed the investor, Camden Partners Limited Partnership, to purchase $2,000,000 in PHC, Inc. Class A Common Stock at $2.08 per share, which is the average selling price per share over the 20 trading days prior to the sale, minus 4%. (For additional details regarding this transaction see the Company's current report on form 8-K filed with the Securities and Exchange Commission on December 20, 2006). Contractual Obligations The Company's future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of June 30, 2007 are as follows (in thousands): YEAR OPERATING ENDING TERM NOTES CAPITAL LEASES LEASES TOTAL** _______ __________ _____________ _________ _______ June 30 Principal Interest Principal Interest Payments 2008 $1,134 $ 25 $ 206 $ 41 $2,088 $3,494 2009 625 20 170 25 2,072 2,912 2010 53 16 45 14 1,764 1,892 2011 46 12 11 6 721 796 2012 51 8 -- -- 304 363 2013 57 3 -- -- 261 321 ______ ____ _____ ____ ______ ______ Total $1,966 $ 84 $ 432 $ 86 $7,210 $9,778 ====== ==== ===== ===== ======= ======= * 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 $1,518,742. This amount represents an accounts receivable funding described below and is shown as a current note payable in the accompanying Financial Statements. 18 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 $441,109 which represents the earn out for the Pivotal acquisition through December 31, 2005 net of payments made through June 30, 2007. 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 of $729,801. 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 $180,112 is included in the schedule above. (See Note C to the consolidated financial statements included in this report for additional details on the Pivotal acquisition) 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 $289,143 at June 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 June 30, 2007 the Company had $2,710,857 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 June 30, 2007 was $1,518,742. For additional information regarding this transaction, see the Company's current report on form 8-K filed with the Securities and Exchange Commission on October 22, 2004. The balance outstanding as of June 30, 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 14.28%. This agreement was amended on June 13, 2007 to modify the terms of the agreement. Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable. Interest is payable monthly at prime (8.25% at June 30, 2007) plus 0.25%, but not less than 4.75%. The amended term of the agreement is for two years, renewable for two additional one year terms. Upon expiration, all remaining principal and interest are due. The revolving credit note is collateralized by substantially all of the assets of the Company's subsidiaries except Pivotal Research Centers, Inc. and guaranteed by PHC. Off Balance Sheet Arrangements The Company has no off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company. Aging of accounts 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 19 of allowance for bad debts) were $6,559,387 at June 30, 2007 compared with $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, standardization of some procedures for collecting receivables and a more aggressive collection policy in order to keep the change in receivables consistent with the change in revenue. We have also established a more aggressive reserve policy, allowing greater amounts of reserves as accounts age from the date of billing. If the amount of receivables, which eventually become uncollectible, exceeds such reserves, we could be materially adversely affected. The following chart represents our Accounts Receivable and Allowance for Doubtful Accounts at June 30, 2007 and 2006, respectively, and Bad Debt Expense for the years ended June 30, 2007 and 2006: Allowance for Accounts Receivable doubtful accounts Bad Debt Expense June 30, 2007 $10,323,972 $3,764,585 $1,933,499 June 30, 2006 10,096,061 3,100,586 1,912,516 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. 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. We do not expect the adoption of FIN 48 to have a material impact on our financial reporting, and we are currently evaluating the impact, if any, the adoption of FIN 48 will have on our disclosure requirements, In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 108, "Considering the Effects on Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," ("SAB 108"). SAB 108 requires registrants to quantify errors using both the income statement method (i.e. iron curtain method) and the rollover method and requires adjustment if either method indicates a material error. If a correction in the current year relating to prior year errors is material to the current year, then the prior year financial information needs to be corrected. A correction to the prior year results that are not material to those years, would not require a "restatement process" where prior financials would be amended. SAB 108 is effective for fiscal years ending after November 15, 2006. Upon adoption SAB 108 did not have a material effect on our financial position, results of operations or cash flows. 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 20 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. 21 Item 8. Financial Statements and Supplementary Data. Financial statements and supplementary data required pursuant to this Item 8 begin on page F-1 of this Annual Report on Form 10-K. PAGE Index F-1 Reports of Independent Registered Public Accounting Firms F-2 - F-3 Consolidated balance sheets F-4 Consolidated statements of income F-5 Consolidated statements of changes in stockholders' equity F-6 Consolidated statements of cash flows F-7 - F-8 Notes to consolidated financial statements F-9 - F-31 F-1 22 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders of PHC, Inc. We have audited the accompanying consolidated balance sheets of PHC, Inc. and subsidiaries as of June 30, 2007 and 2006, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended June 30, 2007 and 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PHC, Inc. and subsidiaries at June 30, 2007 and 2006, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Eisner LLP New York, New York September 27, 2007 F-2 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders of PHC, Inc.: We have audited the accompanying consolidated statements of income, changes in stockholders' equity and cash flows of PHC, Inc. and subsidiaries for the year ended June 30, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of PHC, Inc. and subsidiaries for the year ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP Boston, Massachusetts August 23, 2005 F-3 24 PHC, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2007 2006 ____ ____ ASSETS (Note A) Current assets: Cash and cash equivalents $3,395,173 $1,820,105 Accounts receivable, net of allowance for doubtful accounts of $3,764,583 and $3,100,586 at June 30, 2007 and 2006, respectively 6,524,387 6,955,475 Pharmaceutical research receivables 1,942,268 1,470,019 Prepaid expenses 688,600 490,655 Other receivables and advances 868,628 751,791 Deferred tax assets 2,015,000 2,841,000 _________ _________ Total current assets 15,434,056 14,329,045 _________ _________ Accounts receivable, non-current 35,000 40,000 Other receivables 91,697 53,457 Property and equipment, net 2,121,191 1,799,888 Deferred financing costs, net of amortization of $150,124 and $106,422 at June 30, 2007 and 2006, respectively 613,865 117,023 Customer relationships, net of amortization of $380,000 and $260,000 at June 30, 2007 and 2006, respectively 2,020,000 2,140,000 Goodwill 3,508,576 2,664,643 Other assets 3,465,356 571,931 _________ _________ Total assets $27,289,741 $21,715,987 ============ =========== LIABILITIES Current liabilities: Accounts payable $ 1,261,841 $1,509,659 Current maturities of long-term debt 1,134,300 918,013 Revolving credit note 1,518,742 1,603,368 Deferred revenue 433,301 385,742 Current portion of obligations under capital leases 205,858 57,881 Accrued payroll, payroll taxes and benefits 1,631,693 1,619,672 Accrued expenses and other liabilities 1,702,772 1,026,419 _________ _________ Total current liabilities 7,888,507 7,120,754 Long-term debt, less current maturities 831,387 1,021,546 Obligations under capital leases 226,706 61,912 Deferred tax liabilities 93,000 56,000 _________ _________ Total liabilities 9,039,600 8,260,212 Commitments and contingent liabilities (Notes D, G, H, I and K) 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 17,874,966 shares issued at June 30, 2007 and 2006, respectively 196,221 178,749 Class B common stock, $.01 par value; 2,000,000 shares authorized, 775,760 and 775,760 issued and outstanding at June 30, 2007 and 2006, respectively, each convertible into one share of Class A Common Stock 7,758 7,758 Additional paid-in capital 26,812,808 23,718,197 Treasury stock, 199,098 and 199,098 class A common shares at cost at June 30, 2007 and 2006, respectively (191,700) (191,700) Accumulated deficit (8,574,946)(10,257,229) _________ ___________ Total stockholders' equity 18,250,141 13,455,775 __________ __________ Total liabilities and stockholders' equity $27,289,741 $21,715,987 =========== =========== See accompanying notes to consolidated financial statements. F-4 25 PHC, INC. AND SUBSIDIARIES Consolidated Statements of Income For the Years Ended June 30, 2007 2006 2005 ____ ____ ____ Revenues: Patient care, net $36,022,529 $27,861,701 $26,087,088 Pharmaceutical study 4,564,314 5,799,815 4,509,338 Contract support services 4,540,634 4,351,576 3,466,832 ___________ ___________ ___________ Total revenues 45,127,477 38,013,092 34,063,258 ___________ ___________ ___________ Operating expenses: Patient care expenses 19,738,357 14,269,540 12,905,286 Patient care expenses, pharmaceutical 2,182,357 2,242,900 1,676,749 Cost of contract support services 3,102,551 2,676,340 2,197,518 Provision for doubtful accounts 1,933,499 1,912,516 1,272,037 Administrative expenses 12,722,007 11,210,296 9,667,138 Administrative expenses, pharmaceutical 2,438,802 2,517,074 2,757,118 ___________ ___________ ___________ Total operating expenses 42,117,573 34,828,666 30,475,846 ___________ ___________ ___________ Income from operations 3,009,904 3,184,426 3,587,412 ___________ ___________ ___________ Other income (expense): Interest income 159,946 68,397 73,176 Interest expense (649,166) (606,893) (654,871) Other income, net 308,599 89,449 76,760 ___________ ___________ ___________ Total other expense, net (180,621) (449,047) (504,935) ___________ ___________ ___________ Income before income taxes 2,829,283 2,735,379 3,082,477 Benefit from (provision for) income taxes (1,147,000) 1,310,103 73,423 ___________ ___________ ___________ Net income $ 1,682,283 $ 4,045,482 $ 3,155,900 =========== =========== =========== Basic net income per common share $ 0.09 $ 0.22 $ 0.18 =========== =========== =========== Basic weighted average number of shares outstanding 19,287,665 18,213,901 17,574,678 =========== ========== =========== Fully diluted net income per common share $ 0.09 $ 0.21 $ 0.17 =========== ========== =========== Fully diluted weighted average number of shares outstanding 19,704,697 19,105,193 18,364,076 =========== ========== ===========
See accompanying notes to consolidated financial statements. F-5 26 PHC, INC. AND SUBSIDIARIES Consolidated Statements of Changes In Stockholders' Equity Class A Class B Additional Common Stock Common Stock Paid-in Shares Amount Shares Amount Capital Balance - June 30, 2004 16,744,848 $167,448 776,991 $7,770 $22,791,637 Costs related to private placements (30,000) Issuance of shares for options exercised 104,750 1,048 102,365 Non-cash value of warrant issued in connection with long term debt 167,185 Non-cash value of shares issued for employee bonuses 9,472 95 9,140 Issuance of shares for warrants exercised 626,768 6,267 302,337 Issuance of employee stock purchase plan shares 4,980 50 7,370 Purchase of shares from former employee Value of acceleration of certain stock options 27,025 Net income year ended June 30, 2005 __________ ________ _______ _______ __________ Balance - June 30, 2005 17,490,818 174,908 776,991 7,770 23,377,059 Stock options issued for compensation 116,425 Purchase of treasury shares from former employee Issuance of shares for warrants exercised 98,473 984 51,466 Issuance of shares for options exercised 269,827 2,698 81,379 Common shares issued as compensation 2,000 20 5,640 Disgorgement 112 Value of acceleration of certain stock options 9,875 Non-cash value of warrant issued in connection with an acquisition 56,180 Conversion from Class B to Class A 1,231 12 (1,231) (12) Issuance of employee stock purchase plan shares 12,617 127 20,061 Net income year ended June 30, 2006 __________ ________ _______ _______ ___________ Balance - June 30, 2006 17,874,966 $ 178,749 775,760 $ 7,758 $23,718,197 Costs related to private placements (64,783) Fair value of options 214,606 Issuance of shares for warrants exercised 543,089 5,431 330,692 Issuance of shares for options exercised 231,627 2,316 143,060 Issuance of shares in a private placement 961,539 9,616 1,990,384 Non-cash value of warrant issued in connection with a refinancing 456,880 Issuance of employee stock purchase plan shares 10,855 109 23,772 Net income year ended June 30, 2007 __________ _________ _______ _______ __________ Balance - June 30, 2007 19,622,076 $ 196,221 775,760 $ 7,758 $ 26,812,808 __________ ________ _______ _______ __________ See accompanying notes to consolidated financial statements. 27 PHC, INC. AND SUBSIDIARIES (continued) Consolidated Statements of Changes In Stockholders' Equity Class A Treasury Stock Accumulated Shares Amount Deficit Total ______ ______ ___________ _____ Balance - June 30, 2004 168,136 (141,207) (17,458,611) 5,367,037 Costs related to private placements (30,000) Issuance of shares for options exercised 103,413 Non-cash value of warrant issued in connection with long term debt 167,185 Non-cash value of shares issued for employee bonuses 9,235 Issuance of shares for warrants exercised 308,604 Issuance of employee stock purchase plan shares 7,420 Purchase of shares from former employee 13,602 (13,880) (13,880) Value of acceleration of certain stock options 27,025 Net income-year ended June 30, 2005 3,155,900 3,155,900 ____________________________________________________ Balance - June 30, 2005 181,738 (155,087) (14,302,711) 9,101,939 Stock options issued as compensation 116,425 Purchase of treasury shares from former employee 17,360 (36,613) (36,613) Issuance of shares for warrants exercised 52,450 Issuance of shares for options exercised 84,077 Common shares issued as compensation 5,660 Disgorgement 112 Value of acceleration of certain stock options 9,875 Non-cash value of warrant issued in connection with an acquisition 56,180 Conversion from Class B to Class A Issuance of employee stock purchase plan shares 20,188 Net income year ended June 30, 2006 4,045,482 4,045,482 ____________________________________________________ Balance - June 30, 2006 199,098 $(191,700) $(10,257,229) $13,455,775 Costs related to private placements (64,783) Fair value of options 214,606 Issuance of shares for warrants exercised 336,123 Issuance of shares for options exercised 145,376 Issuance of shares in a private placement 2,000,000 Non-cash value of warrant issued in connection with a refinancing 456,880 Issuance of employee stock purchase plan shares 23,881 Net income year ended June 30, 2007 1,682,283 1,682,283 ____________________________________________________ Balance - June 30, 2007 199,098 (191,700) (8,574,946) 18,250,141 ======= ========== ============= ===========
See accompanying notes to consolidated financial statements. F-6 28 PHC, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended June 30, 2007 2006 2005 ____ ____ ____ Cash flows from operating activities: Net income $1,682,283 $4,045,482 $3,155,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 744,206 777,419 511,211 Non-cash interest expense 164,994 65,583 51,080 Deferred income taxes 863,000 (1,638,713) (303,994) Stock based compensation 220,067 134,988 105,681 Change in allowance for doubtful accounts 663,999 1,143,602 (68,904) Changes in operating assets and liabilities: Accounts and other receivables (855,237) (1,946,547) (2,183,027) Prepaid expenses and other current assets (197,945) (343,667) 21,554 Other assets (229,885) (186,817) (92,044) Accounts payable (247,818) 611,046 (754,011) Accrued expenses and other liabilities 735,933 471,930 540,020 ____________ __________ __________ Net cash provided by operating activities 3,543,,597 3,134,306 983,466 ____________ __________ __________ Cash flows from investing activities: Acquisition of property and equipment (955,459) (710,638) (483,462) Equity investment in unconsolidated subsidiary (400,000) -- -- Construction in progress ($1,362,000 in escrow for improvements) (1,719,623) -- -- Costs related to business acquisition -- -- (62,258) ____________ __________ ___________ Net cash used in investing activities (3,075,082) (710,638) (545,720) ____________ __________ __________ Cash flows from financing activities: (Repayment) Proceeds on revolving debt, net (84,626) (782,261) 671,249 Proceeds from borrowings on long term debt -- 17,551 1,430,154 Principal payments on long-term debt (1,162,172) (858,669) (2,307,709) Deferred financing costs (83,664) (15,000) (208,445) Purchase of treasury stock -- (36,613) (13,880) Proceeds from issuance of common stock, net 2,437,015 153,799 313,692 ____________ __________ __________ Net cash provided by (used in) financing activities 1,106,553 (1,521,193) (114,939) ____________ __________ __________ Net increase in cash and cash equivalents 1,575,068 902,475 322,807 Cash and cash equivalents, beginning of year 1,820,105 917,630 594,823 ____________ __________ __________ Cash and cash equivalents, end of year $ 3,395,173 $ 1,820,105 $ 917,630 =========== ========== ========== Supplemental cash flow information: Cash paid during the period for: Interest $ 472,169 $ 606,893 $ 652,582 Income taxes $ 354,777 $ 296,100 $ 123,150
See accompanying notes to consolidated financial statements. F-7 29 PHC, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) For the Years Ended June 30, 2007 2006 2005 ____ ____ ____ Supplemental disclosures of non-cash investing and financing activities: Conversion of debt into common stock $ -- $ -- $ 14,250 Issuance of common stock in cashless exercise of options 299 186 -- Issuance of common stock in cashless exercise of warrants 2,239 380 3,229 Pivotal Acquisition Note A earn out adjustments recorded 843,934 (39,746) 1,169,832 Value of warrants issued with debt recorded as deferred financing costs 456,880 -- 167,185 Value of warrants issued in connection with the Pivotal Acquisition -- 56,180 -- Obligations under capital leases 497,014 154,069 -- Disposal of fully depreciated equipment 15,928 -- --
See accompanying notes to consolidated financial statements. F-8 30 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Operations and business segments: 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 eleven 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, four 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. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. In January 2007, the Company purchased a 15.24% membership interest in the Seven Hills Psych Center, LLC, the entity that will be the landlord of the Seven Hills Hospital subsidiary once the facility is built. This investment is included in other assets on the consolidated balance sheet as this is an unconsolidated subsidiary. (Note D) Revenues and accounts receivable: Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor F-9 31 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues and accounts receivable (continued): agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the period of settlement. The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable. The allowance for doubtful accounts does not include the contractual allowances. Medicaid reimbursements are based on established rates depending on the level of care provided and are adjusted prospectively. Effective for fiscal years beginning after January 1, 2005, the prospective payment system ("PPS") was brought into effect for all Psychiatric services paid through the Medicare program. The new system changed the TEFRA-based (Tax Equity and Fiscal Responsibility Act of 1982) system to the new variable per diem-based system. The new rates are based on a statistical model that relates per diem resource use for beneficiaries to patient and facility characteristics available from "Center for Medicare and Medicaid Services, ("CMS's"), administrative data base (cost reports and claims data). Patient-specific characteristics include, but are not limited to, principal diagnoses, comorbid conditions, and age. Facility specific variables include an area wage index, rural setting, and the extent of teaching activity. This change is being phased in over three fiscal years with a percentage of payments being made at the old rates and a percentage at the new rates, 75/25, 50/50, and 25/75, respectively. During fiscal 2007 we were operating in the second stage at 50/50. In the current fiscal year we are in the third and final phase of the conversion to PPS. For the fiscal year ended June 30, 2007, Medicare reimbursements rates were based 25% on provisional rates that are adjusted retroactively based on annual cost reports filed by the Company with Medicare and 75% on the new prospective payment rates. The Company will continue to file cost reports to Medicare to determine the new TEFRA portion of the rate for the following year. These cost reports are routinely audited on an annual basis. Activity and cost report expense differences are reviewed on an interim basis and adjustments are made to the net expected collectable revenue accordingly. The Company believes that adequate provision has been made in the financial statements for any adjustments that might result from the outcome of Medicare audits. Approximately 24%, 23%, and 21% of the Company's total revenue is derived from Medicare and Medicaid payors for the years ended June 30, 2007, 2006 and 2005, respectively. Differences between the amounts provided and subsequent settlements are recorded in operations in the year of the settlement. The Company is unable to estimate any future adjustment at this time but past adjustments have not been material to the financial statement. Patient care revenue is recognized as services are rendered, provided there exists persuasive evidence of an arrangement, the fee is fixed or determinable and collectability of the related receivable is reasonably assured. Pre - -admission screening of financial responsibility of the patient, insurance carrier or other contractually obligated payor, provides the Company the net expected collectable patient revenue to be recorded based on contractual arrangements with the payor or pre-admission agreements with the patient. Revenue is not recognized for emergency provision of services for indigent patients until authorization for the services can be obtained. As of June 30, 2007, the Company has no outstanding balance in other receivables, due as a result of cost report settlements. 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. Each study calls for a participant to complete a specific number of visits in order to validate the study. While some studies require all visits to be complete before any services can be billed, most studies will allow billing for each visit once the participant is randomized, or identified as meeting all study criteria, even if the participant does not complete the study. Where a contract requires F-10 32 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenues and accounts receivable (continued): completion of the study by the patient, no revenue is recognized until the patient completes the study program. Advance payment provided by the pharmaceutical companies is recorded as deferred revenue until study receivables are produced based on the above criteria. The Company expects to complete the studies related to the deferred revenue within the next fiscal year. Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. Long-term assets include accounts receivable non-current, other receivables and other assets. Accounts receivable, non-current consists of amounts due from former patients for service. This amount represents estimated amounts collectable under supplemental payment agreements, arranged by the Company or its collection agencies, entered into because of the patients' inability to pay under normal payment terms. All of these receivables have been extended beyond their original due date. Reserves are provided for accounts of former patients that do not comply with these supplemental payment agreements and accounts are written off when deemed unrecoverable. Other receivables included as long-term assets include the non-current portion of loans provided to employees and amounts due on a contractual agreement. Charity care amounted to approximately $231,702, $150,511, and $242,385 for the years ended June 30, 2007, 2006 and 2005, respectively. Patient care revenue is presented net of charity care in the accompanying consolidated statements of operations. The Company had accounts receivable from Medicaid and Medicare of approximately $1,811,000 at June 30, 2007 and $1,786,000 at June 30, 2006. Included in accounts receivable is approximately $450,000 and $284,000 in unbilled receivables at June 30, 2007 and 2006, respectively. Allowance for doubtful accounts: The Company records an allowance for uncollectible accounts which reduces the stated value of receivables on the balance sheet. This allowance is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 360 days outstanding, at which time the provision is 80-100% of the outstanding balance. These percentages vary by facility based on each facility's experience in and expectations for collecting older receivables. The Company compares this required reserve amount to the current "Allowance for doubtful accounts" to determine the required bad debt expense for the period. This method of determining the required "Allowance for doubtful accounts" has historically resulted in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance. 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 F-11 33 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Estimates and assumptions: (continued) 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, which represents a significant portion of the estimates made by management. Reliance on key clients: 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 the Company's ability to meet its fixed costs. The Company has 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 the Company for treatment, the cost of which is reimbursed on a per diem or per capita basis. Approximately 30% of the Company's total revenue is derived from these clients for all periods presented. No one of these large employers, health care institutions or labor unions individually accounts for 10% or more of the Company's consolidated revenues, but the loss of any of these clients would require the Company to expend considerable effort to replace patient referrals and would result in revenue and attendant losses. Cash equivalents: Cash equivalents include short-term highly liquid investments with maturities of less than three months when purchased. Property and equipment: Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets using straight-line methods. The estimated useful lives are as follows: Estimated Assets Useful Life Buildings 39 years Furniture and equipment 3 through 10 years Motor vehicles 5 years Leasehold improvements Lesser of useful life or term of lease (2 to 10 years) Other assets: Other assets consists of deposits, deferred expenses advances, construction in progress, investment in Seven Hills LLC, licensure fees, internally developed and acquired software which is being amortized over three to seven years based on it's estimated useful life. F-12 34 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Long-lived assets: In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less costs to sell. The Company believes that the carrying value of its long-lived assets is fully realizable at June 30, 2007. Fair value of financial instruments: The carrying amounts of cash, trade receivables, other current assets, accounts payable, notes payable and accrued expenses approximate fair value based on their short-term maturity. The carrying value of long term debt, which have variable interest rates, approximates fair value. Basic and diluted income per share: Income per share is computed by dividing the income applicable to common shareholders, by the weighted average number of shares of both classes of common stock outstanding for each fiscal year. Class B common stock has additional voting rights. All dilutive common stock equivalents have been included in the calculation of diluted earnings per share for the fiscal years ended June 30, 2007, 2006 and 2005 using the treasury stock method. The weighted average number of common shares outstanding used in the computation of earnings per share is summarized as follows: Years Ended June 30, ____________________ 2007 2006 2005 ____ _____ ____ Weighted average shares outstanding - basic 19,287,665 18,213,901 17,574,678 Employee stock options 397,428 510,731 530,896 Warrants 19,604 380,561 258,502 __________ __________ __________ Weighted average shares outstanding - fully diluted 19,704,697 19,105,193 18,364,076 =========== ========== ========== The following table summarizes securities outstanding as of June 30, 2007, 2006 and 2005, but not included in the calculation of diluted net earnings per share because such shares are antidilutive: Years Ended June 30, ____________________ 2007 2006 2005 ____ _____ ____ Employee stock options 190,000 253,500 32,500 Warrants -- -- 471,360 __________ __________ __________ Total 190,000 253,500 503,860 =========== ========== ========== In August 2007, the Company repurchased 150,000 shares of its Class A common stock (See Note M). If this transaction had been completed prior to year end it would not have had an impact on earnings per share. F-13 35 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income taxes: The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the assets and liabilities. The Company's policy is to record a valuation allowance against deferred tax assets, when the deferred tax asset is not recoverable. The Company considers estimated future taxable income or loss and other available evidence when assessing the need for its deferred tax valuation allowance. As a result of this assessment, during fiscal 2006, the Company eliminated 100% of the Federal deferred tax valuation allowance. Comprehensive income: SFAS No. 130, "Reporting Comprehensive Income", requires companies to classify items of other comprehensive income in a financial statement. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company's comprehensive net income is equal to its net income for all periods presented. Stock-based compensation: The Company issues stock options to its employees and directors and provides employees the right to purchase stock pursuant to stockholder approved stock option and stock purchase plans. 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 equity instruments and there have been no liability awards granted. At June 30, 2005, the Company accelerated the vesting on all previously granted options. Therefore, as of the date of adoption there was no unrecognized expense of these options and the expense recorded in the year ended June 30, 2006 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 $214,606 and $126,300 of stock-based compensation on its consolidated statements of income for the years ended June 30, 2007 and 2006, respectively, which is included in administrative expenses as follows: Year ended June 30, Year ended June 30, ___________________ __________________ 2007 2006 ____ ____ Directors fees $ 47,088 $ 21,000 Employee compensation 167,518 105,300 ________ ________ Total $214,606 $126,300 ======== ======== F-14 36 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock-based compensation: (continued) The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted after the adoption of SFAS 123R. The weighted-average fair values of the options granted under the stock option plans for the years ended June 30, 2007, 2006 and 2005 were calculated using the following assumptions: Year ended June 30, 2007 2006 2005 ____ ____ ____ Risk free interest rate 4.60% 4.45% 4.00% Expected dividend yield -- -- -- Expected lives 5-10 years 5-10 years 5-10 years Expected volatility 48.0% 47.27% 45% Weighted average value of grants per share $1.54 $2.42 $.63 Weighted average remaining contractual life of options outstanding (years) 3.56 3.65 3.70 The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company's common stock over the period commensurate with the expected life of the options. The risk-free interest rate is the U.S. Treasury rate on the date of grant. The expected life was calculated using the Company's historical experience for the expected term of the option. Based on the Company's historical voluntary turnover rates for individuals in the positions who received options 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. For the years ended June 30, 2005 in the accompanying financial statements, the Company accounted for its employee stock-based compensation arrangements using the intrinsic value method under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and FIN No. 44. The Company had elected to use the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"; and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." Had compensation expense for stock option grants to employees been determined based on the fair value method at the grant dates for awards under the stock option plans consistent with the method prescribed by SFAS No. 123, the Company's net income and net income per share would have decreased to the pro forma amounts indicated as follows: F-15 37 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock-based compensation: (continued) Year Ended __________ June 30, ________ 2005 _________ Net income, as reported $3,155,900 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 105,681 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes (298,084) ____________ Pro forma net income (loss) $2,963,497 Earnings (loss) per share: Basic - as reported $ 0.18 ========== Basic - pro forma $ 0.17 ========== Diluted - as reported $ 0.17 ========== Diluted - pro forma $ 0.16 ========== Advertising Expenses: Advertising costs are expensed when incurred. Advertising expense for the year ended June 30, 2007, 2006 and 2005 were $184,678, $455,806 and $378,899, respectively. Reclassifications: Certain June 30, 2006 amounts have been reclassified to be consistent with the June 30, 2007 presentation. 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. We do not expect the adoption of FIN 48 to have a material impact on our financial reporting, and we are currently evaluating the impact, if any, the adoption of FIN 48 will have on our disclosure requirements. In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 108, "Considering the Effects on Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," ("SAB 108"). SAB 108 requires registrants to quantify errors using both the income statement method (i.e. iron curtain method) and the rollover method and requires adjustment if either method indicates a material error. If a correction in the current year relating to prior year errors is material to the current year, then the prior year financial information needs to be corrected. A correction to the prior year results that are not material to those years, F-16 38 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE A - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent accounting pronouncements: (continued) would not require a "restatement process" where prior financials would be amended. SAB 108 is effective for fiscal years ending after November 15, 2006. Adopting SAB 108 did not have a material effect on our financial position, results of operations or cash flows. 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. NOTE B - PROPERTY AND EQUIPMENT Property and equipment is composed of the following: As of June 30, ______________ 2007 2006 ____ ____ Land $ 69,259 $ 69,259 Buildings 1,136,963 1,136,963 Furniture and equipment 2,614,274 2,048,006 Motor vehicles 178,478 174,302 Leasehold improvements 1,462,260 1,224,624 __________ __________ 5,461,234 4,653,154 Less accumulated depreciation and amortization 3,340,043 2,853,266 __________ __________ Property and equipment, net $2,121,191 $ 1,799,888 =========== =========== Total depreciation expense was $502,705, $580,933 and $314,394 for the fiscal years ended June 30, 2007, 2006 and 2005, respectively. F-17 39 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from services to be provided, customer contracts and relationships, and (ii) the acquired market position. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment. Customer relationships, acquired as a part of the assets acquired in the membership interest purchase of Pivotal Research Centers, LLC, are used to acquire new studies on an ongoing basis. Since there is no true "consumption" of the relationship that can be defined, the asset is being amortized, using the straight-line method, over an estimated useful life of twenty years. Amortization expense of intangible assets, which amounted to $120,000, $120,000 and $120,000 for the fiscal years ended June 30, 2007, 2006 and 2005, respectively, is included in administrative expenses in the accompanying consolidated statement of operations. The following is a summary of expected amortization expense of intangible assets for the succeeding fiscal years and thereafter as of June 30, 2007: Year Ending June 30, Amount _________ __________ 2008 $120,000 2009 120,000 2010 120,000 2011 120,000 2012 120,000 Thereafter 1,420,000 ___________ $2,020,000 Goodwill: SFAS No. 142, "Goodwill and Other Intangible Assets", requires, among other things, that companies not amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 required that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. The Company's goodwill of $969,099 relating to the treatment services reporting unit of the Company and $2,539,477 related to the research study services reporting unit of the Company were evaluated under SFAS No. 142 as of June 30, 2007. As a result of the evaluation, the Company determined that no impairment exists. The Company will continue to test goodwill for impairment at least annually in accordance with the guidelines of SFAS No. 142. On April 30, 2004, the Company acquired Phoenix-based Pivotal Research Centers, LLC, ("Pivotal") significantly expanding the Company's clinical research capabilities and geographic presence. As part of the acquisition, one of the former owners and CEO signed a three-year employment and non-compete agreements. Pivotal, at the time of the acquisition, performed all phases of clinical research for Phase I-IV drugs under development through two dedicated research sites. When acquired, Pivotal had approximately 22 enrolling studies and an additional 31 ongoing studies with approximately 75-80 percent of Pivotal's research activity in central nervous system (CNS) research. F-18 40 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS: (CONTINUED) The Company paid $1.5 million in cash and $500,000 in PHC, Inc. Class A Common Stock based on the closing market price of $1.17. The value of the Class A Common Stock was determined in accordance with EITF 99-12, "Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination." Additionally, the Company agreed to three performance-based promissory notes (Notes A, B and C) which were staged during the next five years based on future profitability and secured by all the assets of Pivotal as well as by PHC, Inc.'s ownership interest in Pivotal. Promissory Note A is a secured note with a face value of $1,000,000, with an annual interest rate of 6%, a maturity date of December 31, 2008 and payments due in quarterly installments beginning January 2005. Note A was subject to adjustment in the first and second years of the note based on adjusted EBITDA as defined in the agreement. Quarterly payments are then made based on the adjusted value of the promissory notes. The first adjustment of $169,832 was made on February 1, 2005. The Company recorded the value of Note A of $1,169,832 as additional purchase price during fiscal 2005. The second adjustment of ($39,746) was made on April 1, 2006. As of June 30, 2007, $441,109 is due under Note A. Promissory Note B is a secured note with a face value of $500,000, with an annual interest rate of 6%, a maturity date of December 31, 2008 and payments due in quarterly installments beginning January 2007. This note was recorded in December 2006 as EBITDA targets defined in the agreement were met. An earn-out of $343,934 was recorded on February 1, 2007 as stipulated in the agreement. Eight quarterly payments are due on this note with a maturity date of December 31, 2008. As of June 30, 2007, the principal balance due on this note is $729,801. Promissory Note C is a secured note with a face value of $1,000,000, a maturity date of March 31, 2009 and annual payments commencing on March 31, 2005. Note payment amounts will be determined based on the adjusted EBITDA as defined in the agreement of the non-Pivotal Research business for each payment period beginning at the effective date of the agreement and ending on December 31, 2004 and each year thereafter multiplied by .35. In addition, this promissory note provides for the issuance of up to $200,000 in PHC, Inc. Class A Common Stock, should the total of the five note payments be less than the $1,000,000 face value of the note. The value of the $200,000 stock minimum value less imputed interest at 6% was recorded at the time of acquisition. Since all but $200,000 of these promissory notes is contingent on future earnings, only $200,000, less imputed interest, was recorded as of June 30, 2004 as stipulated in SFAS No. 141. As of June 30, 2007, the balance on Note C is $180,112. The fair value assigned to customer relationships was determined by the Company based on information provided by the former owners. The acquisition of Pivotal is accounted for as a purchase under SFAS No. 141, "Business Combinations". Accordingly, the operating results of Pivotal have been included in the Company's consolidated statements of operations since the acquisition date. Goodwill generated from this acquisition is deductible for tax purposes over a period of 15 years. The Company estimates the useful lives of customer relationships to be twenty years. F-19 41 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE D - OTHER ASSETS Included in other assets as of June 30, 2007 is the Company's investment in Seven Hills Psych Center, LLC of $400,000. This LLC holds the assets of the Seven Hills Hospital currently being built and expected to be complete in the early part of calendar year 2008. Also included is the escrow deposit of $1,362,000 the Company has made toward the leasehold improvements for the anticipated leasing arrangement upon completion of the construction of the building. The following table lists amounts included in other assets: Description As of June 30, ______________ 2007 2006 ____ ____ Construction in progress ($1,362,000 in escrow for improvements) $1,719,623 $ -- Licensure fees 701,220 158,271 Investment in unconsolidated subsidiary 400,000 -- Deferred Expense 319,842 153,507 Deposits 314,671 250,153 Excess of cost over book value 10,000 10,000 __________ __________ Total $3,465,356 $ 571,931 ========== ========= NOTE E - NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt is summarized as follows: As of June 30, ______________ 2007 2006 ____ ____ Pivotal acquisition note (Note A) due in sixteen quarterly principal installments, plus interest at 6% per annum, beginning January 2005. Current quarterly payments are $73,518 plus accumulated interest at 6% per annum. No further adjustment to Note A are required. $ 441,109 $728,218 Pivotal acquisition note (Note B) due in eight quarterly principal installments, plus interest at 6% per annum beginning January 2007. Current quarterly payments are $121,633 plus accumulated interset at 6% per annum. No further adjustments to Note B are required. 729,801 -- Note payable (Note C) in conjunction with the earn out of the Pivotal Research Centers, LLC acquisition. Minimum payment amount $200,000 in common stock due March 2009 with interest imputed at 6%. 180,112 169,648 Term mortgage note payable with monthly principal installments of $50,000 beginning July 1, 2007 increasing to $62,500 July 1, 2009 until the loan terminates. The note bears interest at prime (8.25% at June 30, 2007) plus 0.75% and is collateralized by all of the assets of the Company and its material subsidiaries except Pivotal Research Centers, Inc. At June 30, 2007 the Company had $2,710,857 available credit on the term loan. 289,143 732,500 9% mortgage note due in monthly installments of $4,850 including interest through July 1, 2012, when the remaining principal balance is payable, collarteralized by a first mortgage on the PHC, Inc. of Virginia, Inc. Mount Regis Center facility. 269,986 302,273 F-20 42 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE E - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED) Notes payable and long-term debt is summarized as follows: As of June 30, ______________ 2007 2006 ____ ____ Note payable due in monthly installments of $578 including interest at 5.9% through May 2010. 18,058 23,746 Note payable due in monthly installments of $555 including interest at 3.9% through March 2010. 17,327 23,180 Note payable due in monthly installments of $775 including interest at 3.9% through October 2008. 12,061 20,698 Unamortized debt discount in connection with the Term loan -- (69,660) Insurance installment notes renewed annually 8,090 8,956 _________ __________ Total 1,965,687 1,939,559 Less current maturities 1,134,300 918,013 _________ ___________ Long-term portion $ 831,387 $ 1,021,546 ========= =========== Maturities of notes payable and long-term debt are as follows as of June 30, 2007: Year Ending June 30, Amount ___________ _________ 2008 $ 1,134,300 2009 624,870 2010 52,817 2011 46,244 2012 50,582 Thereafter 56,874 ___________ $1,965,687 In October 2004, the Company refinanced its revolving credit note under which a maximum of $3,500,000 may be outstanding at any time. The outstanding balance on this note was $1,518,742 and $1,603,368 at June 30, 2007 and 2006, respectively. This agreement was amended on June 13, 2007 to modify the terms of the agreement. Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable. Interest is payable monthly at prime (8.25% at June 30, 2007) plus 0.25%, but not less than 4.75%. The average interest rate paid during the fiscal year ended June 30, 2007 was 14.28%, which includes the amortization of deferred financing costs related to the initial financing. The amended term of the agreement is for two years, renewable for two additional one year terms. Upon expiration, all remaining principal and interest are due. The revolving credit note is collateralized by substantially all of the assets of the Company's subsidiaries except Pivotal Research Centers, Inc. and guaranteed by PHC. The Company paid $32,500 in commitment fees and issued a warrant to purchase 250,000 shares of Class A common stock at $3.09 expiring on June13, 2017. As of June 30, 2007, the Company was in compliance with all of its financial covenants under the revolving line of credit note. These covenants were modified with the refinancing of the debt in June 2007 to include only a debt coverage ratio of 1:1 and a decreased minimum EBITDA. F-21 43 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE F - CAPITAL LEASE OBLIGATION At June 30, 2007, the Company was obligated under various capital leases for equipment providing for aggregate monthly payments of approximately $14,765 and terms expiring from June 2008 through June 2011. The carrying value of assets under capital leases included in property and equipment and other assets are as follows: June 30, ________ 2007 2006 ____ ____ Equipment and software $ 784,114 $ 287,099 Less accumulated amortization (225,055) (168,869) __________ _________ $ 559,059 $ 118,230 ========== ========= Amortization expense for the years ended June 30, 2007 and 2006 was $56,186 and $73,423, respectively. Future minimum lease payments under the terms of the capital lease agreements are as follows at June 30, 2007: Year Ending June 30, ____________________ 2008 $246,475 2009 195,777 2010 58,483 2011 17,786 ________ Future minimum lease payments 518,521 Less amount representing interest 85,957 ________ Total future principle payments 432,564 Less current portion 205,858 ________ Long-term obligations under capital leases $226,706 ======== NOTE G - ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: June 30 _______ 2007 2006 ____ ____ Accrued professional fees $ 896,874 $ 249,260 Accrued operating expenses 630,898 522,063 Income tax payable 175,000 255,096 _________ __________ Total $1,702,772 $1,026,419 =========== ========== F-22 44 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE H - INCOME TAXES The Company has the following deferred tax assets included in the accompanying balance sheets: Years Ended June 30, ____________________ 2007 2006 ____ ____ Deferred tax asset: Allowance for doubtful accounts $1,430,000 $1,179,000 Depreciation 332,000 261,000 Difference between book and tax bases of intangible assets 7,000 8,000 Operating loss carryforward 585,000 1,837,000 __________ __________ Gross deferred tax asset 2,354,000 3,285,000 __________ __________ Less: Valuation allowance -- (175,000) __________ __________ Deferred tax asset 2,354,000 3,110,000 __________ __________ Current portion 2,015,000 2,841,000 __________ __________ Long-term portion 339,000 269,000 ========== ========== Deferred tax liability: Difference between book and tax bases of intangible assets (432,000) (325,000) __________ __________ Net deferred tax liability $ ( 93,000) $ ( 56,000) ========== ========== The components of the income tax provision (benefit) for the years ended June 30, 2007, 2006 and 2005 are as follows: 2007 2006 2005 ____ ____ ____ Current Federal $ 68,000 $ 78,399 $ -- State 216,000 250,211 230,571 _________ ________ _______ 284,000 328,610 230,571 _________ ________ _______ Deferred Federal 811,000 (1,467,302) (235,595) State 52,000 (171,411) (68,399) _________ ________ _______ 863,000 (1,638,713) (303,994) _________ ________ _______ Income tax provision (benefit) $1,147,000 $(1,310,103) $ (73,423) ========== ============ ========== F-23 45 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE H - INCOME TAXES (CONTINUED) A reconciliation of the federal statutory rate to the Company's effective tax rate for the years ended June 30, 2007, 2006 and 2005 is as follows: 2007 2006 2005 ____ ____ ____ Income tax provision at federal statutory rate 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from: State tax provision, net of federal benefit 10.4% 4.7% 4.5% Non-deductible expenses 2.6% 1.7% 1.0% Other, net -- -- 1.5% Valuation allowance (6.5%) (88.3%) (43.0%) ______ _______ _______ Effective income tax rate 40.5% (47.9%) (2.0%) ======= ====== ====== At June 30, 2007, the Company had a federal net operating loss carryforward amounting to approximately $1,181,000. The Company's Federal net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service. The Federal carryforward expires beginning in 2011 through 2024. The Company's state net operating loss carryforwards of $4,209,841 have expired. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset except as described above, will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The valuation allowance changed by ($175,000), ($2,416,200) and ($2,076,994) for the years ended June 30, 2007, 2006 and 2005, respectively. In the past, the Company had provided a significant valuation allowance against its deferred tax asset based on the projections for the next fiscal year. During the fiscal year ended June 30, 2006, the Company recognized 100% of the tax benefit associated with the federal loss carry forwards based on the Company's future projections. NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES Operating leases: The Company leases office and treatment facilities, furniture and equipment under operating leases expiring on various dates through May 2014. Rent expense for the years ended June 30, 2007, 2006 and 2005 was approximately $2,026,000, $1,695,000 and $1,484,000, respectively. Rent expense includes certain short-term rentals. Minimum future rental payments under non-cancelable operating leases, having remaining terms in excess of one year as of June 30, 2007 are as follows: Year Ending June 30, Amount ___________ _______ 2008 $ 2,087,819 2009 2,071,512 2010 1,763,949 2011 721,268 2012 304,084 Thereafter 260,510 ___________ $ 7,209,142 =========== F-24 46 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) In addition to the above leases, on June 24, 2006, the Company entered into a lease agreement to lease the Seven Hills Hospital property, a 60-bed psychiatric hospital located in Las Vegas, Nevada, with initial rent payments of approximately $70,000 per month beginning upon completion of the building estimated to be in the quarter ending March 31, 2008. In addition to the 10-year lease on the property, the Company has also purchased approximately 15% membership interest in the entity that owns the property. Contingent Notes Payable: In conjunction with the acquisition of Pivotal Research Centers, LLC (Note C), the Company signed three notes, A, B and C, respectively, with face amounts of $1,000,000, $500,000 and $1,000,000. The ultimate amount payable under these notes are based on the future earnings of the acquired entity. Since all but $200,000 was contingent on future earnings, only $200,000 less imputed interest was recorded as a liability as of June 30, 2004 as stipulated in SFAS No. 141. As of June 30, 2007 $180,112 has been recorded on Note C. In December 2004 the first earn-out period ended and resulted in the recording of $1,209,832, (including $40,000 in interest), as a liability on Note A. On April 1, 2006 the second earn-out adjustment was made on Note A. This adjustment resulted in the net reduction of the liability of $39,746 as earn-out targets were not met for the calendar year ended December 31, 2005. Note B was recorded in December 2006 at its face value of $500,000 as earnings targets were met for the calendar year ended December 31, 2006. The total amount recorded on February 1, 2007 as earn-out under this Note B was $343,934. The earn-outs are recorded as a change in the purchase price and affect goodwill. (See Note C for discussion of the terms of these notes.) Litigation: The Company is a party in two separate actions between a former employee who was terminated and filed a claim for wrongful termination and a breach of contract on an indemnification claim against the same terminated employee where the company is the plaintiff. Both matters are being resolved through binding arbitration and awards in either case will offset. The outcome of the two actions together cannot be determined at this time, but management does not expect the outcome to have a material adverse effect on the financial position or results of operations of the Company. 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. Other: On December 20, 2004, Harbor Oaks Hospital experienced a loss due to a flood at the facility. The physical damage was repaired quickly and the claim for the damage paid. The Company subsequently filed a claim for lost business income as allowed by the insurance policy. During the fourth quarter of fiscal 2007 this claim was settled for $325,000, which is included in the consolidated statements of income as other income, net of legal fees of $25,000. F-25 47 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS Preferred Stock The Board of Directors is authorized, without further action of the shareholders, to issue up to 1,000,000 shares in one or more classes or series and to determine, with respect to any series so established, the preferences, voting powers, qualifications and special or relative rights of the established class or series, which rights may be in preference to the rights of common stock. No shares of the Company's preferred stock are currently issued or outstanding. Common Stock The Company has authorized two classes of common stock, the Class A Common Stock and the Class B common stock. Subject to preferential rights in favor of the holders of the Preferred Stock, the holders of the common stock are entitled to dividends when, as and if declared by the Company's Board of Directors. Holders of the Class A Common Stock and the Class B common stock are entitled to share equally in such dividends, except that stock dividends (which shall be at the same rate) shall be payable only in Class A Common Stock to holders of Class A Common Stock and only in Class B common stock to holders of Class B common stock. Class A Common Stock The Class A Common Stock is entitled to one vote per share with respect to all matters on which shareholders are entitled to vote, except as otherwise required by law and except that the holders of the Class A Common Stock are entitled to elect two members to the Company's Board of Directors. The Class A Common Stock is non-redeemable and non-convertible and has no pre-emptive rights. All of the outstanding shares of Class A common stock are fully paid and nonassessable. Class B Common Stock The Class B common stock is entitled to five votes per share with respect to all matters on which shareholders are entitled to vote, except as otherwise required by law and except that the holders of the Class A Common Stock are entitled to elect two members to the Company's Board of Directors. The holders of the Class B common stock are entitled to elect all of the remaining members of the Board of Directors. The Class B common stock is non-redeemable and has no pre-emptive rights. Each share of Class B common stock is convertible, at the option of its holder, into a share of Class A Common Stock. In addition, each share of Class B common stock is automatically convertible into one fully-paid and non-assessable share of Class A Common Stock (i) upon its sale, gift or transfer to a person who is not an affiliate of the initial holder thereof or (ii) if transferred to such an affiliate, upon its subsequent sale, gift or other transfer to a person who is not an affiliate of the initial holder. Shares of Class B common stock that are converted into Class A Common Stock will be retired and cancelled and shall not be reissued. All of the outstanding shares of Class B common stock are fully paid and nonassessable. F-26 48 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED) Private Placement On December 19, 2006, the Company entered into an agreement pursuant to which the Company sold $2,000,000 in unregistered Class A Common Stock to a single investor to provide the equity component for the build-out of the Company's Las Vegas hospital project, Seven Hills Behavioral Institute. The agreement allowed the investor, Camden Partners Limited Partnership, to purchase $2,000,000 in PHC, Inc. Class A Common Stock at $2.08 per share, which was the average selling price per share over the 20 trading days prior to the sale, minus 4%. In addition to providing a certificate evidencing the 961,539 unregistered shares within three business days from the close of the transaction, the Company is also obligated to file a Registration Statement with the Securities and Exchange Commission within 90 days of the close of the transaction to register the shares issued, to put forth it's best efforts to cause the Registration Statement to be brought effective within 120 days of the close of the transaction and to maintain the Registration Statement's current status for a period of two years from the date of the close of the transaction. The Registration Statement was declared effective on April 2, 2007. Stock Plans The Company has three active stock plans: a stock option plan, an employee stock purchase plan and a non-employee directors' stock option plan, and three expired plans, the 1993 Employee and Directors Stock Option plan, the 1995 Non-employee Directors' stock option plan and the 1995 Employee Stock Purchase Plan. The stock option plan, dated December 2003 and expiring in December 2013, 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. As of June 30, 2007, 744,687 options were granted under this plan. On October 18, 1995, the Board of Directors voted to provide employees who work in excess of 20 hours per week and more than five months per year rights to elect to participate in an Employee Stock Purchase Plan (the "Plan"), which became effective February 1, 1996. The price per share shall be the lesser of 85% of the average of the bid and ask price on the first day of the plan period or the last day of the plan period to encourage stock ownership by all eligible employees. The plan was amended on December 19, 2001 and December 19, 2002 to allow for a total of 500,000 shares of Class A Common Stock to be issued under the plan. On January 31, 2006 the stockholders approved a replacement Employee Stock Purchase Plan to replace the 1995 plan which expired on October 18, 2005. A maximum of 500,000 shares may be issued under the January 2006 plan. As of June 30, 2007, 10,855 shares have been issued under this plan. The new plan is identical to the old plan and expires on January 31, 2016. As of June 30, 2007, a total of 157,034 shares of Class A Common Stock have been issued under the 1995 plan. Thirteen employees are participating in the current offering period under the new plan, which began on February 1, 2007 and will end on January 31, 2008. There are 489,145 shares available for issue under the January 2006 plan. F-27 49 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED) The non-employee directors' stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Through June 30, 2007, options for 145,500 shares were granted under the 1995 plan. This plan expired in August 2005 and, in January 2005, the shareholders voted to approve a new non-employee directors' stock plan. The new plan is identical to the plan it replaced. Under the new plan a maximum of 350,000 shares may be issued. As of June 30, 2007, a total of 160,000 options were issued under the new plan. On January 31, 2006, this plan was amended to increase the number of options issued to each outside director each year from 10,000 options to 20,000 options. Each outside director is granted an option to purchase 20,000 shares of Class A Common Stock annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date. The new plan will expire in January 2015, ten years from the date of shareholder approval. Under the above plans, at June 30, 2007, 1,234,458 shares were available for future grant or purchase. The Company had the following activity in its stock option plans for fiscal 2007, 2006 and 2005: Weighted-Average Number Remaining Aggregate of Exercise Contractual Intrinsic Shares Price Term Value ________ ________ ___________ _________ Outstanding balance - June 30, 2004 945,000 $0.64 Granted 320,000 $1.30 Exercised (104,750) $0.33 Expired (22,000) $0.76 __________ _____ Outstanding balance - June 30, 2005 1,138,250 $0.85 Granted 408,750 $2.42 Exercised (277,750) $0.39 Expired (35,000) $1.84 __________ _____ Outstanding balance - June 30, 2006 1,234,250 $1.45 Granted 177,500 $2.64 Exercised (241,687) $0.74 Expired (74,063) $1.94 __________ _____ Outstanding balance - June 30, 2007 1,096,000 $1.76 3.56 $1,413,840 ========= ===== ==== =========== Exercisable at June 30, 2007 791,626 $1.46 3.04 $1,258,685 ========= ===== ==== ===========
Of the options granted during the fiscal year ended June 30, 2007, 39,688 were vested and the remaining options will vest over the next three to five years. The fair value of the options vested was $1.50 per option. On June 30, 2005, the Company accelerated the vesting on the remaining 326,250 outstanding unvested options. This resulted in a non-cash charge to compensation of $27,025. The decision to accelerate these options was made primarily to avoid recognizing compensation cost in the consolidated statement of operations in the Company's future financial statements upon the effectiveness of SFAS 123R. During the fiscal year ended June 30, 2006, an additional $9,875 was recognized as a result of this accelerated vesting. In February 2007, 10,855 shares of common stock were issued under the employee stock purchase plan. The Company recorded as share based compensation expenses of $3,582. During the fiscal year ended June 30, 2007, 241,687 options were exercised resulting in $145,376 in proceeds. Included in the above balance, 40,000 options were exercised using a cashless exercise feature resulting in the issuance of 29,940 common shares. F-28 50 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE J - STOCK HOLDERS' EQUITY AND STOCK PLANS (CONTINUED) The weighted average grant-date fair value of options granted during the fiscal years ended June 30, 2007, 2006 and 2005 was $1.54, $1.17 and $2.33, respectively. The total intrinsic value of options exercised during the fiscal years ended June 30, 2007, 2006 and 2005 was $522,921, $517,917 and $188,243, respectively. As of June 30, 2007 and 2006, there were $323,313 and $357,459, respectively, in unrecognized compensation cost related to nonvested share-based compensation arrangements granted under existing stock option plans. This cost is expected to be recognized over the next four years. In addition to the outstanding options under the Company's stock plans, the Company has the following warrants outstanding at June 30, 2007: Date of Number of Exercise Expiration Issuance Description Shares Price Date ________ ___________ _________ ________ _________ 04/01/2003 Warrants issued for consulting services $3,185 charged to professional fees. 10,000 shares $1.00 per share April 2008 09/22/2003 Warrants issued for consulting services $6,261 charged to professional fees 20,000 shares $ .90 per share Sept 2008 06/13/2007 Warrants issued in conjunction with long-term debt transaction, $456,880 recorded as deferred financing costs. 250,000 shares $3.09 per share June 2017
Warrants issued for services or in connection with debt are valued at fair value at grant date using the Black-Scholes pricing model and accounted for in a manner consistent with the underlying reason the warrants were issued. Charges to operations in connection with warrants were $1,880 in fiscal 2007. There were no charges to operations in connection with warrants in fiscal 2006 or 2005. All of these warrants were fully vested at the grant date. The Company had the following warrant activity during fiscal 2007: Outstanding balance - June 30, 2006 708,453 Warrants issued 250,000 Exercised 675,953 Expired 2,500 _______ Outstanding balance - June 30, 2007 280,000 ======= During fiscal 2007, the Company issued warrants to purchase 250,000 shares of Class A common stock to the Company's lender as part of the refinancing of its term loan. The relative fair value of the warrant of $456,880 was recorded as deferred financing costs and will be amortized as non-cash interest expense over the period of the loan of two years. During the fiscal year ended June 30, 2006, the Company acquired 17,360 shares of Class A common stock for $36,613 from a former employee. During the fiscal year ended June 30, 2007, 675,953 warrants were exercised resulting in $336,123 in proceeds. Included in the above total are 356,750 warrants exercised using a cashless exercise feature resulting in the issuance of 223,886 common shares. F-29 51 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE K - BUSINESS SEGMENT INFORMATION The Company's behavioral health treatment services have similar economic characteristics, services, patients and clients. Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment. The Company's segments are more fully described in Note A above. Residual income and expenses from closed facilities are included in the administrative services segment. The following summarizes the Company's segment data: Behavioral Health Treatment Pharmaceutical Contract Administrative Services Study Services Services Services Eliminations Total __________ ______________ ________ ______________ ____________ ________ For the year ended June 30, 2007 Revenues-external customers $36,022,529 $4,564,314 $4,540,634 $ -- $ -- $45,127,477 Revenues - intersegment 182,700 -- 79,390 3,696,000 (3,958,090) -- Segment net income 4,459,796 (228,104) 1,072,837 (3,622,246) -- 1,682,283 (loss) Total assets 10,624,784 6,792,439 807,361 9,065,157 -- 27,289,741 Capital expenditures 522,790 48,402 15,964 368,303 -- 955,459 Depreciation & amortization 391,960 156,536 106,427 52,328 -- 707,251 Goodwill 969,099 2,539,477 -- -- -- 3,508,576 Interest expense 395,445 172,804 4,236 76,681 -- 649,166 Income tax expense (benefit) 845,156 3,100 368,441 (69,697) -- 1,147,000 For the year ended June 30, 2006 Revenues-external customers $27,861,701 $5,799,815 $4,351,576 $ -- $ -- $38,013,092 Revenues - intersegment 38,750 -- 88,875 3,264,000 (3,391,625) -- Segment net income 3,172,699 972,973 1,636,408 (1,736,598) -- 4,045,482 (loss) Total assets 10,399,918 5,584,753 844,784 4,886,532 -- 21,715,987 Capital expenditures 603,152 51,628 144,636 65,291 -- 864,707 Depreciation & amortization 436,488 170,167 62,220 61,139 -- 730,014 Goodwill 969,099 1,695,544 -- -- -- 2,664,643 Interest expense 485,589 67,528 5,048 48,728 -- 606,893 Income tax expense (benefit) 210,231 3,840 34,860 (1,559,034) -- (1,310,103) For the year ended June 30, 2005 Revenues-external customers $26,087,088 $4,509,338 $3,466,832 $ -- $ -- $34,063,258 Revenues - intersegment 5,940 -- 62,707 2,724,000 (2,792,647) -- Segment net income 4,543,372 180,820 1,243,514 (2,811,806) -- 3,155,900 (loss) Total assets 9,333,260 5,596,917 669,229 2,296,242 -- 17,895,648 Capital expenditures 365,644 18,336 38,057 61,425 -- 483,462 Depreciation & amortization 233,734 144,010 7,899 139,295 -- 524,938 Goodwill 969,099 1,679,110 -- -- -- 2,648,209 Interest expense 469,384 65,651 -- 119,836 -- 654,871 Income tax expense (benefit) 105,400 -- 25,800 (204,623) -- (73,423)
F-30 52 PHC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2007 NOTE K - BUSINESS SEGMENT INFORMATION (CONTINUED) All revenues from contract services provided for the treatment services segment and treatment services provided to other facilities included in the treatment services segment are elimated in the consolidation and shown on the table above under the heading "Revenues Intersegment". The Company has one customer in its Behavioral Health Treatment Services segment whose revenues approximate 26% of its total external revenues for the segment or $9,500,000 for the yaear ended June 30, 2007. For the years ended June 30, 2006 and 2005, the total revenues for this payor were 27% and 17% or $7,661,431 and $4,440,274 respectively. NOTE L - QUARTERLY INFORMATION (Unaudited) The following presents selected quarterly financial data for each of the quarters in the years ended June 30, 2007 and 2006. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ___________ ___________ __________ ___________ 2007 Revenue $10,062,206 $9,952,360 $12,318,043 $12,794,868 Income from operations 553,974 604,994 638,155 1,212,781 Net income available to common shareholders 283,283 261,088 315,779 822,133 Earnings per share: Basic $ 0.02 $ 0.01 $ 0.02 $ 0.04 Diluted $ 0.01 $ 0.01 $ 0.02 $ 0.04 2006 Revenue $8,944,826 $8,702,513 $9,953,959 $10,411,794 Income from operations 601,404 549,060 1,112,980 920,982 Net income available to common shareholders 384,207 346,782 950,549 2,363,944 Earnings per share: Basic $ 0.02 $ 0.02 $ 0.05 $ 0.13 Diluted $ 0.02 $ 0.02 $ 0.05 $ 0.12
NOTE M - SUBSEQUENT EVENT In September 2006, the Board approved the acquisition of up to $2,000,000 in treasury stock without further communication. In August, 2007, the Company purchased 150,000 shares of Class A common stock at a total price of $394,515 which included $4,515 in broker fees. F-31 53 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and officers of the Company as of the date of the Company's Annual Report on Form 10-K are as follows: Name Age Position _____ ___ ________ Bruce A. Shear 52 Director, President and Chief Executive Officer Robert H. Boswell 59 Senior Vice President Paula C. Wurts 58 Treasurer, Chief Financial Officer and Clerk Donald E. Robar (1)(2)(3) 70 Director Howard W. Phillips 77 Director William F. Grieco (1)(2)(3) 53 Director David E. Dangerfield (1)(3) 66 Director (1) Member of Audit Committee. (2) Member of Compensation Committee. (3) Member of the Nominating/Governance Committee. Directors may be nominated by the Board of Directors or by stockholders in accordance with the Company's Amended and Restated Articles of Incorporation and Bylaws. All of the directors hold office until the annual meeting of stockholders next following their election, or until their successors are elected and qualified. The primary duties of the various committees of the Board are shown below. The board appoints officers of the Company for undefined terms. There are no family relationships among any of the directors or officers of the Company. Information with respect to the business experience and affiliations of the directors and officers of the Company is set forth below. BRUCE A. SHEAR has been President, Chief Executive Officer and a Director of the Company since 1980 and Treasurer of the Company from September 1993 until February 1996. From 1976 to 1980, he served as Vice President, Financial Affairs, of the Company. Mr. Shear has served on the Board of Governors of the Federation of American Health Systems for over fifteen years. Mr. Shear received an M.B.A. from Suffolk University in 1980 and a B.S. in Accounting and Finance from Marquette University in 1976. Since November 2003, Mr. Shear has been a member of the board of directors of Vaso Active Pharmaceuticals, Inc., a public company marketing and selling over-the-counter pharmaceutical products that incorporate Vaso's transdermal drug delivery technology. ROBERT H. BOSWELL has served as the Senior Vice President of the Company since February 1999 and as Executive Vice President of the Company from 1992 to 1999. From 1989 until the spring of 1994, Mr. Boswell served as the Administrator of the Company's Highland Ridge Hospital facility where he is based. Mr. Boswell is principally involved with the Company's substance abuse facilities. From 1981 until 1989, he served as the Associate Administrator at the Prevention Education Outpatient Treatment Program--the Cottage Program, International. Mr. Boswell graduated from Fresno State University in 1975 and from 1976 until 1978 attended Rice University's doctoral program in philosophy. Mr. Boswell is a Board Member of the National Foundation for Responsible Gaming and the Chair for the National Center for Responsible Gaming. PAULA C. WURTS has served as the Chief Financial Officer and Controller of the Company since 1989, as Assistant Clerk from January 1996 until February 2006, when she became Clerk, as Assistant Treasurer from 1993 until April 2000 when she became Treasurer. Ms. Wurts served as the Company's Accounting Manager from 1985 until 1989. Ms. Wurts received an Associate's degree in Accounting from the University of South Carolina in 1980, a B.S. in Accounting from Northeastern University in 1989 and passed the examination for Certified Public Accountants. She received a Master's Degree in Accounting from Western New England College in 1996. 54 DONALD E. ROBAR has served as a Director of the Company since 1985 and as the Treasurer from February 1996 until April 2000. He served as the Clerk of the Company from 1992 to 1996. Dr. Robar has been a professor of Psychology at Colby-Sawyer College in New London, New Hampshire from 1967 to 1997 and is now Professor Emeritus. Dr. Robar received an Ed.D. (Counseling) from the University of Massachusetts in 1978, an M.A. in Clinical Psychology from Boston College in 1968 and a B.A. from the University of Massachusetts in 1960. HOWARD W. PHILLIPS has served as a Director of the Company since August 1996 and has been employed by the Company as a public relations specialist since August 1995. From 1982 until 1995, Mr. Phillips was the Director of Corporate Finance for D.H. Blair Investment Corp. From 1969 until 1981, Mr. Phillips was associated with Oppenheimer & Co. where he was a partner and Director of Corporate Finance. WILLIAM F. GRIECO has served as a Director of the Company since February 1997. Mr. Grieco is the Vice President and General Counsel of American Science and Engineering, Inc., an X-Ray inspection technology company. Prior to that, from 1999 to 2005, he was Managing Director of Arcadia Strategies, LLC, a legal and business consulting organization servicing science and technology companies. From 2001 to 2002, he also served as Senior Vice President and General Counsel of IDX Systems Corporation, a healthcare information technology Company. From 1995 to 1999 he was Senior Vice President and General Counsel for Fresenius Medical Care North America. Prior to that, Mr. Grieco was a partner at Choate, Hall & Stewart, a general service law firm. Mr. Grieco received a B.S. from Boston College in 1975, an M.S. in Health Policy and Management from Harvard University in 1978 and a J.D. from Boston College Law School in 1981. DAVID E. DANGERFIELD has served as a Director of the Company since December 2001. Mr Dangerfield formerly served as the Chief Executive Officer for Valley Mental Health in Salt Lake City, Utah. Since 1974, Mr. Dangerfield has been a partner for Professional Training Associates (PTA). In 1989, he became a consultant across the nation for managed mental health care and the enhancement of mental health delivery services. David Dangerfield serves as a Board member of the Mental Health Risk Retention Group and Utah Alliance for the Mentally Ill, an advocacy organization of family and friends of the mentally ill, which are privately held corporations, and the Utah Hospital Association, which is a trade organization in Utah. Mr. Dangerfield graduated from the University of Utah in 1972 with a Doctorate of Social Work after receiving his Masters of Social Work from the University in 1967. Meetings of the Board of Directors During fiscal 2007, the Board of Directors held a total of four meetings and took action by written consent seven times. Each director attended all of the meetings of the Board and committees of the Board on which such director served. Audit Committee The Board of Directors has appointed an audit committee to assist the Board in the oversight of the financial reports, internal controls, accounting policies and procedures. The primary responsibilities of the Audit Committee are as follows: o Hire, evaluate and, when appropriate, replace the Company's independent registered public accounting firm, whose duty it is to audit the books and accounts of the Company and its subsidiaries for the fiscal year in which it is appointed. o Approve all audit fees in advance of work performed. o Approve any accounting firm and fees to be charged for taxes or any other non-audit accounting fees. o Review internal controls over financial reporting with the independent accountant and a designated accounting staff member. o Review with management and the registered public accounting firm: o The independent accountant's audit of and report on the financial statements. o The auditor's qualitative judgments about the appropriateness, not just the acceptability, of accounting principles and financial disclosures and how aggressive (or conservative) the accounting principles and underlying estimates are. 55 o Any serious difficulties or disputes with management encountered during the course of the audit. o Anything else about the audit procedures or findings that GAAS requires the auditors to discuss with the committee. o Consider and review with management and a designated accounting staff member: o Any significant findings during the year and management's responses to them. o Any difficulties an accounting staff member encountered while conducting audits, including any restrictions on the scope of their work or access to required information. o Any changes to the planned scope of management's internal audit plan that the committee thinks advisable. o Review the annual filings with the SEC and other published documents containing the company's financial statements and consider whether the information in the filings is consistent with the information in the financial statements. o Review the interim financial reports with management, the independent registered public accounting firm and an accounting staff member. o Prepare a letter for inclusion in the annual report that describes the committee's composition and responsibilities and how the responsibilities were fulfilled. o Review the audit committee charter at least annually and modify as needed. During fiscal 2007 the Audit Committee consisted of Dr. David Dangerfield, Mr. Donald Robar and Mr. William Grieco. As required by the SEC, all members of the audit committee are "independent" as such term is defined pursuant to applicable SEC rules and regulations and as required under AMEX listing standard Section 121. Dr. Dangerfield serves as the chairman and is the audit committee financial expert. The Company reviewed Dr. Dangerfield's extensive experience managing the budget and operations for large Behavioral Healthcare organizations and determined that this industry experience qualifies him to act as the financial expert in accordance with SEC requirements. The Audit Committee met four times during fiscal 2007. All of the committee members attended the meetings. Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee was established in October 2005. This committee is appointed by the Board of Directors for the purpose of identifying individuals qualified to become Board members and to recommend that the Board select these individuals as nominees for election to the Board at the next annual meeting of the Company's stockholders, and developing and recommending to the Board a set of effective corporate governance policies and procedures applicable to the Company. The Nominating and Corporate Governance Committee consists of Dr. David Dangerfield, Mr. Donald Robar and Mr. William Grieco. Compensation Committee The Board of Directors has appointed the members of the Compensation Committee to review and approve officer's compensation, formulate bonuses for management and administer the Company's equity compensation plans. The Compensation Committee is a chartered committee made up of independent members of the Board of Directors. During fiscal 2007 the Compensation Committee consisted of Mr. Donald Robar and Mr. William Grieco. The Compensation Committee met three times during fiscal 2007, twice telephonically and once in person. Mr. Shear does not participate in discussions concerning, or vote to approve, his salary. Code of Ethics The Company maintains a Corporate Compliance Plan, which incorporates our code of ethics that is applicable to all employees, including all officers. The Corporate Compliance Plan incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. It also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications. In addition, it incorporates our guidelines pertaining to topics such as health and safety compliance, diversity and non-discrimination, patient care and privacy. 56 The full text of our Corporate Compliance Plan is published on our website at www.phc-inc.com. We will post any amendments to the Corporate Compliance Plan, as well as any waivers that are required to be disclosed by the rules of the SEC, on our website. Compliance with Section 16(A) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Common Stock, to file with the SEC reports of ownership and reports of changes in ownership of Common Stock. SEC rules also require the reporting persons and entities to furnish the Company with a copy of the reports they file. The Company is required to report any failure to file these reports. Based on the review of the filings and written representations from the Company's directors and executive officers, the Company believes that all reports required to be filed with the SEC by Section 16(a) during the most recent fiscal year have been filed on a timely basis. Item 11. Executive Compensation Compensation Discussion and Analysis The Board of Directors, the Compensation Committee and senior management share responsibility for establishing, implementing and continually monitoring our executive compensation program, with the Board making the final determination with respect to executive compensation. The goal of our executive compensation program is to provide a competitive total compensation package to our executive management team through a combination of base salary, quarterly cash incentive bonuses, long-term equity incentive compensation in the form of stock options and benefits programs. This Compensation Discussion and Analysis explains our compensation objectives, policies and practices with respect to our Chief Executive Officer, Chief Financial Officer and one of our other most highly-compensated executive officers as determined in accordance with applicable SEC rules, which are collectively referred to in this report as the Named Executive Officers. Objectives of our Executive Compensation Program Our executive compensation program is designed to achieve the following objectives: o to attract and retain talented and experienced executives necessary to achieve our strategic objectives in the highly competitive industry in which we compete; o to motivate and reward executives whose knowledge, skills and performance are critical to our success; o to align the interest of our executives and stockholders by motivating executives to increase stockholder value by increasing our Company's long-term profitability; o to provide a competitive compensation package in which a significant portion of total compensation is determined by Company and individual results and the creation of stockholder value; and, o to foster a shared commitment among executives by coordinating their Company and individual goals. Role of the Compensation Committee Our Compensation Committee oversees all aspects of executive compensation. The committee plays a critical role in establishing our compensation philosophy and in setting and amending elements of the compensation package offered to our named executive officers. The members of our Compensation Committee during fiscal 2007 were Donald Robar and William Grieco. Each current member of our Compensation Committee is an independent, non-employee director. During fiscal 2007, the Compensation Committee met one time. On an annual basis, or in the case of promotion or hiring of an executive officer, the Compensation Committee reviews and makes recommendations to the Board of Directors regarding the compensation package to be provided to our named executive officers. On an annual basis, the Compensation Committee undertakes a review of the base salary and bonus targets of each of our named 57 executive officers and evaluates their respective compensation based on the committee's overall evaluation of their performance toward the achievement of our financial, strategic and other goals, with consideration given to each executive officer's length of service and to comparative executive compensation data. Based on its review, from time to time the Compensation Committee has increased the salary and/or potential bonus amounts for our executive officers. COMPENSATION COMMITTEE REPORT The compensation committee report below is not "soliciting material," is not deemed "filed" with the Securities and Exchange Commission and is not incorporated by reference in any of our filings under the Securities Act of 1933 as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after this filing and irrespective of any general language to the contrary. The Compensation Committee comprised solely of independent directors, reviewed and discussed the above Compensation Discussion and Analysis with management. Based on this review and discussions, the committee recommended to the Board of Directors, and the Board has approved, the inclusion of the Compensation Discussion and Analysis in the Company's annual report on Form 10-K. Compensation Committee ______________________ Donald E. Robar William F. Grieco Elements of Executive Compensation Compensation for our named executive officers generally consists of the following elements: o base salary; o cash bonuses; o stock-based awards; o health, dental and life insurance and disability and retirement plans; and o severance and change-in-control arrangements. The Company does not have a policy or target for allocating compensation between long-term and short-term compensation. Instead the Compensation Committee determines subjectively what it believes to be the appropriate level and mix of various compensation components. The Compensation Committee's objective in allocating between annual and long-term compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our Company and its stockholders. Base Salary Salary for our executives is generally set by reviewing compensation levels for comparable positions in the market and the historical compensation levels of our executives. Salaries may then be adjusted from time to time, based upon market changes, actual corporate and individual performance and changes in responsibilities. Bonuses Bonuses are based on actual corporate and individual performances compared to targeted performance criteria and various subjective performance criteria. Targeted financial performance for the Company is set annually by the compensation committee for each fiscal quarter. In considering bonuses the Compensation Committee does not rely on a formula that assigns a pre-determined value to each of the criteria, but instead evaluates each executive officer's contribution in light of all relevant criteria. Individual performance targets are used less frequently but may include completion of specific projects. There were no individual performance targets specified in the prior or current fiscal years meetings of the compensation committee. 58 Stock Based Awards Compensation for executive officers also includes the long-term incentives afforded by stock options and other equity-based awards. Our stock option program is designed to align the long-term interests of our employees and our stockholders and assist in the retention of executives. The size of stock-based awards is generally intended to reflect the executive's position and the executive's expected contributions. Although some awards may be provided as part of the hiring agreement of new executives, in general these stock-based awards follow the same benchmarks as the executive bonus element of the named executive's compensation. Options are generally granted with installment-vesting over a period of three years. Because of the direct relationship between the value of an option and the market price of our common stock, the compensation committee believes that stock options are an effective method of motivating the named executive officers to manage our Company in a manner that is consistent with the interests of our Company and our Stockholders. In addition the named executives are also eligible to participate in the Company's Employee Stock purchase plan as long as all other criteria of the plan are met. Insurance and Other Employee Benefits We maintain insurance benefits for all employees that include health, dental and life insurance. The company bears one hundred percent of the cost of these benefits for the named executives. In addition the company provides a company vehicle or an auto allowance, additional supplemental life insurance and other supplemental taxable fringe benefits for the named executive officers. In addition, the company provides a disability pool for the named executives based on the number of years of service. The number of days of pay under the disability plan increases incrementally until it reaches a maximum accrual of 730 days. This disability pool has no cash value and is not payable upon termination of employment. The Company also provides an Executive Retirement plan, which allows for the use of the accrued disability plan bank to be distributed as an annuity over a four year period at the named executive's retirement providing the minimum term of employment of twenty years of service has been met. For the fiscal year ended June 30, 2007, no accrual has been made for this retirement plan as each of the named executives have waived their right to the retirement plan based on the Company's financial position at the time that the plan was approved. Severance and Change-in-Control Arrangement The Company has not entered into any severance agreements with any of the named executive officers; however, compensation for the named executive officers does include change-in-control arrangements. These arrangements, like other elements of executive compensation, are structured with regard to practices at comparable companies for similarly situated officers and in a manner we believe is likely to attract and retain high quality executive talent. The plan calls for the named executive officers, in the event of a change in control, to receive payment of their average annual salary for the past five years times a multiplier based on their number of years of service in the position at the effective date as shown below. Name and position Multiplier _________________ __________ Bruce A. Shear, Chief Executive Officer 2.99 Robert H. Boswell, Senior Vice President 2.00 Paula C. Wurts, Chief Financial Officer 2.00 Changes in Executive Compensation for Fiscal 2007 In September 2006, the Compensation Committee met to discuss the compensation of the named executive officers. The meeting resulted in a proposal to the Board of Directors to increase the base salary of the named executive officers and change the net earnings targets for the named executive officers to earn cash and stock based compensation for each quarter of fiscal 2007. The Board of Directors accepted the proposals of the Committee and salary increase 59 were affected and bonus and stock-based compensation targets were set. The named executive officers met the bonus and stock-based compensation targets in the fourth fiscal quarter of 2007. Accounting for Executive Compensation We account for equity based compensation paid to our employees under the rules of Statement of Financial Accounting Standards No. 123R (SFAS 123R), which requires us to measure and record an expense over the service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is incurred. Employment agreements The Company has not entered into any employment agreements with its executive officers. The Company owns and is the beneficiary on a $1,000,000 key man life insurance policy on the life of Bruce A. Shear. Three executive officers of the Company received compensation in the 2007 fiscal year, which exceeded $100,000. The following table sets forth the compensation paid or accrued by the Company for services rendered to these executives in fiscal year 2007, 2006 and 2005: Summary Compensation Table Name and Principal Option All Other Position Year Salary Bonus Awards Compensation Total ($) ($) ($) ($) ($) (a) (b) (c) (d) (f) (i) (j) Bruce A. Shear 2007 $420,957 $40,000 $38,013 $21,833(1) $520,803 President and Chief 2006 $393,515 $70,000 $124,800 $27,458(2) $615,773 Executive Officer 2005 $383,965 $45,000 $37,050 $62,498(3) $528,513 Robert H. Boswell 2007 $196,538 $20,000 $11,778 $14,901(4) $243,217 Senior Vice President 2006 $176,878 $40,000 $33,488 $14,701(5) $265,067 2005 $164,590 $10,000 $15,750 $29,016(6) $219,356 Paula C. Wurts 2007 $170,231 $20,000 $11,481 $76,563(7) $278,275 Chief Financial Officer, 2006 $152,878 $35,000 $32,300 $15,029(8) $235,207 Treasurer and Clerk 2005 $140,586 $10,000 $15,750 $35,009(9) $201,345
* The named executive officers did not forfeit any stock options during any of the fiscal years presented. For information regarding the assumptions used to value these stock options, see "Note A THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Stock-based compensation" in the financial statements included in this report. (1) This amount represents $9,019 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Shear, $9,152 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear and $3,662 personal use of a Company car held by Mr. Shear. (2) This amount represents $8,910 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Shear, $13,648 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear, $864 in club membership dues paid by the Company for the benefit of Mr. Shear, and $4,036 personal use of a Company car held by Mr. Shear. 60 (3) This amount represents $7,789 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Shear, $7,541 in premiums paid by the Company with respect to life and disability insurance for the benefit of Mr. Shear, $2,805 in club membership dues paid by the Company for the benefit of Mr. Shear, $4,027 personal use of a Company car held by Mr. Shear and $40,336 based on the intrinsic value of the repricing of options held by Mr. Shear. (4) This amount represents a $6,000 automobile allowance, $8,001 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Boswell and $900 in benefit derived from the purchase of shares through the employee stock purchase plan (5) This amount represents a $6,000 automobile allowance, $8,172 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Boswell and $529 in benefit derived from the purchase of shares through the employee stock purchase plan. (6) This amount represents a $6,000 automobile allowance, $6,656 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Mr. Boswell, $1,020 in benefit derived from the purchase of shares through the employee stock purchase plan, and $15,340 based on the intrinsic value of the repricing of options held by Mr. Boswell. (7) This amount represents a $4,800 automobile allowance, $9,505 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Ms. Wurts, $218 in benefit derived from the purchase of shares through the employee stock purchase plan and $62,040 realized on the exercise of options. (8) This amount represents a $4,800 automobile allowance, $10,053 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Ms. Wurts and $176 in benefit derived from the purchase of shares through the employee stock purchase plan. (9) This amount represents a $4,800 automobile allowance, $8,392 contributed by the Company to the Company's Executive Employee Benefit Plan on behalf of Ms. Wurts, $340 in benefit derived from the purchase of shares through the employee stock purchase plan and $21,477 based on the intrinsic value of the repricing of options held by Ms. Wurts. COMPENSATION OF DIRECTORS Directors who are employees of the Company receive no compensation for services as members of the Board. Directors who are not employees of the Company receive $10,000 stipend per year and $2,500 for each Board meeting they attend. The Audit Committee Chairperson receives an annual stipend of $5,000, members of the audit committee receive an annual stipend of $3,000 and compensation committee and nominating/governance committee receive an annual stipend of $2,000. In addition, Directors of the Company are entitled to receive certain stock option grants under the Company's Non-Employee Director Stock Option Plan (the "Director Plan"). The following table presents Director compensation for the fiscal year ended June 30, 2007. DIRECTOR COMPENSATION Fees Earned or Paid Option All Other Name in Cash Awards Compensation Total ____ ___________ ______ ____________ ______ ($) ($) ($) ($) (a) (b) (d) (g) (h) Donald Robar $27,000 $22,525 $ -- $49,525 William Grieco $27,000 $22,525 % -- $49,525 David Dangerfield $27,000 $22,525 % -- $49,525 Howard W. Phillips* $ -- $16,550 $42,470 $50,020 78 * Mr. Phillips is an employee of the Company, serving as a Public Relations Specialist. Other than his salary as an employee he receives no additional compensation as a director. 61 As of June 30, 2007 each member of the Board of Directors had the following options outstanding: Donald Robar, 117,500 (87,500 vested); William Grieco, 117,500 (87,500 vested); David Dangerfield, 50,000 (20,000 vested); and, Howard Phillips, 117,500 (87,500 vested). Compensation Committee Interlocks and Insider Participation During fiscal 2007 the Compensation Committee consisted of Mr. Donald Robar and Mr. William Grieco, neither of which was an officer or employee of the Company during the 2007 fiscal year. Mr. Robar served as the Company's Treasurer from February 1996 until April 2000. During the 2007 fiscal year, none of our executive officers served on our Compensation Committee (or equivalent), or board of directors, of another entity whose executive officer(s) served on our Compensation Committee or Board of Directors. OPTION PLANS Stock Plan The Board of Directors adopted the Company's first stock option plan on August 26, 1993. This stock option plan has expired, however, options to purchase 195,000 shares remain outstanding under the plan. On September 22, 2003 the Board of Directors adopted the Company's current stock option plan and the stockholders of the Company approved the plan on December 31, 2003. The Stock Plan provides for the issuance of a maximum of 1,300,000 shares of the Class A Common Stock of the Company pursuant to the grant of incentive stock options to employees and the grant of nonqualified stock options or restricted stock to employees, directors, consultants and others whose efforts are important to the success of the Company. The Board of Directors administers the Stock Plan. Subject to the provisions of the Stock Plan, the Board of Directors has the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the Class A Common Stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options. Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, generally, no option may be exercised more than 60 days following termination of employment. However, in the event that termination is due to death or disability, the option is exercisable for a period of one year following such termination. During the fiscal year ended June 30, 2007, the Company issued additional options to purchase 177,500 shares of Class A Common Stock under the 2003 Stock Plan at a price per share ranging from $2.06 to $3.35. Generally, options are exercisable upon grant for 25% of the shares covered with an additional 25% becoming exercisable on each of the first three anniversaries of the date of grant. Employee Stock Purchase Plan On October 18, 1995, the Board of Directors voted to provide employees who work in excess of 20 hours per week and more than five months per year rights to elect to participate in an Employee Stock Purchase Plan (the "Plan"), which became effective February 1, 1996. The price per share was to be the lesser of 85% of the average of the bid and ask price on the first day of the plan period or the last day of the plan period. The plan was amended on December 19, 2001 and December 19, 2002 to allow for a total of 500,000 shares of Class A Common Stock to be issued under the plan. On January 31, 2006 the stockholders approved a replacement Employee Stock Purchase Plan to replace the 1995 plan, which expired on October 18, 2005. The new plan is identical to the old plan and expires on January 31, 2016. A total of 157,034 shares of Class A Common Stock were issued under the 1995 plan before it's expiration and 10,855 shares have been issued under the 2005 plan. Thirteen employees are participating in the current offering period under the new plan, which began on February 1, 2007 and will end on January 31, 2008. 62 Non-Employee Director Stock Plan The non-employee directors' stock option plan provides for the grant of nonstatutory stock options automatically at the time of each annual meeting of the Board. Through June 30, 2007, options for 145,500 shares were granted under the 1995 plan. This plan expired in August 2005 and, in January 2005, the shareholders voted to approve a new non-employee directors' stock plan. The new plan is identical to the plan it replaced. Under the new plan a maximum of 350,000 shares may be issued. On January 31, 2006, this plan was amended to increase the number of options issued to each outside director each year from 10,000 options to 20,000 options. Each outside director is granted an option to purchase 20,000 shares of Class A Common Stock annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date. The new plan will expire in January 2015, ten years from the date of shareholder approval. As of June 30, 2007, 160,000 options have been issued under the plan. If an optionee ceases to be a member of the Board of Directors other than for death or permanent disability, the unexercised portion of the options, to the extent unvested, immediately terminate, and the unexercised portion of the options which have vested lapse 180 days after the date the optionee ceases to serve on the Board. In the event of death or permanent disability, all unexercised options vest and the optionee or his or her legal representative has the right to exercise the option for a period of 180 days or until the expiration of the option, if sooner. Options Exercised During the fiscal year ended June 30, 2007, a total of 241,687 options were exercised under the plans, of which 41,000 options were exercised at prices ranging from $0.22 to $0.45, 152,000 options were exercised at prices ranging from $0.55 to $0.81, 42,000 options were exercised at prices ranging from $1.03 to $1.48 and 6,687 options were exercised at prices ranging from $2.01 to 2.53. The following table provides information about options granted to the named executive officers during fiscal 2007 under the Company's Stock Plan, Employee Stock Purchase Plan and Non-Employee Director Stock Plan. GRANTS OF PLAN-BASED AWARDS ____________________________ All Other Option Exercise or Grant Date Awards Number of Base Price Fair Value of Name Grant Date Securities of Option Stock and Underlying Awards Option Options ($/Share)* Awards ______ __________ _________________ ____________ ___________ (#) (a) (b) (j) (k) (l) Bruce A. Shear 10/31/2006 15,000 $2.06 $16,350 Robert H. Boswell 10/31/2006 7,500 $2.06 $ 8,175 Paula C. Wurts 10/31/2006 7,500 $2.06 $ 8,175 These options were issued under the Executive bonus plan based on the Company's performance in fiscal 2006. The Company utilized the Black-Scholes valuation model for estimating the Grant Date Value with no adjustments for non-transferability or risk of forfeiture. The assumptions used are as follows: Risk free interest rate 4.60% Expected dividend yield 0.0% Expected lives 5 Expected volatility 48.0% 63 The following table provides information about options outstanding, held by the named executive officers at the end of fiscal 2007. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END Number of Number of Securities Securities Underlying Underlying Option Unexercised Unexercised Exercise Option Options Options Price Expiration Date Name Exerciseable Unexerciseable # # $ ____ ____________ ______________ _______ ________________ (a) (b) (c) (e) (f) Bruce A. Shear 40,000 -- $0.75 09/30/2007 15,000 -- $0.69 01/06/2008 15,000 -- $1.37 11/04/2009 15,000 -- $1.21 11/04/2009 15,000 -- $2.38 06/16/2010 7,500 7,500 $2.68 09/20/2010 37,500 37,500 $2.68 09/20/2010 11,250 3,750 $2.20 05/22/2011 3,750 11,250 $2.06 10/31/2011 Robert H. Boswell 25,000 -- $0.75 09/30/2007 25,000 -- $1.41 12/21/2009 10,000 10,000 $2.73 09/22/2010 625 625 $1.95 02/16/2011 5,625 1,875 $2.20 05/22/2011 1,875 5,625 $2.06 10/31/2011 Paula C. Wurts 25,000 -- $0.75 09/30/2007 25,000 -- $1.41 12/21/2009 10,000 10,000 $2.73 09/22/2010 5,625 1,875 $2.20 05/22/2011 1,875 5,625 $2.06 10/31/2011 On June 30, 2005, the Company accelerated the vesting on the 326,250 of outstanding unvested options held by employees. This resulted in a non-cash charge to compensation of $9,875 and $27,025 in the fiscal years ended June 30, 2006 and 2005, respectively. No charge was made for these repriced options in the fiscal year ended June 30, 2007. 64 OPTIONS EXERCISED AND STOCK VESTED The following table provides information about options exercised, held by the named executive officers during the fiscal year ended June 30, 2007. Option Awards Number of Value Shares Realized Acquired on On Name Exercise Exercise (#) ($) (a) (b) (c) Bruce A. Shear 20,000 $51,000 Robert H. Boswell 25,000 59,625 Paula C. Wurts 25,000 69,250 65 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Annual Report on Form 10-K. 1) Consolidated Financial Statements: Page Number o Reports of Independent Registered Public Accounting Firms F-2 - F-3 o Consolidated balance sheets F-4 o Consolidated statements of income F-5 o Consolidated statements of changes in stockholders' equity F-6 o Consolidated statements of cash flows F-7 - F-8 o Notes to consolidated financial statements F-9 - F-31 2) Financial Statement Schedules: All schedules are included in the Consolidated financial statements and footnotes thereto. (b) The following exhibits are filed as part of or furnished with this Form 10-K/A as applicable: Exhibits Exhibit No. Description *23.1 Consent of Eisner, LLP, an independent registered public accounting firm. *23.2 Consent of BDO Seidman, LLP, an independent registered public accounting firm. * 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. *Filed herewith 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHC, INC. Date: October 4, 2007 By: /S/ BRUCE A. SHEAR __________________________ Bruce A. Shear, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE(S) DATE /s/ BRUCE A. SHEAR President, Chief October 4, 2007 _________________________ Executive Officer and Bruce A. Shear Director (principal executive officer) /s/ PAULA C. WURTS Chief Financial Officer, October 4, 2007 _________________________ Treasurer and Clerk Paula C. Wurts (principal financial and accounting officer) /s/ DONALD E. ROBAR Director October 4, 2007 _________________________ Donald E. Robar /s/ HOWARD PHILLIPS irector October 4, 2007 _________________________ Howard Phillips /s/WILLIAM F. GRIECO Director October 4, 2007 _________________________ William F. Grieco /S/ DAVID E. DANGERFIELD Director October 4, 2007 _________________________ David E. Dangerfield 67 EX-31 2 exh31_1.txt CERTIFICATION OF CEO EXHIBIT 31.1 PHC, INC. CERTIFICATION OF CHIEF EXECUTIVE OFFICER Section 302 Certification I, Bruce A. Shear, certify that: 1. I have reviewed this annual report on Form 10-K/A of PHC, Inc., a Massachusetts corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or person's performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information: and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 4, 2007 by: /s/ BRUCE A. SHEAR _______________________ Bruce A. Shear Chief Executive Officer 68 EX-31 3 exh31_2.txt CERTIFICATION OF CFO EXHIBIT 31.2 PHC, INC. CERTIFICATION OF CHIEF FINANCIAL OFFICER Section 302 Certification I, Paula C. Wurts, certify that: 1. I have reviewed this annual report on Form 10-K/A of PHC, Inc., a Massachusetts corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 4, 2007 by: /s/ PAULA C. WURTS _______________________ Paula C. Wurts Chief Financial Officer 69 EX-32 4 exh32_1.txt WRITTEN STATEMENT OF CEO AND CFO Exhibit 32.1 WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER The undersigned hereby certify that, to the best of the knowledge of the undersigned, the Annual Report on Form 10-K/A for the fiscal year ended June 30, 2007 filed by PHC, Inc. with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: October 4, 2007 By: /s/ Bruce A. Shear __________________________ Bruce A. Shear, President and Chief Executive Officer Date: October 4, 2007 By: /s/ Paula C. Wurts __________________________ Paula C. Wurts, Chief Financial Officer 70 EX-23 5 exh23_2.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PHC, Inc. Peabody, MA. We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No's. 333-2246, 333-41494, 333-76137, 333-117146 and 222-141431) and Form S-8 (No's 333-102402 and 333-123842) of PHC, Inc. and subsidiaries of our report dated August 23, 2005, relating to the consolidated statements of income, changes in stockholders' equity and cash flows for the year ended June 30, 2005, which appears in this Form 10-K/A. /s/ BDO Seidman, LLP Boston, MA October 3, 2007 73 EX-23 6 exh23_1.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements of PHC, Inc. on Form S-3 (No.'s 333-2246, 333-41494, 333-76137, 333-117146 and 333-141431) and Form S-8 (No's 333-102402 and 333-123842) of our report dated September 27, 2007, with respect to our audits of the consolidated financial statements of PHC, Inc. as of June 30, 2007 and 2006 and for the years then ended, which is included in the Annual Report on Form 10-K/A for the year then ended June 30, 2007. We also consent to the reference to us as "Experts" in the Registration Statements on Form S-3. /s/ Eisner LLP New York, New York October 3, 2007 186 -----END PRIVACY-ENHANCED MESSAGE-----