q10a2q09.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2008.

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________

Commission file number 1-33323

PHC, INC.

(Exact name of registrant as specified in its charter)

Massachusetts		04-2601571
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 Lake Street, Suite 102, Peabody MA		01960
(Address of principal executive offices)		(Zip Code)

978-536-2777

(Registrant’s telephone number)

_____________________________________________________________________________________________

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No___

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

(Check one):

Large accelerated filer ________		Accelerated filer ________

Non accelerated filer _________		Smaller reporting company X

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

Yes ____ No X

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Number of shares outstanding of each class of common equity as of February 1, 2009:

Class A Common Stock	19,136,609
Class B Common Stock	775,080

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PHC, Inc.

	Explanatory Note

PART I.	FINANCIAL INFORMATION

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

PART II.	OTHER INFORMATION

Item 6.	Exhibits

	Signatures

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Explanatory Note

This amendment to the Company’s report on Form 10-Q for the fiscal quarter ended December 31, 2008, filed with the Securities and Exchange Commission (the “Commission”) on February 17, 2009, is being filed in response to correspondence received from the Commission on April 16, 2009 requesting further information and clarification in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding the impact of start-up operations relating to Seven Hills Hospital and the ramping up of Capstone Academy. We have provided such further information and clarification and have also expanded our disclosure in Liquidity and Capital Resources to outline future cash flow expectations with regard to operations and potential resources for such cash in view of current negative cash flows from operations.

This Form 10-Q/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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

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

Overview

The Company presently provides behavioral health care services through two substance abuse treatment centers, two psychiatric hospitals, a residential treatment facility and eight outpatient psychiatric centers (collectively called "treatment facilities"). The Company’s revenue for providing behavioral health services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients. The profitability of the Company is largely dependent on the level of patient census and the payor mix at these treatment facilities. Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics. Payor mix is determined by the source of payment to be received for each client being provided billable services. The Company’s administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases. The Company’s research division, Pivotal Research Centers, Inc., contracts with major manufacturers of pharmaceuticals to assist in the study of the effects of certain pharmaceuticals in the treatment of specific illnesses through its clinics in Utah and Arizona. The Company has signed a definitive agreement to sell all the assets of its research division, which provides for the completion of the sale in the next few months. Since the sale is expected to be complete in the near future, the assets and liabilities of the research division are reported as held for sale on the accompanying balance sheet and the results of operations are shown as discontinued operations on the statement of operations. (See the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2009 for additional information regarding the sale of Pivotal).

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

Critical Accounting Policies

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

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Revenue recognition and accounts receivable:

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

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

All revenues reported by the Company are shown net of estimated contractual adjustment and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA “Audit and Accounting Guide for Health Care Organizations.” Net Contractual adjustments recorded in the six months ended December 31, 2008 for revenue booked in prior years resulted in a decrease in net revenue of approximately $56,700. Net contractual adjustments recorded in fiscal 2008 for revenue booked in prior years resulted in an increase in net revenue for the year of approximately $48,500.

During the fiscal year ended June 30, 2008, a Medicare cost report settlement of $360,588 was received. No cost report settlements were received or recorded during the three or six months ended December 31, 2008.

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 for the three months and six months ended December 31, 2008 and 2007 and the fiscal year ended June 30, 2008 and accounts receivable aging information as of December 31, 2008 and June 30, 2008, for our treatment services segment.

Net Revenue by Payor (in thousands)_

	For the Three Month Ended December 31,						For the Six Months Ended December 31,						For the Fiscal Year Ended June 30,
	2008			2007			2008			2007			2008
	$		%	$		%	$		%	$		%	$		%

Private Pay	$	513	5	$	473	5	$	1,051	5	$	943	5	$	1,893	5
Commercial		6,819	67		6,808	67		13,961	68		13,561	67		27,229	66
Medicare *		275	3		458	4		581	3		831	4		1,263	3
Medicaid	$	2,499	25	$	2,408	24	$	5,072	24	$	4,968	24	$	10,471	26

Net Revenue	$	10,106		$	10,147		$	20,665		$	20,303		$	40,856

* Includes Medicare settlement revenue as noted above

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

As of December 31, 2008

Payor

Current

Over 30

Over 60

Over 90

Over 120

Over 150

Over 270

Over 360

Total


Private Pay	$	121	$	135	$	147	$	122	$	86	$	179	$	72	$	194	$	1,056
Commercial		2,053		1,141		400		174		99		225		16		84		4,192
Medicare		82		--		--		--		--		--		--		--		82
Medicaid		932		175		42		26		10		10		--		--		1,195
Total	$	3,188	$	1,451	$	589	$	322	$	195	$	414	$	88	$	278	$	6,525

As of June 30, 2008

Payor

Current

Over 30

Over 60

Over 90

Over 120

Over 150

Over 270

Over 360

Total

Private Pay	$	544	$	72	$	45	$	58	$	56	$	235	$	107	$	263	$	1,380
Commercial		1,382		985		746		194		228		183		10		60		3,788
Medicare		38		--		--		1		--		--		--		--		39
Medicaid		1,140		98		5		--		--		25		--		--		1,268
Total	$	3,104	$	1,155	$	796	$	253	$	284	$	443	$	117	$	323	$	6,475

The Company’s days sales outstanding (“DSO”) are significantly different for each type of service and each facility based on the payors for each service. Overall, the DSO for the combined operations of the Company were 59 days at December 31, 2008 and 68 days at June 30, 2008. The table below shows the DSO by segment for the same periods.

Period	Treatment	Contract
End	Services	Services

12/31/2008	54	55
06/30/2008	59	43

Contract services DSO’s fluctuate dramatically by the delay in payment of a few days for any of our large contracts. A delay in payment from our major contract occurred when a payment due on December 31, 2008 was not received until January 16, 2009.

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. These amounts are shown in “Discontinued operations” and “Assets held for sale” on the accompanying financial statements as the sale of the research operations is expected to close in the near future.

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

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Allowance for doubtful accounts:

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

Income Taxes:

The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. The Company’s policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods. The Company recorded a tax benefit of $506,053 for the six months ended December 31, 2008 based on the losses incurred in continuing operations. The company also recorded a tax benefit based on the losses in discontinued operations for the same six-month period.

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

Valuation of Goodwill and Other Intangible Assets

Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. The Company makes significant estimates and assumptions, which are derived from information obtained from the management of the acquired businesses and the Company’s business plans for the acquired businesses in determining the value ascribed to the assets acquired. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from services to be provided, (ii) customer contracts and relationships, and (iii) 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.

In the fiscal year ended June 30, 2008, the Company recorded an impairment loss on the intangible assets of the Company’s research segment of $1,771,000 based on the annual review and valuation of intangible assets. The Company determined the impairment during the routine annual review of intangible assets of the Company. The impairment represents the difference between the Company’s carrying value of goodwill and its fair value at June 30, 2008. The fair value was determined using a combination of approaches including a trading multiple, an acquisition multiple and the income approach. The Company recorded an additional $1,500,000 impairment loss on these intangible assets in the current quarter.

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Results of Operations

The following table illustrates our consolidated results of operations for the three months and six months ended December 31, 2008 and 2007 (in thousands):

For the Three Months Ended		For the Six Months ended
December 31,		December 31,
2008	2007	2008	2007

(in thousands)

Statements of Operations Data:		Amount	%		Amount	%		Amount	%		Amount	%

Revenue	$	11,020	100.0	$	11,273	100.0	$	22,712	100.0	$	22,556	100.0
Cost and Expenses:
Patient care expenses		5,906	53.6		5,473	48.5		12,065	53.1		10,769	47.7
Contract expenses		772	7.0		824	7.3		1,599	7.0		1,626	7.2
Administrative expenses		4,878	44.3		3,800	33.7		9,572	42.1		7,410	32.9
Provision for bad debts		308	2.8		342	3.0		754	3.3		765	3.4
Interest expense		96	0.9		103	0.9		178	0.8		217	1.0
Other (income) expenses, net		(69)	(0.6)		(71)	(0.6)		(151)	(0.7)		(118)	(0.5)

Total expenses		11,891	107.9		10,470	92.9		24,017	105.7		20,669	91.6

Income (loss) before income taxes		(871)	(7.9)		802	7.1		(1,305)	(5.7)		1,887	8.4

Income tax (benefit) provision		(467)	(4.2)		278	2.5		(506)	(2.2)		739	3.3

Income (loss) from continuing operations		(404)	(3.7)		524	4.7		(799)	(3.5)		1,148	5.1

Discontinued operations		(1,312)	(11.9)		(43)	(0.4)		(1,250)	(5.5)		134	0.6

Net income (loss)	$	(1,716)	(15.6)	$	482	4.30	$	(2,049)	(9.0)	$	1,282	5.7

Results of Operations

Total net revenue from operations decreased 2.2% to $11,020,316 for the three months ended December 31, 2008 from $11,272,577 for the three months ended December 31, 2007 and increased 0.7% to $22,712,221 for the six months ended December 31, 2008 from $22,555,778 for the six months ended December 31, 2007.

Net patient care revenue decreased 0.4% to $10,105,942 for the three months ended December 31, 2008 from $10,147,332 for the three months ended December 31, 2007 and increased 1.8% to $20,665,438 for the six months ended December 31, 2008 from $20,302,549 for the six months ended December 31, 2007. These minimal changes in revenue are due primarily to general economic conditions offset partially by the opening of our new operations in Las Vegas and Michigan. Census at our inpatient facilities increased 8.7% for the six months ended December 31, 2008 compared to the same six months last year. Patient care revenue did not increase proportionately with census because the increase in census was primarily related to our capitated contracts which generate a fixed amount of revenue regardless of census.

Two key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay. Increases in the number of patient days result in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) will usually result in higher profitability. Therefore, patient census and payor mix are monitored very closely.

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Contract support services revenue provided by Wellplace decreased 18.7% to $914,374 for the three months ended December 31, 2008 compared to $1,125,245 for the three months ended December 31, 2007 and 9.2% to $2,046,783 for the six months ended December 31, 2008 from $2,253,229 for the six months ended December 31, 2007. This decrease is due to the expiration of a smoking cessation contract with a government contractor. The Company has bid to continue and expand the contract should the contractor decide to continue the program. The Company expects to increase this revenue through new contracts for EAP (Employee Assistance Programs) and Smoking Cessation programs.

Patient care expenses in our treatment centers increased 7.9% to $5,906,307 for the three months ended December 31, 2008 from $5,472,592 for the three months ended December 31, 2007 and 12.0% to $12,064,464 for the six months ended December 31, 2008 from $10,768,666 for the six months ended December 31, 2007. This increase in expenses is due to the opening of the Seven Hills Hospital in Las Vegas, pre-opening expenses of Capstone Academy and higher utilization under the capitated contracts, with the majority of the increases in direct care expenses. Payroll and service related expenses increased 14.6% to $4,695,501 for the three months ended December 31, 2008 from $4,096,092 for the three months ended December 31, 2007 and 17.2% to $9,413,970 for the six months ended December 31, 2008 from $8,034,216 for the same period a year ago. Payroll tax expenses increased 32.7% to $287,048 for the three months ended December 31, 2008 from $216,323 for the three months ended December 31, 2007 and 27.7% to $550,688 for the six months ended December 31, 2008 from $431,284 for the same period a year ago. Contract expenses related to the capitated contracts increased 16.2% to $974,346 for the three months ended December 31, 2008 from $838,389 for the three months ended December 31, 2007 and 37.2% to $2,200,271 for the six months ended December 31, 2008 from $1,603,301 for the same period a year ago. Food expenses increased 22.3% to $250,061 for the three months ended December 31, 2008 from $204,394 for the three months ended December 31, 2007 and 21.1% to $499,406 for the six months ended December 31, 2008 from $412,290 for the same period a year ago. Pharmacy expenses increased 95.5% to $243,478 for the three months ended December 31, 2008 from $124,553 for the three months ended December 31, 2007 and 59.5% to $480,316 for the six months ended December 31, 2008 from $301,072 for the same period a year ago. Other patient related expenses increased 350.5% to $83,074 for the three months ended December 31, 2008 from $18,442 for the three months ended December 31, 2007 and 336.9% to $179,831 for the six months ended December 31, 2008 from $41,164 for the same period a year ago. Many of these increases are the result of the new hospital and the comparisons period over period are expected to reflect similar increases.

Contract support services expenses related to Wellplace decreased 6.3% to $771,505 for the three months ended December 31, 2008 from $823,571 for the three months ended December 31, 2007 and 1.7% to $1,599,284 for the six months ended December 31, 2008 from $1,626,219 for the six months ended December 31, 2007. This decrease is primarily the result of the expiration of the previously mentioned smoking cessation contract, which eliminated staff and administrative expenses including software maintenance to support the contract.

Administrative expenses increased 28.4% to $4,877,391 for the quarter ended December 31, 2008 from $3,799,897 for the quarter ended December 31, 2007 and 29.2% to $9,572,364 for the six months ended December 31, 2008 from $7,409,833 for the six months ended December 31, 2007. For both the three months and the six months ended December 31, 2008, these changes are a result of the increased administrative payroll and employee benefits related to the opening of the Seven Hills Hospital and the ramp up of Capstone Academy. Administrative payroll increased 15.0% and 14.2% for the quarter and six months ended December 31, 2008, respectively. Rent expense increased over 100% for the quarter and six months ended December 31, 2008, as compared to the same periods last year, due to the additional rent expense for Seven Hills Hospital and Capstone Academy Utilities also increased over 70.0% for the quarter and six months ended December 31, 2008, as compared to the same period last year, which was also related to the opening of Seven Hills Hospital and set up of Capstone Academy. All other general facilities expenses such as maintenance, telephone and insurance expense also increased with the start up of these locations. Consultant fees increased over 100% as we engaged outside firms to assist with the accreditation process at Seven Hills Hospital. Fees and licenses increased 41.8% and 24.5% for the three months and six months ended December 31, 2008, as compared to the same period last year, as a result of our accreditation processes in all our facilities.

Provision for doubtful accounts decreased 9.9% to $308,329 for the three months ended December 31, 2008 from $342,342 for the three months ended December 31, 2007 and decreased 1.4% to $754,143 for the six months ended December 31, 2008 from $764,568 for the six months ended December 31, 2007. The Company’s policy is to maintain reserves based on the age of its receivables. This decrease in the provision for doubtful accounts is largely attributable to the change in age of the receivables and the utilization of the allowance of $601,688 against accounts receivable during the six months ended December 31, 2008.

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Interest income decreased 15.8% to $44,206 for the three months ended December 31, 2008 from $52,504 for the three months ended December 31, 2007 and increased 12.3% to $95,475 for the six months ended December 31, 2008 from $85,039 for the six months ended December 31, 2007. These changes are a result of changes in our short-term investment accounts.

Other income / expense increased 34.7% to $24,888 for the three months ended December 31, 2008 from $18,472 for the three months ended December 31, 2007 and 71.1% to $55,742 for the six months ended December 31, 2008 from $32,571 for the six months ended December 31, 2007. This increase is primarily due to the earnings recorded by Seven Hills from its investment in the Seven Hills Psych Center, LLC.

Interest expense decreased 6.4% to $96,306 for the three months ended December 31, 2008 from $102,854 for the three months ended December 31, 2007 and 17.9% to $177,948 for the six months ended December 31, 2008 from $216,753 for the six months ended December 31, 2007. This decrease is primarily due to the general decrease in interest rates as the interest rate on our revolving credit line and our long term debt is tied to the Prime rate.

The Company’s income tax benefit of $506,053 for the six months ended December 31, 2008 is based on the losses incurred during the six months based on an estimated combined tax rate of approximately 37% for both Federal and State taxes. If this estimate is found to be high or low, adjustments will be made in the period of the determination.

The opening of Seven Hills Hospital and the ramping up of Capstone Academy had a material negative impact on the results of operations for the six months ended December 31, 2008 as facilities are required to be fully operational and, in some cases units fully staffed in order to be considered for licensure and accreditation. These increased costs are reflected in our increased administrative and patient care expenses noted above with minimal related increases in revenue. The start-up of these facilities, in addition to having a negative impact on operations, also has a negative impact on cash flow from increased receivables as collections are subject to the usual delay in payment experienced in all health care receivables. In anticipation of this negative cash flow the Company expanded it’s availability under its term loan in June 2007 to provide cash flow during the start-up phase. Due to general economic conditions the effects of these start-up activities have impacted operations and cash flow longer than anticipated but the Company has made provisions to secure additional financing, as outlined under Note L – “Subsequent events” in this report, to assure adequate cash in the short term as we await the final closing on the sale of Pivotal which will provide longer term cash relief.

Although general economic conditions have made maintaining and growing revenues a challenge, the Company believes its plans for addressing and replacing any lost revenue through negotiated rate increases, combining operations, cutting expenses and temporarily modifying its growth plan are sound and therefore; the Company does not believe there are any trends or events, except as noted above , that will have a material impact on the Company’s Revenues or Net Income.

Liquidity and Capital Resources

The Company’s net cash used in operating activities was $1,008,061 for the six months ended December 31, 2008 compared to $2,583,180 provided by operating activities for the six months ended December 31, 2007. Cash flow used in operations in the six months ended December 31, 2008 consists of net loss of $2,048,776 plus depreciation and amortization of $543,907, non–cash interest expense of $82,571, non-cash share based charges of $69,202, provision for doubtful accounts of $754,143, an increase in accounts payable of $27,830 and a decrease in accrued expenses of $48,533. These sources of cash were offset by non-cash earnings in an unconsolidated subsidiary of $14,203, an increase in deferred income tax asset of $1,314,238 generated by current losses, an increase in accounts receivable of $1,071,240, an increase in prepaid expenses and other current assets of $8,455, an increase in other assets of $4,639 and cash provided by discontinued operations of $677,240. The Company expected increased cash used in operations as Seven Hills and Capstone receivables increased from the expanded operations. This increase in receivables from the new operations is expected to decrease during the quarter ending June 30, 2009 as the normal insurance payments are processed and collection efforts begin to show results .

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Cash used in investing activities in the six months ended December 31, 2008 consisted of $1,095,907 in capital expenditures and $38,100 investment in an unconsolidated subsidiary, compared to $779,948 in capital expenditures during the same period last year. The Company expects lower use of cash in investing activities as the Seven Hills and Capstone build outs are completed.

Cash used in financing activities of $40,928 in the six months ended December 31, 2008 consisted of proceeds from borrowings of $941,307 and proceeds from the issuance of common stock of $19,898 offset by payments on long term debt of $117,707, the acquisition of treasury stock of $499,930 and the use in discontinued operations of $384,496.

A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of December 31, 2008, accounts receivable from patient care, net of allowance for doubtful accounts, increased 0.8% to $6,525,297 from $6,474,733 on June 30, 2008. This minimal increase is primarily due to improved collection efforts. The Company monitors increases in accounts receivable closely and strives to assure that increases in receivables are in line with increases in revenue. Over the years, we have increased staff, standardized some procedures for determining insurance eligibility and collecting receivables and established a more aggressive collection policy. The increased staff has allowed the Company to concentrate on current accounts receivable and resolve any issues before they become uncollectible. The Company’s collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. Our collectors will also seek assistance through every legal means, including the State Insurance Commissioner’s office, when appropriate, to collect claims. The Company has implemented the Meditech software at all non-residential facilities and begun the implementation process at the Michigan residential facility. The system is designed to fully integrate the admissions, billing and collections process. It will assist staff in the timely billing and collection of receivables. At the same time, the Company will continue to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections.

The Company expects to experience continued net cash used in operating activities over the next quarter until Seven Hills completes CMS accreditation and Capstone Academy is fully occupied.

Contractual Obligations

The Company’s future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of December 31, 2008 are as follows (in thousands):

YEAR ENDING December 31,		TERM NOTES				CAPITAL LEASES			OPERATING LEASES		TOTAL*
		Principal		Interest		Principal		Interest
2009	$	654	$	18	$	122	$	43	$	3,299	$	4,136
2010		1,050		14		109		14		2,886		4,073
2011		48		10		76		3		2,353		2,490
2012		53		5		--		--		2,116		2,174
2013		30		1		--		--		1,945		1,976
2014		--		--		--		--		8,316		8,316
Thereafter		--		--		--		--		--		--
Total	$	1,835	$	48	$	307	$	60	$	20,915	$	23,165

* Total does not include the amount due under the revolving credit note of $1,124,319. This amount represents accounts receivable funding as described below and is shown as a current note payable in the accompanying financial statements.

In October 2004, the Company entered into a revolving credit, term loan and security agreement with CapitalSource Finance, LLC to replace the Company’s primary lender and provide additional liquidity. Each of the Company’s material subsidiaries, 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 $1,602,143 at December 31, 2008, 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.

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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 December 31, 2008 the Company had $422,857 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 December 31, 2008 was $1,124,319. 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 revolving credit note is not included in the above table. The average interest rate paid on the revolving credit loan, which includes the amortization of deferred financing costs related to the financing of the debt, was 7.5%.

This agreement was amended on June 13, 2007 to modify the terms of the agreement. Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable. Interest is payable monthly at Prime (3.25% at December 31, 2008) 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.

For the quarter ended December 31, 2008, the Company was not in compliance with its long term debt covenants related to Earnings before Interest, Taxes, Depreciation, and Amortization. These covenants are based on the Company’s projections using an equally distributed average of the Company’s annual projections, which we failed to meet for the quarter ended December 31, 2008. CapitalSource, the Company’s lender, has provided the Company with a waiver of the covenants for the period.

On February 5, 2009, the Company signed the first amendment to the amended and restated revolving credit, term loan and security agreement with its primary lender to increase availability under its revolving credit line for the next six months or until the Pivotal sale is complete (the “overline”). The interest rate on this overline is Prime plus 3.25% with an origination fee of $25,000. The agreement increases the percentage of receivables available for borrowing and provides for additional availability of $200,000.

Also subsequent to the quarter ended December 31, 2008, the Company’s Board of Directors voted by unanimous written consent to allow short-term borrowing from related parties up to a maximum of $500,000, with an annual interest rate of 12% and a 2% origination fee. As of January 31, 2009, two family members of the Company’s Chief Executive Officer entered into lending agreements with the Company for a total of $275,000.

Off Balance Sheet Arrangements

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

Litigation

During the quarter ended December 31, 2008, the litigation involving the Company and a terminated employee was resolved through binding arbitration. As a result of this arbitration, the Arbitrator awarded the employee approximately $410,000. In the calculation of the amount awarded, the Arbitrator erroneously took into consideration an employment agreement that was not in question and not terminated by the Company. Based on this miscalculation, the Company’s attorney has recommended an appeal, which the Company intends to pursue. Since the Company intends to appeal this decision and the Company’s attorney expects a favorable outcome, no provision has been made for this judgment in the accompanying financial statements.

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

Item 6. Exhibits

Exhibit List

Exhibit No.	Description

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PHC, Inc.
	Registrant


Date: April 30, 2009	/s/ Bruce A. Shear
	Bruce A. Shear
	President
	Chief Executive Officer


Date: April 30, 2009	/s/ Paula C. Wurts
	Paula C. Wurts
	Treasurer
	Chief Financial Officer

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