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Bob Flaherty Rides Again! Welcome to our twenty-first issue of Flaherty Special Situations. If you have not already done so, please join our financial family. All of our recent Flaherty Financial News or Flaherty Special Situation Newsletters have been opened by over one million online investors and two over 8.2 million. We have an amazing open rate of over 25%. To receive our next FREE issues of Flaherty Financial News and also Flaherty Special Situations simply go to our website www.flahertyfinancialnews.com and opt in as a reader. You can opt out any time too. 
 
HOW OUTSIDE SERVICES HAVE RANKED OUR PERFORMANCE: Let me share with you how our past performance was recently described: Flaherty has built an enviable reputation as an early -bird stock picker who again and again uncovers overlooked special situation bargains long before TV's talking heads or Wall Street's big financial firms even know of their existence. His track record as measured by Hulbert Financial Digest and Select Information Exchange is one few other financial newsletter writers have matched. Besides being editor of Equities magazine, Robert Flaherty was editor of Equities Special Situations for 25 years. Bob was ranked No.1 for 14 consecutive months in Long Term Portfolio Gains among all Advisory Services measured by Select Information Exchange.
 
In several years Bob was first in his small cap category, according to The Hulbert Financial Digest, gaining an average of 1.7% in 2002, 76.5% in 2003, 16.1% in 2004 and 14.7% in 2005 versus -20.9%, 31.6%, 12.6% and 6.2% for the Wilshire 5000 Index. Very few other newsletters have ever beaten their index for four consecutive years and been up in a sharply down year. In 2006 Bob retired from Equities, which sadly appears to have slipped under the waves in stormy 2010, while his picks for 2006 were still ahead of the relevant averages. Mark Hulbert reports that over 80% of all advisory letters fail to beat the stock market over the long term. Naturally besides many big past winners, Bob has had a lot of strikeouts too because he swing for the fences, aiming for minimum gains of 50% to 100% over two years.  

Attention, Bargain Hunters: Bad News is Good News!  More and more we seem to be retracing the double dip cycle which followed the Great Stock Market Crash of l929. The wealthy media pundits label this The Great Recession but to people afraid of losing their jobs or without one this is the Depression of their lives. Each move our national and local leaders make seems to worsen our situation and darkens the outlook for employment.  Over 10% of all U.S. banks are in danger of default. States like California and New York appear to be at least as shaky as Greece or Spain. Cities, like the capital of Pennsylvania, are skipping interest payments on municipals. The war in Afghanistan is going poorly, but with terrorists planning new attacks on our mainland we don't dare leave even if we can't afford to stay.
With sustained U.S. growth in doubt and consumers worried about the security of their own jobs or homes, our average price -earnings ratio of U.S. stocks occasionally dipped below 12 or so depending on the wild fluctuations that day. In fact, the validity of using P/Es has been questioned because future earnings are so uncertain.
Not so. The late Sir  John Templeton felt P/Es were most valuable as a relative barometer of investor sentiment about a country's outlook. When pessimism was high, the country was likely to be filled with attractive bargains, especially compared with those in higher P/E countries.
Before he died, Sir John really didn't like most U.S. equities instead then seeking bargains in countries with less debt, higher growth and lower P/Es like China and India. He liked to buy stocks when hope was priced out of them. When asked, he did believe that when the average P/E of U.S. stocks fell below 10, it would be time to look homeward again. Long term America has a great future and we will solve our many present problems. Pressure from angry members of the Tea Party will force both parties to stop binging with tax payers' money and heads of many resisting incumbents will roll.
In the meantime, what can we do for you? The task will be helping you identify good companies at bargain prices to buy now. When the outlook for America brightens and investor confidence returns your rewards will be rich.  
Over the next few issues, we will take an inventory of our current open BUYs so our readers can stick with our possible winners and sell losers for tax losses. More importantly, in this newsletter and our sister Flaherty Financial News Newsletter we will try to find new interesting overlooked opportunities and bargains abandoned or sharply discounted in this national flight from risk by American investors. When the newspapers are filled with bad news it's a good time to find wonderful bargains.
 
Now for this issue let us just swing for the fences again! Let's go with a past winner we closed out in January 2003 for a gain of 131%.  It wasn't we no longer liked PHC Inc., which does business as Pioneer Behavioral Health; it was just we exceeded our 50% to 100% target and locked in profits for readers. Now PHC is stronger and more promising than ever and we have a new chance to hit another home run. Batter up!
The goal of a Flaherty Special Situation is a gain of 50% to 100% over two years. We believe patient investors can achieve such gains. Read on and see if you agree.

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PHC, Inc (NYSEAmex:PHC) , doing business as Pioneer Behavioral Health, is a pure play on post 9/11 America, treating the ills from stress and violence in the U.S. and substance abuse from drugs, alcohol and smoking plus gambling addiction.In stress- filled dyslexic America substance abuse is everywhere. Fortunately, with treatment and follow up programs miracles are happening every day restoring the walking dead to useful lives. Treatment works! The stock of PHC is a value packed bargain in this explosive hope for the hopeless growth niche and could increase 100% in 24 months.  A rival was acquired for ratios of revenues to stock price and EBITDA 4 times higher than those PHC sells for now.     

By Robert J. Flaherty and Arnaldo Arroyo  
 
Recent Price:                 $1.27                    Balance Sheet as of March 31, 2010
Market Capitalization:      $25.0 million           Total Assets:                $2.3 million
52-Week Range:             $1.69 - 0.91           Long-Term Debt:           $795,000
2009-l994 Range:           $9.00-  0.10           Shareholders' Equity:      $16.9 million
Shares Outstanding:        19.7 million            Book Value Per Share:     $0.86
Float:                           17.6 million            Mkt Val. % of Revenues:   0.49%
Avg. Daily Shr Vol.3m       21,729
 

Buy Recommendation

   We have followed PHC, Inc., doing business as Pioneer Behavioral Health, since its stock was traded over-the-counter for only $0.30. So it is a joy to report the progress achieved by founder Bruce Shear, President and CEO. Shear presented at our investor conference on September 20, 2001 just a few days after the still smoldering Twin Towers went down in flames and PHC was profiled in the October 2001 issue of Equities Magazine, "Dealing with Shock and Fear," page 10. In October 2001 we also issued a Special Situation on PHC at $0.35 and put out a SELL for a 131% gain in January 31, 2003. We still liked PHC but had exceeded our target of a 50% to 100% gain within two years. 
   Now PHC is stronger and more focused than ever, and we have a new chance to hit a second homerun for our fans. Currently, we are in an investment period of flight from risk and naturally micro-caps are being heavily discounted. But fads change unexpectedly. When hope returns, perhaps as quickly as a weather vane turning, the value gap between micro-caps like PHC and its larger rivals will dramatically narrow. Overnight, investors will again look forward instead of backwards. Let us look forward now while others fear to do so.
 
   Down 86% from its all time high of $9, PHC is a spectacular contrarian pick in the most bombed out fully corrected part of the American stock market -a micro-cap turnaround. In its new fiscal 2011 year which commenced July 1st, PHC should increase revenues to at least the   $60 million to $65 million range, and earnings per share in the range of $0.15 to $0.20 cents per share unencumbered by any transitional costs and charges of the last two years. At a recent stock price of around $1.25 that would create a forward P/E range of 8.3 to 6.3. These are conservative projections and PHC may do even better and also make accretive acquisitions. Since the future is unknowable, why try to be too exact?   
 
   PHC also is a value stock with superior relative value in the tradition of the late great Columbia Business School Professor Benjamin Graham. Here is our argument. At a recent total stock market cap of around $25 million, PHC's stock value only commands 49% of trailing 12 months total revenues while its much larger competitors sell for multiples of sales.
   Analysts see a substantial consolidation opportunity for well-managed and well-capitalized larger healthcare chains due to industry fragmentation. The recent acquisition of Psychiatric Solutions, Inc. (NASDAQ:PSYS) by Universal Health Services, Inc. fetched a price of $33.75 per share in cash, or approximately $2.0 billion. Including the assumption of Psychiatric Solutions' net debt, the total transaction consideration is approximately $3.1 billion. This puts PSYS's valuation at 1.7x revenue and 10x EBITDA. Using those ratios would put PHC stock 4x higher than where it is now.
 
   With more internal growth certain and acquisition candidates becoming more attractive for PHC, this non-leveraged, in-patient and out-patient behavioral health services company has a bright future. As its growth strategy continues to unfold, PHC should eventually become a target for acquisition itself. So if management can grow PHC profitably and achieve its goals, the upside potential at the end of the rainbow is a pretty picture.  

   With the company's fundamentals continuing to improve, modest debt and accretive acquisitions on the agenda, PHC initiated a new stock buyback of up to one million shares of common stock for a one year period beginning July 1, 2010. This is not PHC's first stock buyback program, and over time these help earnings per share grow faster than net income.
 
   In a nutshell, this is why we think PHC will be a winner for patient investors. We didn't want our case to become lost in too much detail.  For those who wish to do deeper, the sections which follow we will give you more information to help you learn more about this unique play on treating stress and substance abuse in America.

The goal of a Flaherty Special Situation is a gain of 50% to 100% over two years. We believe that the stock of PHC can do at least that well and perhaps considerably better. 
 
WORSENING U.S. SUBSTANCE ABUSE AND MENTAL ILLS: TREATMENT WORKS; NEGLECT SAPS OUR NATION'S PRODUCTIVITY AND INNER CORE.
 
As the nation continues to confront a weak economy, wide spread substance abuse, and a range of stress-related mental health disorders, demand for mental health services has continued to increase. This growing demand is related to clinical advances in the treatment of substance abuse, greater societal willingness to acknowledge the underlying problems as treatable illnesses, improved health insurance coverage for addictive disorders and chemical dependencies and governmental regulation which requires certain employers to provide information to employees about drug counseling and employee assistance programs.
Each year, about one in four adults suffer from a diagnosable mental illness, according to the National Institutes of Health (NIH). The recession that began in 2008 could raise that number, since unemployment increases a person's risk of mental health problems.
Drug abuse also continues to be a major problem in the U.S., especially among young people. NIH estimates that the nation's overall costs of substance abuse-including health- and  crime-related costs as well as losses in productivity-is estimated at more than half a trillion dollars a year. Unfortunately, while an estimated 22.5 million Americans suffer from drug abuse, less than four million actually receive treatment. What's even more frightening about these statistics is that many of those drug users started using drugs between the ages of 12 to 15.
Of the $100 billion behavioral health market, industry analysts estimate the facilities-based behavioral healthcare market exceeds $20 billion annually and could exceed $30 billion when the more fragmented chemical dependency treatment segment is brought into the equation.
This represents an enormous opportunity, especially given the fact that the behavioral health care sector continues to benefit from the lingering effects of facility closures in the 1990s, with total inpatient psychiatric hospital beds down 44% from the 1991 peak.
Then along came the Columbine massacre and the Twin Towers traumatic events. Also a new realization spread about substance abusers. Treatment works! Millions of the nation's walking dead can be restored to useful lives. Interventions can make a positive difference for the people involved and in a larger sense for our entire nation.
These are just some of the key factors that are driving the growth of PHC, doing business as Pioneer Behavioral Health. This small emerging growth company has the potential to become a large and profitable player. Based in Peabody, MA, PHC is an expanding national healthcare company, providing behavioral health services through contracts with government agencies, national insurance companies and major transportation and gaming companies. Patients include individuals with psychiatric, alcohol and drug dependency-related disorders plus gambling addiction.
Steady bed growth fuels PHC's facility-based business, while outpatient programs and contract support provide a diversified earnings stream. The company operates in five states and its programs cover more than 1 million individuals, which include substance abuse treatment facilities in Utah and Virginia, and inpatient and outpatient psychiatric facilities in Michigan, Pennsylvania and Nevada. The Wellplace division offers Internet and telephonic-based referral services that includes employee assistance programs and critical incident services.
In August, PHC's Seven Hills Behavioral Institute, based in Henderson, NV, received approval to accept patients who have Medicare and Medicaid. The facility also added a 10-bed adolescent unit. "The census at this facility has been increasing steadily, and we continue to see consistently strong demand in the region," says Bruce A. Shear, Pioneer's president and CEO. "With this certification, the Seven Hills Behavioral Institute has the potential to add as much as five cents per year to the company's earnings per share."
Last year, Pioneer decided to focus on growing its higher growth, core businesses. In order to do that, the company sold its pharmaceutical research and clinical trials business unit to Premier Research International, LLCfor a total consideration of up to $5 million. Funds were used to develop key markets in Las Vegas and Detroit. For instance, PHC opened a 7,000 square-foot behavioral health outpatient facility near downtown Las Vegas. It also plans to eventually build a 45,000 square-foot, three-story hospital/medical complex on the site, with 100 inpatient beds and capacity to generate more than $25 million annually. The hospital would be roughly twice the size of the Seven Hills.
Turnaround PHC has continued to improve its bottom line. The 2010 fiscal third quarter represented the PHC's fifth consecutive quarter of profitability. Net income applicable to common shareholders was $0.9 million for the nine months ended March 31, 2010, or $0.05 per diluted share, compared to a net loss of $2.2 million or a loss of $0.11 for the previous share period. Stockholders' equity improved from $16 million as of Jun 30, 2009, to $16.9 million as of March 31, 2010, reflecting the increased profitability. As of March 2010, Pioneer had cash and cash equivalents of $3.3 million. 
       "We believe these results validate the investments that we have made more than one year ago at Capstone and Seven Hills along with the development of the company's new chemical dependency unit opened in September at Harbor Oaks Hospital in Michigan," says Shear.
As larger players in the highly fragmented behavioral health industry look to consolidate, PHC's expansion strategy could eventually make the company an attractive acquisition candidate. Shear believes that the recent acquisition of Psychiatric Solutions is a "reflex of the potential that the industry has, particularly since parity between mental and physical reimbursement became a reality this year for payers," he says. "We realize that these developments highlight the need for PHC to become acquired by a larger company.  At this point, we do not believe it makes sense for us to sell our company as we believe it is highly undervalued. However, we are actively pursuing acquisitions and expect to complete one such transaction this year. There are a number of small private companies that would benefit from such a transaction, which would help PHC further expand within its target markets. We are only seeking acquisitions that would be immediately accretive to earnings the day after the acquisition is completed."
 
Business
 
PHC, through its subsidiaries, provides behavioral health services in five states, including substance abuse treatment facilities in Utah and Virginia, and inpatient and outpatient psychiatric facilities in Michigan, Pennsylvania, and Nevada. The company also offers Internet and telephonic-based referral services that includes employee assistance programs and critical incident services.
Currently, the company's contracted services with government agencies, national insurance companies, and major transportation and gaming companies cover more than one million individuals
 
PHC's Hospital and Clinical Services:
 
Detroit Capstone Academy: Detroit Behavioral Institute operates a 70-bed residential treatment facility licensed as Capstone Academy. It is located in midtown Detroit and serves adjudicated adolescents diagnosed as seriously emotionally disturbed. These adolescents are placed in Capstone Academy by court order.
The residents in the programs range from 12 to 17 years of age, with a minimum IQ of 70.  Each program provides individual, group and family therapy sessions for medication orientation, anger management, impulse control, grief and loss, family interactions, coping skills, stress management, substance abuse, discharge and aftercare planning (home visits and community reintegration), recreation therapy and sexual/physical abuse counseling as required.
As a part of the treatment model, each resident learns life skills and receives education, in accordance with Michigan's required educational curriculum, from state certified teachers, who are members of PHC's staff.  Typically, a resident is placed for treatment for an initial period of 30 days to six months, case dependent.
Periodic case review and psychiatric evaluations are conducted to evaluate progress or areas requiring improvement in accordance with goals and planning for discharge and eventual transition back to the community. The treatment teams that provide therapy and review each resident for progress include licensed counselors, nursing staff, certified teachers, psychiatrists, youth specialists and other program personnel.
During the fiscal year ended June 2009, the company was approved by the local school district, in accordance with state law to operate as a school under its auspices, for the education of program residents. Consequently, when residents transition back to the community they do so without losing school credits. Transcripts, testing scores and related items are readily accepted by the new education environment. PHC has successfully fulfilled this obligation for three years, with improved success. This allows its programs to integrate the residents' education with their individual treatment model and provide the best education possible without transporting the individuals to another site.
 
Harbor Oaks Hospital:This is a 70-bed psychiatric hospital located in New Baltimore, MI, approximately 20 miles northeast of Detroit. The hospital is licensed by the Michigan Department of Community Health, Medicare certified and accredited by The Joint Commission.  Harbor Oaks provides inpatient psychiatric care, partial hospitalization and outpatient treatment to children, adolescents and adults. The facility has treated clients from Macomb, Oakland and St. Clair counties and has expanded its coverage area to include Wayne, Sanilac and Livingston counties.
       Harbor Oaks has become a primary provider for Medicaid patients from Wayne, Macomb and St. Clair counties. Utilization of a short-term crisis management model in conjunction with strong case management has allowed Harbor Oaks to successfully enter this segment of the market. Reimbursement for these services is comparable to traditional managed care payers.  Given the current climate of public sector treatment availability, Harbor Oaks anticipates continued growth in this sector of the business.
In 2005, Harbor Oaks began operating an outpatient site near New Baltimore, Michigan.  Its close proximity to the hospital allows for a continuum of care for patients after discharge.
 
Highland Ridge Hospital: Highland Ridge is a 41-bed, freestanding alcohol and drug treatment hospital, which the company has been operating since 1984. Its focus remains substance abuse and it is the oldest facility dedicated to substance abuse in Utah. Highland Ridge is accredited by The Joint Commission on Accreditation of Healthcare Organizations and is licensed by the Utah Department of Health. 
Highland Ridge is recognized nationally for its excellence in treating substance abuse disorders.  Although it does provide services to individuals from all of the states through contracts with the railroads and other major employers, most patients at this facility are from Utah and surrounding states. Individuals typically access Highland Ridge's services through professional referrals, family members, employers, employee assistance programs or contracts between the PHC and health maintenance organizations located in Utah.
Highland Ridge was the first private for-profit hospital to address specifically the special needs of chemically dependent women in Salt Lake County. In addition, Highland Ridge has contracted with Salt Lake County to provide medical detoxification services targeted to women. The hospital also operates a specialized continuing care support group to address the unique needs of women and minorities.
The hospital also offers extensive aftercare assistance at programs strategically located in areas of client concentration throughout the U.S. in addition, it maintains a comprehensive array of professional affiliations to meet the needs of discharged patients and other individuals not admitted to the hospital for treatment.
 
Mount Regis Center: Mount Regis is a 25-bed, freestanding alcohol and drug treatment center located in Salem, VA. Acquired in 1987, the center is the oldest of its kind in the Roanoke Valley.  Mount Regis is accredited by The Joint Commission and licensed by the Department of Mental Health, Mental Retardation and Substance Abuse Services of the Commonwealth of Virginia. Mount Regis also operates Right Track, which is a residential program designed to provide individuals with the tools they need to make a smooth transition from inpatient treatment back into their everyday routine. In addition, Mount Regis operates Changes, an outpatient clinic, at its Salem location. The Changes clinic provides structured intensive outpatient treatment for patients who have been discharged from Mount Regis and for patients who do not need the formal structure of a residential treatment program. The program is licensed by the Commonwealth of Virginia and approved for reimbursement by major insurance carriers.
The majority of Mount Regis clients are from Virginia and surrounding states. In addition, because of its relatively close proximity and accessibility to New York, Mount Regis has been able to attract an increasing number of referrals from New York-based labor unions. It has also been able to attract a growing number of clients through the Internet.
 
Seven Hills Behavioral Institute: Seven Hills is a 55-bed hospital situated on a one-and-a-half-acre site owned by Seven Hills Psych Center LLC and located in Las Vegas, NV. It provides adolescent and adult psychiatric treatment as well as alcohol and drug addiction treatment. The lease is for a 10-year term expiring April 30, 2018, which provides for monthly rental payments of approximately $72,000. The company believes that these premises are adequate for its current and anticipated needs and does not anticipate any difficulty in renewing or securing alternate space on expiration of the lease.   
 
PHC's Integrated Delivery Services:
 
Harmony Healthcare: Harmony Healthcare, which consists of four psychiatric clinics in Nevada, provides outpatient psychiatric care to children, adolescents and adults in the local area.  Harmony also operates employee assistance programs for railroads, health care companies and several large gaming companies including Boyd Gaming Corporation, the MGM Grand and the Venetian with a rapid response program to provide immediate assistance 24 hours a day and seven days a week. Harmony also provides outpatient psychiatric care and inpatient psychiatric case management through capitated rate behavioral health carve-outs with Behavioral Health Options and PacifiCare Insurance.  The agreement with Behavioral Health Options is a significant contract which began in January 2007 and caused a major expansion of Harmony to better serve the contract population.
 
Wellplace: In 1994, the PHC began to operate a crisis hotline service under contract with a major transportation client. The hotline, Wellplace, is a national, 24-hour telephone service, which supplements the services provided by the client's employee assistance programs. The services provided include information, crisis intervention, critical incidents coordination, employee counselor support, client monitoring, case management and health promotion.
As of June 30, 2009, three major transportation companies subscribed to these services. This operation is physically located in Highland Ridge hospital, but a staff dedicated to Wellplace provides the services from a separate designated area of the hospital.  Wellplace also contracts with Wayne County Michigan to operate its call center. This call center is located in mid-town Detroit on the campus of the Detroit Medical Center and provides 24-hour crisis, eligibility and enrollment services for the Detroit-Wayne County Community Mental Health Agency, which oversees 56,000 consumers for mental health services in Wayne County Michigan.
Wellplace's primary focus is now on growing its operations to take advantage of current opportunities and capitalize on the economies of scale in providing similar services to other companies and government units.
 
Pioneer Counseling Centers: Serving the populations of Oakland, Macomb, and Northern Wayne counties in Southwest Lower Michigan, the company's counseling centers provide outpatient mental health and substance abuse services.
 
Management and Key Personnel

Bruce A. Shear, a co-founder of Pioneer Behavioral Health, has been president, chief executive officer and a director of the company since 1980. He held the position of treasurer from September 1993 until February 1996. From 1976 to 1980 he served as vice president, financial affairs. Shear has served on the Board of Governors of the Federation of American Health Systems for over 15 years. He received an M.B.A. from Suffolk University in 1980 and a B.S. in accounting and finance from Marquette University in 1976. Shear currently sits on the Board of Trustees for the National Association of Psychiatric Health Systems.
 
Robert H. Boswell has served as the senior vice president of the company since February 1999. From 1992 to 1999, Boswell served as executive vice president of Pioneer. Prior to that, Boswell served as the administrator of the company's Highland Ridge Hospital, and is principally involved with the company's substance abuse facilities. From 1981 until 1989, he served as the associate administrator at the Prevention Education Outpatient Treatment Program-the Cottage Program, International. Boswell is a graduate, in 1975, of Fresno State University and attended Rice University's Doctoral Program in philosophy from 1976 to 1978. He is a board member of the National Foundation for Responsible Gaming, and serves as the chair for the National Center for Responsible Gaming.
 
Paula C. Wurts has served as the chief financial officer for the company since 1989, assistant clerk since 1996, assistant treasurer from 1993 until April 2000, and currently serves as treasurer. Wurts served as the company's accounting manager from 1985 until 1989. She earned an A.S. in accounting from the University of South Carolina in 1980, a B.S. in accounting from Northeastern University in 1989, and an M.A. in accounting from Western New England College in 1996. She is also a CPA.
 
Alexander N. Luvall was hired in September 2004 as executive vice president. He is an experienced and licensed attorney, who supports the company's rapid growth in the Michigan marketplace.
 
Finance
 
Over the past year, the company has begun a turnaround, refocusing on its core businesses, improving finances and divesting itself of its clinical trials for new drugs. For the third fiscal quarter ended March 31, 2010, PHC posted total net revenues of $13.5 million, up 12.7% from $12.0 million in the same period a year ago. Income from operations improved to $781,000 and earnings per share were $0.02 for the 2010 fiscal third quarter compared to $98,000 in the same period a year ago.
   For the nine months ended March 31, 2010, total net revenues amounted to $39.0 million compared to $34.7 million in the year earlier period.  In the same nine-month period, income from operations was $1.7 million compared to a loss of $1.2 million in the same nine months in fiscal 2009. PHC's revenues for the first three quarters of fiscal 2010 were up 12.5% year-on-year, an increase of more than $4 million, and net patient care revenue in the same period increased 14.7% year-on-year.
   Looking forward PHC is a bargain.  In its new fiscal 2011 year which commenced July 1st, PHC should increase revenues to at least the   $60 million to $65 million range, and earnings per share in the range of $0.15 to $0.20 cents per share unencumbered by any transitional costs and charges of the last two years. At a recent stock price of around $1.25 that would create a forward P/E range of 8.3 to 6.3. These are conservative projections and PHC may do even better and also make accretive acquisitions.
 
Because management believes that its shares are undervalued, it has again recently initiated a 12 month common stock purchase plan for up to one million shares. Since 2009 savvy   venture capitalist Russell Cleveland's RENN Global Entrepreneurs Fund   acquired over one million shares of PHC common stock.  Debt was recently only $795,000 versus shareholder's equity of over $16 million, leaving PHC relatively unleveraged and able to take advantage of new opportunities. Cash and equivalents are over $3 million.  
 
Competition
 
Pioneer Behavioral Health's substance abuse programs compete nationally with other health care providers, including general and chronic care hospitals, both non-profit and for-profit, other substance abuse facilities and short-term detoxification centers.  Some competitors have substantially greater financial resources than the company. In addition, its psychiatric facilities and programs compete primarily within the geographic area serviced by them. Among its competitors are private doctors, hospital-based clinics, hospital-based outpatient services and other comparable facilities. In its substance abuse efforts, PHC both competes with and often complements the many Twelve Step Programs patterned after Alcoholic Anonymous. Seriously ill abusers often need the help of a detoxification center before they can even join such a self help recovery program which also suggests medical help for any members with medical needs. 
 
Risks
 
PHC, Inc. faces strong competition, both regional and national, with numerous healthcare providers, many of which have far greater financial resources. Still, remember that rivals can also become acquirers. The company's business is subject to extensive legislation at all levels of governments. Changes in regulation to its operations to the insurance industry, Medicare or Medicaid, could materially affect PHC.  The gaming and transportation industries, which PHC serves, face uncertain times.
To command a higher stock market valuation, management cannot afford to make a major mistake. As its expansion accelerates, more size will mean PHC will be required to seek payment from a larger number of payers and the amount of accounts receivable will likely increase.  Because the behavioral health industry is typically a difficult collection environment, the company has established a more aggressive reserve policy, allowing greater amounts of reserves as accounts age from the date of billing.  However, if the amount of receivables, which eventually become uncollectible, exceeds such reserves, PHC's results could be adversely affected.
 
In addition, the concentration of accounts receivable due from government payers such as Medicare and Medicaid could create a severe cash flow problem should these agencies defer or fall behind in making reimbursement payments. 
Stress disorder and substance abuse are huge and expanding markets in today's America. If management   performs profitably, makes accretive acquisitions and grows substantially, PHC will become a more attractive acquisition candidate itself.  Success should bring a rich reward for patient shareholders.  
 
CONTACT INFORMATION:

 

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Disclaimer: This Flaherty Special Situation Newsletter contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, and actual circumstances, events or results may differ materially from those projected.  We caution readers not to place undue reliance on any forward-looking statements and to supplement this newsletter with specific company SEC filings and their own research. Please be aware that there is risk in every company stock that you buy. Coverage or other mention of a stock in this newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. We are not investment dealers or investor advisers registered with the SEC or State Security Authorities. We do not guarantee all the information in this newsletter is correct or will be updated. Remember some errors are inevitable. Reproduction without written permission is forbidden. No individual at Flaherty Financial News Inc. is a shareholder of PHC, Inc. featured in this Flaherty Special Situation, and our policy forbids editorial from buying or selling a featured stock until this issue is out at least ten business days after its issue date of September 8, 2010. PHC paid a fee of $3,000 to be featured as a special situation in this Flaherty Special Situation issue and for extra Internet distribution. When asked, the company may or may not decide to  pay for further online distibution.  In cases where a report or profile is subsidized, readers should consider such subsidized articles as paid advertorials and understand that sponsored material will not be as objective as non sponsored editorial. As FNN editor I always reserve "Final Copy Responsibility" on what to include and what to leave out of every issue. We have tried to be objective, but may have failed. We are not security analysts or stockbrokers engaged in buying or selling, but financial journalists with all the many failings of that profession. You readers must decide the merits of each company yourself and whether to invest. -Bob Flaherty, Editor
 
Flaherty Financial News Inc. (FFN) and its newsletters Flaherty Financial News and Flaherty Special Situations are not registered as broker dealers or investment advisers with the U.S. Securities and Exchange Commission or any state securities authority. Our newsletters and their information and content providers make no representations or warranties of any kind in connection with the subject matter, performance or suitability of the information contained in the publications for any purpose and are not liable for the timeliness, accuracy or completeness of the information. The information is provided for general information purposes and is not a substitute for obtaining professional advice from a qualified person or entity familiar with your personal circumstances. Please seek the help and advice of professionals as appropriate regarding the evaluations of any specific security, report, opinion, advice or other content. FFN is not responsible for trades placed by recipients. All opinions expressed, information and data provided are subject to change without notice. FFN, its officers and its employees may have positions in and may from time to time make purchases or sales of the securities discussed or mentioned by FFN. (However, we will avoid front running and the buying or selling of any security about to be discussed until ten business days after our particular report is released to the public.) FFN shall have no liability for any newsletter that is lost, intercepted or not received in a timely manner, or not received at all, for any reason.-RJF 

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