Via Facsimile and U.S. Mail
Mail Stop 6010
September 21, 2005
Mr. Bruce Mogel
Chief Executive Officer
Integrated Healthcare Holdings, Inc.
695 Town Center Drive
Suite 260
Costa Mesa, CA 92626
Re: Integrated Healthcare Holdings, Inc.
Form 10-KSB for Fiscal Year Ended December 31, 2004
Forms 10-Q for Fiscal Quarters Ended
March 31, 2005 and June 30, 2005
Form 8-K/A Dated March 3, 2005
Filed June 8, 2005
File No. 0-23511
Dear Mr. Mogel:
We have reviewed your filings and have the following
comments.
We have limited our review of your filings to only your financial
statements and related disclosures and do not intend to expand our
review to other portions of your documents. Where indicated, we
think you should revise your documents in response to these
comments.
If you disagree, we will consider your explanation as to why our
comment is inapplicable or a revision is unnecessary. Please be
as
detailed as necessary in your explanation. In some of our
comments,
we ask you to provide us with more information so we may better
understand your disclosure.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your
filings.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form 10-KSB for the year ended December 31, 2004
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm, page F-2
1. We note the audit report of Ramirez International Financial &
Accounting Services, Inc. relied on the report of another auditor
for
financial information as of and through June 30, 2003. Please
file
this audit report as required by Rule 2-05 of Regulation S-X.
Form 8-K/A filed June 8, 2005
Exhibit 99.12: Unaudited Pro Forma Condensed Consolidated
Financial
Statements of IHHI
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
2. Please revise your footnotes to clearly disclose the amounts of
each individual adjustment and how you determined them. Further,
disclose each pro forma adjustment separately on the face of the
pro
forma financial statements rather than combining several pro forma
adjustments in one amount. For example, please refer to your pro
forma adjustments to "Current portion of debt & capital leases"
and
"Accumulated (deficit) earnings" on the face of the pro forma
condensed consolidated balance sheet.
3. Please refer to footnote one. You disclose that IHHI assumed
capital lease obligations but your purchase price allocation does
not
include these assumed liabilities. Please revise your purchase
price
allocation to include liabilities assumed or tell us why
liabilities
assumed were omitted from your purchase price allocation.
4. Please refer to footnote four. Please tell us why you
depreciate
buildings over the 25 year lease term and your consideration of
the
right to renew the lease for an additional 25 years. We note that
you consolidate the buildings owned by PCHI and that Tenet
assigned
these buildings up to a 40 year life as disclosed in the Note 1e
of
the acquisition financial statements.
5. Please refer to footnote seven. It appears that pro forma
adjustment seven includes adjustments to the historical statement
of
operations of Tenet Hospitals. Please reinstate these historical
amounts or disclose, and explain to us, how these pro forma
adjustments are directly related to the transaction and factually
supportable.
6. It appears that pro forma adjustment eight for warrants issued
will not have a continuing impact on operations. Please remove
this
adjustment and indicate in your footnote disclosure that this
charge
was not considered in the pro forma condensed statement of
operations
or explain to us how this adjustment complies with Article 11 of
Regulation S-X. Please refer to Rules 11-02(b)(5) and 11-02(b)(6)
of
Regulation S-X.
Form 10-Q for the six months ended June 30, 2005
Financial Statements, page 1
Condensed Consolidated Statements of Cash Flows, page 5
7. Please revise your 2005 Forms 10-Q to remove the $5 million
proceeds of the sale property as an investing activity or tell us
why
it is appropriate. It appears that this item should be eliminated
in
consolidation against the corresponding asset purchase on the
books
of PCHI. In addition, please revise your Liquidity and Capital
Resources disclosure in MD&A, as appropriate.
Note 1: Summary of Significant Accounting Policies, page 6
Company Operations, page 7
8. We note that you acquired four separate hospitals from Tenet
and
that separate financial information was disclosed for each of
these
hospitals in your Form 8-K/A filed June 8, 2005. Please revise
your
2005 Forms 10-Q to include segment reporting disclosures required
by
SFAS 131 or explain to us why each of these hospitals are not
reportable segments under paragraph 16 of SFAS 131. Disclose, and
explain to us, any operating segments aggregated using the
criteria
of paragraph 17 of SFAS 131.
Net Patient Service Revenue, page 8
9. Please revise the disclosure in your 2005 Forms 10-Q regarding
discounts for retroactively cost-based revenues to indicate the
magnitude of these revenues. You disclose that these revenues
were
prevalent in prior periods. As you recently acquired your
hospitals
from Tenet it is not clear how significant these revenues are to
your
current operations.
Medical Claims Incurred but not Reported, page 11
10. Please tell us and revise your disclosure, as appropriate:
* The nature of your contractual obligations to various HMOs;
* What you receive from the HMOs in return for your obligation;
* Whether you earn service revenues from patients of these HMOs;
and
* How you account for all revenues and expenses under your
contractual relationship.
Please ensure that you reference all applicable accounting
guidance
in your response to the last bullet.
Note 2: Acquisition, page 13
11. It does not appear that you identified any intangible assets
or
goodwill in your purchase price allocation. Please tell us how
you
applied the guidance provided in paragraphs 35, 37, 39 and 44 of
SFAS
141.
12. Please revise your 2005 Forms 10-Q to provide the 2004 interim
pro forma disclosures required by 58b of SFAS 141 or explain to us
why you cannot provide this information even though you have
provided
2004 annual financial results of the acquired hospitals.
Note 4: Common Stock, page 14
13. Please revise your 2004 Form 10-KSB and your 2005 Forms 10-Q
to
clarify the apparent disparity between the share prices inherent
in
the Stock Purchase Agreement. It is unclear why 102.6 million
shares
were issued for $10.1 million and an additional 5.4 million shares
were issued for $20 million.
14. Please tell us how the placement of 57.25 million shares into
an
escrow account impacted the shares used in your loss per share
computation under SFAS 128. In your response, please specifically
address the guidance provided in paragraph 10 of SFAS 128.
Note 5: Common Stock Warrants, page 15
15. We note the potential variability in the ultimate number of
shares exercisable under the warrants resulting from the limit of
24.9% of your fully-diluted capital stock. Please tell us your
consideration of accounting for these warrants as a derivative
financial instrument under SFAS 133.
16. You disclose that the warrants were issued as part of the
restructuring agreement associated with the initial funding
arrangement for your hospital acquisition. It appears that the
holders have no continuing performance obligation associated with
the
exercise of the warrants. Please tell us your basis under GAAP
for
deferring a portion of the warrant value. In your response please
specifically address why you have not recorded the fair value of
the
expected warrants to be issued as a charge to earnings on the date
of
issuance. Please reference the authoritative literature you
relied
upon to support your accounting.
17. We note that you effectively recorded the fair value of the
warrants issued in January 2005 at approximately $0.375 per share.
Please tell us the following information to clarify how the fair
value of the warrants was determined:
a. Please explain how you determined the fair value per share of
approximately $0.375 when the intrinsic value appears to be at
least
$0.62 per share. We note that your closing stock price on January
27,
2005 was $0.77 and that the highest possible exercise price is
$0.15
per share.
b. Please explain to us how you were able to estimate the expected
warrant life at between two and two and one-half years.
c. Please tell us the comparable companies you used to determine
your
expected volatility. In your response please provide for each
company:
* the number of hospitals and beds operated
* years as a publicly held company
* historical volatility over two years, two and one-half years and
three and one-half years.
Note 8: Income Taxes, page 19
18. Please revise your 2005 Forms 10-Q to quantify the individual
amounts in your statutory rate reconciliation as required by
paragraph 47 of SFAS 109 and disclose the components of your net
deferred tax assets and valuation allowance as required by
paragraph
43 of SFAS 109.
19. You disclose that you are currently assessing the potential
impact of the taxable event related to your sale of membership
interest in PCHI. Please revise your 2005 Forms 10-Q to quantify
the potential impact of the 2005 taxable event and the amount of
the
tax provision recorded in 2005. If no tax provision was recorded,
please disclose, and explain to us, why this taxable event does
not
result in a provision for income taxes.
Management`s Discussion and Analysis, page 23
Critical Accounting Policies and Estimates, page 24
20. We believe your disclosures should include an analysis of the
uncertainties in applying these accounting policies or
quantification
of the related variability in operating results that you expect to
be
reasonably likely to occur. Your disclosures should not duplicate
accounting policy disclosures from your financial statement
footnotes
and should provide investors with a full understanding of the
uncertainties in applying critical accounting policies and the
likelihood that materially different amounts would be reported
under
different conditions or using different assumptions. For each of
your
critical accounting policies, please revise your 2005 Forms 10-Q
to
disclose the uncertainties in applying these critical accounting
policies, the historical accuracy of these critical accounting
estimates, a quantification of their sensitivity to changes in key
assumptions and the expected likelihood of material changes in the
future.
Contractual Obligations
21. Please revise your 2005 Forms 10-Q to disclose the material
changes to your contractual obligations during the interim
periods.
Please refer to Instruction 7 to Rule 303(b) of Regulation S-K.
Please consider a table of contractual obligations as required by
Rule 303(a)(5) of Regulation S-K due to the significant changes to
your contractual obligations since the end of 2004.
As appropriate, please amend your Form 10-KSB for the year
ended December 31, 2004, Forms 10-Q for the quarters ended March
31,
2005 and June 30, 2005 and Form 8-K/A filed June 8, 2005 and
respond
to these comments within 10 business days or tell us when you will
respond. You may wish to provide us with marked copies of the
amendments to expedite our review. Please furnish a cover letter
with your amendments that keys your responses to our comments and
provides any requested information. Detailed cover letters
greatly
facilitate our review. Please file the letter on EDGAR under the
form type label CORRESP. Please understand that we may have
additional comments after reviewing your amendments and responses
to
our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in your letter, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
If you have any questions, please contact Mark Brunhofer,
Staff
Accountant, at (202) 551-3638 or Donald Abbott, Senior Staff
Accountant, at (202) 551-3608. In this regard, do not hesitate to
contact me, at (202) 551-3679.
Sincerely,
Jim B. Rosenberg
Senior Assistant Chief Accountant
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Mr. Bruce Mogel
Integrated Healthcare Holdings, Inc.
September 21, 2005
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