q10_1110.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2010.

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

Commission file number 1-33323

PHC, INC.

(Exact name of registrant as specified in its charter)

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

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

978-536-2777

(Registrant’s telephone number)

_____________________________________________________________________________________________

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

Yes X No___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ___ No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” 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 November 4, 2010:

Class A Common Stock	18,681,027
Class B Common Stock	775,021

PHC, Inc.

	PART I.	FINANCIAL INFORMATION	Page

	Item 1.	Condensed Consolidated Financial Statements (unaudited)	3-10

		Condensed Consolidated Balance Sheets – September 30, 2010 and June 30, 2010	3
		Condensed Consolidated Statements of Income - Three months ended September 30, 2010 and September 30, 2009

		Condensed Consolidated Statements of Cash Flows– Three months ended September 30, 2010 and September 30, 2009

		Notes to Condensed Consolidated Financial Statements – September 30, 2010	6-10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	17

	Item 4.	Controls and Procedures	18

	PART II.	OTHER INFORMATION

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19

	Item 6.	Exhibits	19

		Signatures

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
		September 30,		June 30,
		2010		2010
ASSETS
Current assets:
Cash and cash equivalents	$	3,066,436	$	4,540,278
Accounts receivable, net of allowance for doubtful accounts of $3,691,295 at September 30, 2010 and $3,002,323 at June 30, 2010		8,573,380		8,333,766
Prepaid expenses		589,836		490,662
Prepaid income taxes		95,808		--
Other receivables and advances		1,585,947		743,454
Deferred income tax asset – current		1,145,742		1,145,742
Total current assets		15,057,149		15,253,902
Restricted cash		512,197		512,197
Accounts receivable, non-current		33,472		17,548
Other receivables		61,122		58,169
Property and equipment, net		4,673,008		4,527,376
Deferred income tax asset – non-current		1,495,144		1,495,144
Deferred financing costs, net of amortization of $619,604 and $582,972 at September 30, 2010 and June 30, 2010		152,637		189,270
Goodwill		969,098		969,098
Other assets		2,146,798		2,184,749
Total assets	$	25,100,625	$	25,207,453

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,540,218	$	1,594,286
Current maturities of long-term debt		797,292		796,244
Revolving credit note		1,232,941		1,336,025
Current portion of obligations under capital leases		104,878		112,909
Accrued payroll, payroll taxes and benefits		1,605,472		2,152,724
Accrued expenses and other liabilities		1,093,297		1,040,487
Income taxes payable		--		23,991
Total current liabilities		6,374,098		7,056,666
Long-term debt, net of current maturities		205,059		292,282
Obligations under capital leases, net of current portion		--		19,558
Long-term accrued liabilities		642,081		582,953
Total liabilities		7,221,238		7,951,459

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, 19,875,505 and 19,867,826 shares issued at September 30, 2010 and June 30, 2010, respectively		198,755		198,679
Class B common stock, $.01 par value, 2,000,000 shares authorized, 775,021 issued and outstanding at September 30, 2010 and June 30, 2010, each convertible into one share of Class A common stock		7,750		7,750
Additional paid-in capital		27,985,236		27,927,536
Treasury stock, 1,140,688 and 1,040,598 shares of Class A common stock at September 30, 2010 and June 30, 2010, respectively, at cost		(1,706,404)		(1,593,407)
Accumulated deficit		(8,605,950)		(9,284,564)
Total stockholders’ equity		17,879,387		17,255,994
Total liabilities and stockholders’ equity	$	25,100,625	$	25,207,453

See Notes to Condensed Consolidated Financial Statements

PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
		Three Months Ended
		September 30,
		2010		2009
Revenues:
Patient care, net	$	14,233,822	$	11,767,668
Contract support services		837,598		879,760
Total revenues		15,071,420		12,647,428
Operating expenses:
Patient care expenses		7,023,722		6,438,563
Cost of contract support services		707,775		727,477
Provision for doubtful accounts		1,003,462		472,973
Administrative expenses		5,100,069		4,652,517
Total operating expenses		13,835,028		12,291,530

Income from operations		1,236,392		355,898

Other income (expense):
Interest income		40,594		32,374
Other income		38,988		49,356
Interest expense		(80,332)		(80,593)

Total other income (expense), net		(750)		1,137

Income before provision for income taxes		1,235,642		357,035
Provision for income tax		557,027		133,431

Net income	$	678,615	$	223,604

Basic net income per common share	$	0.03	$	0.01

Basic weighted average number of shares outstanding		19,532,095		19,997,549


Diluted net income per common share	$	0.03	$	0.01

Diluted weighted average number of shares outstanding		19,603,138		20,141,989

See Notes to Condensed Consolidated Financial Statements.

PHC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		For the Three Months Ended September 30,
		2010		2009
Cash flows from operating activities:
Net income	$	678,615	$	223,604
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization		268,397		301,926
Non-cash interest expense		36,633		36,633
Earnings from investments in unconsolidated subsidiaries		(13,411)		(22,143)
Non-cash stock based compensation		49,023		60,709
Provision for doubtful accounts		1,003,462		472,973
Changes in:
Accounts receivable and other receivable		(2,104,446)		(2,264,986)
Prepaid expenses, prepaid income taxes and other current assets		(194,982)		(250,161)
Other assets		8,735		23,289
Accounts payable		(54,070)		327,999
Accrued expenses and other liabilities		(459,305)		(174,294)
Net cash used in operating activities		(781,349)		(1,264,451)

Cash flows from investing activities:
Acquisition of property and equipment		(361,002)		(249,556)
Purchase of licenses		(10,400)		(14,210)
Equity investment in unconsolidated subsidiary		--		18,288
Net cash used in investing activities		(371,402)		(245,478)

Cash flows from financing activities:
Revolving debt, net		(103,084)		62,720
Principal payments on long-term debt		(113,764)		(38,274)
Proceeds from issuance of common stock, net		8,754		27,835
Purchase of treasury stock		(112,997)		--
Net cash (used in) provided by financing activities		(321,091)		52,281

Net decrease in cash and cash equivalents		(1,473,842)		(1,457,648)
Beginning cash and cash equivalents		4,540,278		3,199,344
Ending cash and cash equivalents	$	3,066,436	$	1,741,696

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	43,699	$	43,960
Income taxes		676,825		351,525

See Notes to Condensed Consolidated Financial Statements

PHC, INC. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2010

Note A - The Company

PHC, Inc. (the “Company”) is incorporated in the Commonwealth of Massachusetts. The Company is a national health care company, which operates subsidiaries specializing in behavioral health services including the treatment of substance abuse, which includes alcohol and drug dependency and related disorders and the provision of psychiatric services. The Company also operates help lines for employee assistance programs, call centers for state and local programs and provides management, administrative and online behavioral health services. The Company primarily operates under three business segments:

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 71-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 66-bed residential facility located in Detroit, Michigan, a 55-bed psychiatric hospital in Las Vegas, Nevada and eight outpatient behavioral health locations (one in New Baltimore, Michigan operating in conjunction with Harbor Oaks Hospital, one in Monroeville, PA operating as Wellplace, three in Las Vegas, Nevada operating as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area);

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 the State of Michigan. The call centers both operate under the brand name, Wellplace; and

Behavioral health administrative services, including delivery of management and administrative and online services. The parent company provides management and administrative services for all of its subsidiaries and online services for its behavioral health treatment subsidiaries and its call center subsidiaries. It also provides behavioral health information through its website Wellplace.com.

Note B - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. The balance sheet at June 30, 2010 has been derived from the audited consolidated balance sheet at that date. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. The accompanying financial statements should be read in conjunction with the June 30, 2010 consolidated financial statements and notes thereto included in the Company’s 10-K, filed on September 24, 2010.

Estimates and assumptions

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Such estimates include patient care billing rates, realizability of receivables from third-party payors, rates for Medicare and Medicaid, the realization of deferred tax benefits and the valuation of goodwill, which represents a significant portion of the estimates made by management.

Revenue Recognition

The Company bills for its inpatient behavioral healthcare services upon discharge and for its outpatient facilities daily. In all cases, the charges are contractually adjusted at the time of billing using adjustment factors based on agreements or contracts with the insurance carriers and the specific plans held by the individuals. This method may still require additional adjustment based on ancillary services provided and deductibles and copays due from the individuals which are estimated at the time of admission based on information received from the individual. Adjustments to these estimates are recognized as adjustments to revenue during the period identified, usually when payment is received.

The Company’s policy is to collect estimated co-payments and deductibles at the time of admission. Payments are made by way of cash, check or credit card. If the patient does not have sufficient resources to pay the estimated co-payment in advance, the Company’s policy is to allow payment to be made in three installments - one third due upon admission, one third due upon discharge and the balance due 30 days after discharge. At times, the patient is not physically or mentally stable enough to comprehend or agree to any financial arrangement. In this case, the Company will make arrangements with the patient once his or her condition is stabilized. At times, this situation will require the Company to extend payment arrangements beyond the three payment method previously outlined. Whenever extended payment arrangements are made, the patient, or the individual who is financially responsible for the patient, is required to sign a promissory note to the Company, which includes interest on the balance due.

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.

Note C- Stock-Based Compensation

The Company has three active stock plans: a stock option plan, an employee stock purchase plan and a non-employee directors’ stock option plan.

The stock option plan provides for the issuance of a maximum of 1,900,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company. Subject to the provisions of this plan, the compensation committee of the Board of Directors (the “Board”) 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.

The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 500,000 shares may be issued under this plan.

The non-employee director’s stock option plan provides for the grant of non-statutory stock options automatically at the time of each annual meeting of the Board. Under the plan, a maximum of 350,000 shares may be issued. Each outside director is granted an option to purchase 20,000 shares of Class A common stock, annually, at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date.

The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Auditing Standards Codification (“ASC”) – “Compensation – Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, the Company recognizes the fair value of stock compensation as expense, 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. Any income tax benefit related to stock compensation will be shown under the financing section of the statement of cash flows. 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 assumed. It is assumed these options will remain outstanding for the full term of issue. Under the true-up provisions of ASC 718, a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.

Under the provisions of ASC 718, the Company recorded $37,397 and $60,709 of stock-based compensation on its consolidated condensed statement of operations for the three months ended September 30, 2010 and 2009.

The Company had the following activity in its stock option plans for the three months ended September 30, 2010:

	Number		Weighted-Average		Intrinsic Value
	Of		Exercise Price		At
	Shares		Per Share		September 30, 2010
Balance – June 30, 2010	1,558,500	$	1.89
Granted	--		--
Exercised	--		--
Expired	(175,000)		2.69
Balance – September 30, 2010	1,383,500	$	1.79	$	141,060

Exercisable	1,014,372	$	1.89	$	97,223

There were no options exercised during the three months ended September 30, 2010.

The following summarizes the activity of the Company’s stock options that have not vested for the three months ended September 30, 2010.

	Number		Weighted- Average
	Of Shares		Fair Value

Non-vested at July 1, 2010	369,128	$	.67
Granted	--		--
Expired	--		--
Vested	--	$	--
Non-vested at September 30, 2010	369,128	$	.67

The compensation cost related to the fair value of these shares of approximately $164,767 will be recognized as these options vest over the next three years.

The Company utilizes the Black-Scholes valuation model for estimating the fair value of the stock compensation granted. There were no options granted under the stock option plans for the three months ended September 30, 2010 or September 30, 2009.

Note D - Fair Value Measurements:

ASC 820-10-65, “Fair Value Measurements and Disclosures”, defines fair value, provides guidance for measuring fair value and requires certain disclosures. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. ASC 820-10-65 defines fair value based upon an exit price model. ASC 820-10-65 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

·	Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

·	Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

·	Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The Company had money market funds stated at fair market value of $2,073,512 and $2,504,047 at September 30, 2010 and June 30, 2010, respectively, that were measured using Level 1 inputs.

Note E – Business Segment Information

The Company’s behavioral health treatment services have similar economic characteristics, services, patients and clients. Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment. The Company’s segments are more fully described in Note A above. Residual income and expenses from closed facilities are included in the administrative services segment. The following summarizes the Company’s segment data:

		Treatment Services		Contract Services		Administrative Services		Eliminations		Total

For the three months ended September 30, 2010

Revenue–external customers	$	14,233,822	$	837,598	$	--	$	--	$	15,071,420
Revenues – intersegment		1,053,789		--		1,293,105		(2,346,894)		--
Segment net income (loss)		2,140,233		129,823		(1,591,441)		--		678,615
Capital expenditures		353,099		5,303		2,600		--		361,002
Depreciation & amortization		208,756		19,851		39,790		--		268,397
Interest expense		40,599		--		39,733		--		80,332
Income tax expense		--		--		557,027		--		557,027
Identifiable assets		18,050,809		669,970		6,379,846		--		25,100,625
Goodwill		969,098		--		--		--		969,098

For the three months ended September 30, 2009

Revenue–external customers	$	11,767,668	$	879,760	$	--	$	--	$	12,647,428
Revenues – intersegment		827,160		--		1,249,998		(2,077,158)		--
Segment net income (loss)		1,298,774		152,310		(1,227,480)		--		223,604
Capital expenditures		171,655		6,522		71,379		--		249,556
Depreciation & amortization		215,185		23,503		63,238		--		301,926
Interest expense		38,287		--		42,306		--		80,593
Income tax expense		--		--		133,431		--		133,431

At June 30, 2010

Identifiable assets		16,214,982		630,558		8,361,913		--		25,207,453
Goodwill		969,098		--		--		--		969,098

Note F - Recent Accounting Pronouncements

Recently Issued Standards

During the quarter ended September 30, 2010, there were no recently issued accounting standards that are expected to have a material impact on our consolidated financial statements.

Recently Adopted Standards

During the quarter ended September 30, 2010, we did not adopt any new accounting standards that had a material impact on our consolidated financial statements.

Note G –Income Taxes

FASB ASC 740, “Income Taxes” (“ASC 740”), prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. ASC 740 required that a change in judgment related to prior years’ tax positions be recognized in the quarter of the change. The Company recognized no material adjustment in the liability for unrecognized tax benefits.

We recognize interest and penalties related to uncertain tax positions in general and administrative expense. As of September 30, 2010, we have not recorded any provisions for accrued interest and penalties related to uncertain tax positions.

Tax years 2006-2009 remain open to examination by the major taxing authorities to which we are subject.

Note H – Restricted Cash

During the quarter ended December 31, 2008, certain litigation involving the Company and a terminated employee reached binding arbitration. As a result of this arbitration, the Arbitrator awarded the employee approximately $410,000 plus costs. In the calculation of the amount awarded, the Company believes the Arbitrator erroneously took into consideration an employment agreement that was not in question and not terminated by the Company. Based on this miscalculation, the Company’s attorney recommended an appeal, which the Company initiated. During the quarter ended March 31, 2010, the Michigan Court of Appeals denied the appeal. The Company has now filed an appeal with the Michigan Supreme Court. Since the Company and its attorney expect a favorable outcome, no provision has been made for this judgment in the accompanying financial statements; however, the Company has placed $512,197 in escrow as required by the courts. This amount is shown as restricted cash on the accompanying condensed consolidated balance sheet.

Note I -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 are included in the calculation of diluted earnings per share.

The weighted average number of common shares outstanding used in the computation of earnings per share is summarized as follows:

	Three months ended
	September 30,
	2010	2009

Weighted average shares
outstanding – basic	19,532,095	19,997,549
Employee stock options	71,043	144,440
Warrants	--	--

Weighted average shares
outstanding – fully diluted	19,603,138	20,141,989

The following table summarizes securities outstanding as of September 30, 2010 and 2009, but not included in the calculation of diluted net earnings per share because such shares are antidilutive:

	Three months ended
	September 30,
	2010	2009
Employee stock options	1,059,000	835,250
Warrants	363,000	343,000
Total	1,422,000	1,178,250

Note J- Reclassifications

Certain prior period amounts have been reclassified to be consistent with the September 30, 2010 presentation.

Note K –Subsequent Events:

The Company evaluated subsequent events through November 10, 2010, which is the date these financial statements were available for issue, and did not find any reportable subsequent events.

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 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 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 its implementation started January 1, 2010. This legislation has improved access to the Company’s programs but its total effect on behavioral health providers cannot yet be assessed since implementation is not yet complete. 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.

Revenue recognition and accounts receivable:

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

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

All revenues reported by the Company are shown net of estimated contractual adjustment and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the American Institute of Certified Public Accountants (AICPA) “Audit and Accounting Guide for Health Care Organizations.” Net contractual adjustments recorded in the three months ended September 30, 2010 for revenue booked in prior years resulted in an increase in net revenue of approximately $28,945. Net contractual adjustments recorded in the three months ended September 30, 2009 for revenue booked in prior years resulted in an increase in net revenue of approximately $12,450.

For the three months ended September 30, 2010, no third party cost report settlements were expected. During fiscal 2010, all cost reports through fiscal 2009 were finalized and net payment of $92,267 was recorded in final settlement for all years through fiscal 2009.

	Net Revenue by Payor (in thousands)
	For the Three Months						For the Fiscal Year
	Ended September 30,						Ended June 30,
	2010			2009			2010
		$	%		$	%		$	%
Private Pay	$	1,073	8	$	835	7	$	3,495	7
Commercial		9,237	65		7,885	67		32,915	66
Medicare		1,594	11		436	4		3,237	7
Medicaid		2,330	16		2,612	22		10,000	20

Net Revenue	$	14,234		$	11,768		$	49,647

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

September 30, 2010

				Over		Over		Over		Over		Over		Over		Over
Payor		Current		30		60		90		120		150		270		360		Total

Private Pay	$	84	$	199	$	187	$	188	$	194	$	301	$	2	$	33	$	1,188
Commercial		3,327		715		358		206		115		352		8		12		5,093
Medicare		383		126		32		29		33		17		1		2		623
Medicaid		1,386		127		55		53		23		59		--		--		1,703
Total	$	5,180	$	1,167	$	632	$	476	$	365	$	729	$	11	$	47	$	8,607

As of June 30, 2010

				Over		Over		Over		Over		Over		Over		Over
Payor		Current		30		60		90		120		150		270		360		Total

Private Pay	$	--	$	62	$	45	$	50	$	60	$	137	$	13	$	151	$	518
Commercial		3,074		795		529		364		285		374		27		52		5,500
Medicare		349		82		19		4		7		23		--		--		484
Medicaid		1,537		145		46		57		35		20		5		4		1,849
Total	$	4,960	$	1,084	$	639	$	475	$	387	$	554	$	45	$	207	$	8,351

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 56 days for the three months ended September 30, 2010 and 61 days the fiscal year ended June 30, 2010. The table below shows the DSO by segment for the same periods.

	Treatment	Contract
Period Ended	Services	Services

09/30/2010	56	60
06/30/2010	61	53

Contract Services DSO’s fluctuate dramatically by the delay in payment of a few days for any of our large contracts.

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

Allowance for doubtful accounts:

The provision for bad debts is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 300 days outstanding, at which time the provision is 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 ASC 740. ASC 740 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. The Company’s policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods. During fiscal 2010, the Company recorded a tax expense of $1,106,100. For the quarter ended September 30, 2010, the company recorded an estimated tax expense of $557,027 based on net income and projected net income for fiscal year 2011.

In accordance with ASC 740, we may establish reserves for tax uncertainties that reflect the use of the comprehensive model for the recognition and measurement of uncertain tax positions. In June 2010, the Company recorded a valuation allowance of $150,103 against its deferred tax asset. This amount relates to Arizona State tax credits accumulated by the research operations which were sold in fiscal 2009. Since the Company no longer does business in Arizona, it is not likely that these tax credits will be used. 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.

Results of Operations

The following table illustrates our consolidated results of operations for the three months ended September 30, 2010 and 2009 (in thousands):


	For the Three Months Ended
	September 30,
	2010			2009
	(in thousands)
Statements of
Operations Data:		Amount	%			Amount	%

Revenue	$	15,071	100.0		$	12,647	100.0
Cost and Expenses:
Patient care expenses		7,024	46.6			6,439	50.9
Contract expenses		708	4.7			727	5.8
Provision for bad debts		1,003	6.7			473	3.7
Administrative expenses		5,100	33.8			4,652	36.8
Interest expense		80	0.5			81	0.6
Other (income) expenses, net		(80)	(0.5)			(82)	(0.6)

Total expenses		13,835	91.8			12,290	97.2

Income before income taxes		1,236	8.2			357	2.8

Provision for income taxes		557	3.7			133	1.1

Income from operations		679	4.5			224	1.7

Results of Operations

Total net revenue from operations increased 19.2% to $15,071,420 for the three months ended September 30, 2010 from $12,647,428 for the three months ended September 30, 2009.

Net patient care revenue increased 21.0% to $14,233,822 for the three months ended September 30, 2010 from $11,767,668 for the three months ended September 30, 2009. This increase in revenue is due primarily to increased census at Seven Hills Hospital in Las Vegas, a retroactive increase in a Macomb County fee for service contract at Harbor Oaks Hospital and a State Medicaid Rate adjustment.

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.

Contract support services revenue provided by Wellplace decreased 4.8% to $837,598 for the three months ended September 30, 2010 compared to $879,760 for the three months ended September 30, 2009 due to decreases in the number of lives covered by some of the Employee Assistance Programs (“EAP”), which is the basis for payment under the contract.

Patient care expenses in our treatment centers increased 9.1% to $7,023,722 for the three months ended September 30, 2010 from $6,438,563 for the three months ended September 30, 2009. This increase in expenses is primarily due to increased census at Seven Hills Hospital in Las Vegas and higher utilization under the capitated contracts with the majority of the increases in expenses directly related to the patient care. Payroll and service related expenses increased 13.8% to $5,571,069 for the three months ended September 30, 2010 from $4,894,050 for the same period a year ago. Payroll tax expenses increased 10.5% to $334,168 for the three months ended September 30, 2010 from $302,476 for the same period a year ago. Contract expenses related to the capitated contracts increased 4.9% to $1,272,304 for the three months ended September 30, 2010 from $1,213,090 for the same period a year ago. Food expenses increased 13.9% to $302,944 for the three months ended September 30, 2010 from $266,031 for the same period a year ago. Lab fees increased 22.6% to $93,171 for the three months ended September 30, 2010 from $75,975 for the same period a year ago. Pharmacy expense increased 11.6% to $197,636 for the three months ended September 30, 2010 from $177,044 for the same period a year ago. Patient activities expense increased 135.6% to $11,482 for the three months ended September 30, 2010 from $4,873 for the same period a year ago. All of these increases are a result of increased census at Seven Hills and utilization under the capitated contracts.

Contract support services expenses decreased 2.7% to $707,775 for the three months ended September 30, 2010 from $727,477 for the three months ended September 30, 2009. This minimal decrease is due to the previously mentioned reduction in covered lives under the EAP contracts.

Administrative expenses increased 9.6% to $5,100,069 for the quarter ended September 30, 2010 from $4,652,517 for the quarter ended September 30, 2009. This increase is primarily due to increases in employee related expenses as the administrative expenses related to our new operations are largely stabilized. Consultant fees expense increased 26.2% to $112,423 for the three months ended September 30, 2010 from $89,118 for the same period a year ago. Administrative payroll increased 8.9% to $1,639,839 for the quarter ended September 30, 2010 from $1,505,677 for the same period a year ago due to some long awaited salary increases. Employee benefits expense increased 34.7% to $313,626 for the three months ended September 30, 2010 from $232,799 for the same period a year ago. Fees and licenses expenses increased 626.9% to $241,798 for the three months ended September 30, 2010 from $33,263 for the same period a year ago. This was due to a refund received from the Michigan Hospital Association in the prior year of fees previously paid.

Provision for doubtful accounts increased 112.2% to $1,003,462 for the three months ended September 30, 2010 from $472,973 for the three months ended September 30, 2009. The Company’s policy is to maintain reserves based on the age of its receivables and the Company’s success at collecting older receivables. General economic conditions have increased the patient responsibility, as some employers have increased the amount of deductibles in employee benefit plans. This has negatively impacted our ability to collect older accounts, therefore we have increased the reserve on all accounts over 300 days outstanding to 100%. This resulted in an increase in bad debt expense of approximately $200,000 for the quarter. Should this amount be subsequently collected, it would result in a recovery of bad debt expense.

Interest income increased 25.4% to $40,594 for the three months ended September 30, 2010 from $32,374 for the three months ended September 30, 2009. This increase is a result of higher earnings on balances in investment accounts.

Other income / expense decreased 21.0% to $38,988 for the three months ended September 30, 2010 from $49,356 for the three months ended September 30, 2009. This change is primarily due to changes in the earnings of the Company’s investments in unconsolidated subsidiaries.

Interest expense decreased 0.3% to $80,322 for the three months ended September 30, 2010 from $80,593 for the three months ended September 30, 2009. This minimal decrease is primarily due to changes in the Company loan balances.

Since the Company has returned to profitability and projects continued profitability for the fiscal year, the Company recorded a provision for income taxes of $557,027 for the three months ended September 30, 2010 as compared to $133,431 for the same period last year. If tax estimates are found to be high or low, adjustments will be made in the period of the determination. This represents an estimated blended state and federal tax rate of 48%, which is considerably higher than the current federal rate and is primarily attributable to expanded operations in Michigan and Utah which have a higher tax rate.

There are no trends that the Company expects 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 $781,349 for the three months ended September 30, 2010 compared to $1,264,451 for the three months ended September 30, 2009. Cash flows used in operations in the three months ended September 30, 2010 consists of net income of $678,615 plus depreciation and amortization of $268,397, non–cash interest expense of $36,633, non-cash stock based compensation of $49,023, non-cash earnings from the unconsolidated subsidiary of $13,411, the provision for doubtful accounts of $1,003,462, an increase in accounts receivable of $2,104,446, an increase in prepaid expenses of $194,982, a decrease in accrued expenses, other liabilities of $435,314, a decrease in other assets of $8,735, a decrease in accounts payable of $54,070 and a decrease in income taxes payable of $23,991.

Cash used in investing activities in the three months ended September 30, 2010 consisted of $361,002 in capital expenditures and $10,400 in licensure fees compared to $249,556 in capital expenditures, $14,210 in licensure fees and $18,288 in cash distribution from our unconsolidated subsidiary investments during the same period last year. The Company expects to make similar investments in our infrastructure through capital expenditures during the remainder of fiscal 2011.

Cash used by financing activities of $321,091 in the three months ended September 30, 2010 was the result of a decrease in the Company’s revolving credit line of $103,084, repayment of $113,764 on the Company’s long-term debt, proceeds from issuance of common stock of $8,754 and $112,997 used to purchase treasury stock compared to an increase in the company’s revolving credit line of $62,720, a decrease in long term debt of $38,274 and proceeds from the issuance of common stock of $27,835 during the same period last year.

A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of September 30, 2010, accounts receivable from patient care, net of allowance for doubtful accounts, increased 3.1% to $8,606,852 from $8,351,314 on June 30, 2010. This increase is a result of increased revenue from Seven Hills Hospital. The Company monitors increases in accounts receivable closely and, based on the aging of the receivables outstanding, is confident that the increase is not indicative of a payor problem. Over the years, the Company has 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. In light of the current economy the Company has redoubled its efforts to collect accounts early while increasing its reserve in the event collection efforts fail. The Company will continue to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections.

Contractual Obligations

The Company’s future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of September 30, 2010 are as follows (in thousands):

YEAR ENDING									OPERATING
September 30,		TERM NOTES				CAPITAL LEASES			LEASES		TOTAL*
		Principal		Interest		Principal		Interest
2011	$	797	$	11	$	105	$	6	$	3,242	$	4,161
2012		162		7		--		--		3,149		3,318
2013		43		2		--		--		2,818		2,863
2014		--		--		--		--		2,628		2,628
2015		--		--		--		--		2,361		2,361
Thereafter		--		--		--		--		7,065		7,065
Total	$	1,002	$	20	$	105	$	6	$	21,263	$	22,396

* Total does not include the amount due under the revolving credit note of $1,232,941. This amount represents accounts receivable funding as described below and is shown as a current note payable in the accompanying financial statements.

In October 2004, the Company entered into a revolving credit, term loan and security agreement with CapitalSource Finance, LLC to replace the Company’s primary lender and provide additional liquidity. Each of the Company’s material subsidiaries is a co-borrower under the agreement. This agreement was amended on June 13, 2007 to increase the amount available under the term loan, extend the term, decrease the interest rates and modify the covenants based on the Company’s current financial position. The agreement now includes a term loan in the amount of $3,000,000, with a balance of $860,000 at September 30, 2010, and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000 and a current balance of $1,232,941. 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 0.75%, but not less than 6.25%, with twelve monthly reductions in available credit of $50,000 beginning July 1, 2007 and increasing to $62,500 on July 1, 2009 until the expiration of the loan. As of September 30, 2010, there were no funds available under the term loan. The Company believes refinancing of this term loan would be available if required for acquisitions.

The revolving credit note carries interest at prime (3.25% at September 30, 2010) plus 0.25%, but not less than 4.75% paid through lockbox payments of third party accounts receivable. The revolving credit term is three years, renewable for two additional one-year terms. The balance on the revolving credit agreement as of September 30, 2010 was $1,232,941. For additional information regarding this transaction, see the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2004. The balance outstanding as of September 30, 2010 for the revolving credit note is not included in the above table. The average interest rate paid on the revolving credit loan, which includes the amortization of deferred financing costs related to the financing of the debt, was 7.74%.

This agreement was amended on June 13, 2007 to modify the terms of the agreement. Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable. The amended term of the agreement is for two years, automatically renewable for two additional one year terms. Upon expiration, all remaining principal and interest are due. The revolving credit note is collateralized by substantially all of the assets of the Company’s subsidiaries and guaranteed by PHC. Availability under this agreement is based on eligible accounts receivable and fluctuates with the accounts receivable balance and aging.

Off Balance Sheet Arrangements

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

Litigation

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The market price of our common stock could be volatile and fluctuate significantly in response to various factors, including:

·	Differences in actual and estimated earnings and cash flows;

·	Operating results differing from analysts’ estimates;

·	Changes in analysts’ earnings estimates;

·	Quarter-to-quarter variations in operating results;

·	Changes in market conditions in the behavioral health care industry;

·	Changes in general economic conditions; and

·	Fluctuations in securities markets in general.

Financial Risk

Our interest expense is sensitive to changes in the general level of interest rates. With respect to our interest-bearing liabilities, all of our long-term debt outstanding is subject to rates at prime plus 0.25% and prime plus 0.75%, which makes interest expense increase with changes in the prime rate. On this debt, each 25 basis point increase in the prime rate will affect an annual increase in interest expense of approximately $2,300; however, the prime rate is currently lower than the base interest rate of 4.50% therefore the prime rate would have to increase 1.25% before there would be any interest expense increase.

Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements requiring a waiver from our lender. A waiver of the covenants may require our lender to perform additional audit procedures to assure the stability of their security, which could require additional fees.

Operating Risk

Aging of accounts receivable could result in our inability to collect receivables. As our accounts receivable age and become uncollectible our cash flow is negatively impacted. Our accounts receivable from patient accounts (net of allowance for bad debts) were $8,606,852 at September 30, 2010 compared with $8,351,314 at June 30, 2010. 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 September 30, 2010 and June 30, 2010, respectively, and Bad Debt Expense for the three months ended September 30, 2010 and the year ended June 30, 2010:

		Accounts Receivable		Allowance for Doubtful accounts		Bad Debt Expense

September 30, 2010	$	12,298,147	$	3,691,295	$	1,003,462
June 30, 2010		11,353,637		3,002,323		2,131,392

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 20% of our total revenue is derived from these clients. No one of these large employers, health care institutions or labor unions individually accounts for 10% or more of our consolidated revenues, but the loss of any of these clients would require us to expend considerable effort to replace patient referrals and would result in revenue losses and attendant loss in income.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions and over time controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures to meet the criteria referred to above. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.

Change in Internal Controls

During the three months ended September 30, 2010, there were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Class A Common Stock

During the Quarter the Company purchased equity securities as follows:

				Total Number of	Maximum Number
	Total		Average	Shares Purchased	of Shares
	Number of		Price	as part of Publicly	that May Yet be
	Shares		Paid per	Announced Plans	Purchased Under the
Period	Purchased		Share	or Programs	Plans or Programs

July 1, 2010 –
July 31, 2010	74,628	$	1.078	74,628	925,372

August 1, 2010 –
August 31, 2010	10,700	$	1.069	10,700	914,672

September 1, 2010
September 30, 2010	14,762	$	1.276	14,762	899,910

TOTAL	100,090	$	1.107	100,090	899,910

The 100,090 shares of PHC class A common stock were repurchased pursuant to a repurchase plan which was approved by PHC’s Board of Directors in June, 2010. The repurchase plan was publicly announced on June 14, 2010 and is effective for the fiscal year ending June 30, 2011. The plan allows for the purchase of 1,000,000 shares of PHC class A common stock on the open market during the 2011 fiscal year based on market conditions, opportunity and excess cash availability. In addition to the price per share, the company paid approximately $2,200 in brokerage fees related to the purchases made during the quarter ended September 30, 2010.

There were no sales of unregistered securities during the period.

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.
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

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

		PHC, Inc.
		Registrant


	Date: November 10, 2010	/s/ Bruce A. Shear_____________
		Bruce A. Shear
		President
		Chief Executive Officer




	Date: November 10, 2010	/s/ Paula C. Wurts_____________
		Paula C. Wurts
		Treasurer
		Chief Financial Officer