ALSTON&BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
Fax: 404-881-7777
www.alston.com
PETER C. NOVEMBER DIRECT DIAL: 404-881-7872 E-MAIL:PNOVEMBER@ALSTON.COM
March 4, 2005
Mr. Jeffrey Riedler
Assistant Director
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0306
Re: LHC Group, Inc.
Registration Statement on Form S-1
Filed November 24, 2004, as amended
File Number 333-120792
Dear Mr. Riedler:
At the request and on behalf of our client, LHC Group, Inc. (the
"Company"), we are filing this letter in response to comment No. 10 included in
the Staff's letter dated February 25, 2005 relating to the above referenced
Registration Statement (the "Registration Statement"). In order to expedite the
resolution of the matters referenced in comment No. 10, we are filing this
letter prior to the filing of Amendment No. 3 to the Registration Statement. We
respectfully request an opportunity to discuss our response with the Staff as
soon as possible. In that regard, we will contact Mr. Atkinson on Monday, March
7 to schedule a conference call. We appreciate the Staff's consideration of our
request. Unless the context requires otherwise, references to we, our, us, LHC
or the Company in this letter refer to LHC Group, Inc.
Bank of America Plaza 90 Park Avenue 3201 Beechleaf Court, Suite 600 601 Pennsylvania Avenue, N.W.
101 South Tryon Street, Suite 4000 New York, NY 10016 Raleigh, NC 27604-1062 North Building, 10th Floor
Charlotte, NC 28280-4000 212-210-9400 919-862-2200 Washington, DC 20004-2601
704-444-1000 Fax: 212-210-9444 Fax: 919-862-2260 202-756-3300
Fax: 704-444-1111 Fax: 202-756-3333
Mr. Jeffrey Reidler
March 4, 2005
Page 2
COMMENT
10) Please refer to your responses to comments 22 and 23. It appears that
your analysis does not follow the appropriate path through the
literature given that this appears to be a financial instrument.
Please discuss the applicability of SFAS 150, EITF 00-6, and ASR268
and other related literature to this agreement. It appears that the
filing of the registration statement makes it appear that it is
probable that this minority interest will become redeemable.
RESPONSE
In the third quarter of 2003 and the second quarter of 2004, we
entered into agreements to purchase majority ownership positions in three
companies. The minority interest holders in these companies were given the
option to put their minority interests to us under certain events, including an
initial public offering of our common stock, or IPO, or the acquisition of LHC
by a third party. We believe these conversion options represent put options on
the membership interests of these three companies.
It is our position that the put options are not freestanding, and are
best characterized as being embedded in the underlying membership interests,
and thus not subject to SFAS No. 150 (see further explanation of this view
below in the discussion of the exchange agreements). However, we note EITF 00-6
should be considered for embedded features. Based on EITF 00-6, the put option
should be separately recognized at fair value and any changes in the fair value
of the put option recognized in earnings. As the purchase price is based on the
fair value of the subsidiary (i.e., the fair value of the put is $0), there is
no accounting recognition required related to the put option. Additionally, we
believe the related minority interest should not be adjusted to the redemption
value at each balance sheet date, but should be accounted for by applying
normal consolidation procedures for minority interest. As discussed above, we
believe the put options are to be accounted for separately (albeit at a fair
value of 0), and not as part of the minority interest.
As part of our analysis we have considered ASR 268 and Topic D-98 with
respect to these put options and the interests in which they are embedded. ASR
268 requires a public entity's stock subject to redemption requirements that
are outside the control of the issuer to be excluded from caption
"stockholders' equity" and presented separately in the issuer's balance sheet.
Although ASR 268 discusses only "Redeemable Preferred Stocks," it is our
understanding that the Staff believes this rule provides analogous guidance to
all redeemable equity instruments, including redeemable classes of common stock
and other redeemable equity instruments. Accordingly we reviewed the
classification of the minority interest liability. No reclassification was
necessary as minority interest is appropriately classified outside of permanent
equity.
Mr. Jeffrey Reidler
March 4, 2005
Page 3
Further, Topic D-98 and SAB 64 provide that the initial carrying
amount of redeemable preferred stock (i.e., redeemable equity interests) should
be its fair value at the date of issue. Subsequent accounting is dependent on
the instrument's redemption provisions. In our case, the minority interest is
redeemable only if specified events occur. If redemption is uncertain,
adjustment of the initial carrying amount is not necessary until redemption is
probable and disclosure of why the redemption is uncertain should be provided.
Given that the redemption of the put option is contingent on an IPO or
the acquisition of LHC, even if reflected as part of the minority interest
(which we do not believe is the case), minority interest should not be adjusted
until the specified event is probable. We initially filed the Registration
Statement on November 24, 2004, which creates the first point at which the
probability of the event occurring should be evaluated. However, the put
options under two of these agreements were removed and the exchange agreements
discussed below were entered into prior to the filing of the initial
Registration Statement. Accordingly, these agreements would never have
triggered any requirement to adjust the initial carrying value of the minority
interest.
The put option under the third agreement remains and we believe the
probability of the IPO occurring has not reached a "probable" threshold even on
the filing of the initial Registration Statement. However, if the put option
were reflected as part of the minority interest (which again we do not believe
is the case), probability must be reassessed at December 31, 2004. It is our
position that the "probable" threshold still would not have been crossed at
December 31, 2004. It would be assessed again when we reached the point where
the Staff had cleared its comments sufficiently to reduce the risk of
significant changes to the Registration Statement and we began our investor
road show.
The exchange agreements entered into with two of our minority interest
holders replaced the contingent conversion options, and require the minority
interest holders to sell their interests to us in the event we complete the
planned initial public offering of our common stock. These exchange agreements
represent contingent forward contracts and are not unlike business combination
agreements as the purchase price for the minority interest is based on the fair
value of the minority interest. In one of the exchange agreements, the minority
shareholders will receive 68,036 shares of our common stock for its minority
interest. In the other exchange agreement, the minority shareholders will
receive 450,000 shares of our common stock and cash consideration in an amount
equal to the value of 230,658 shares of our common stock based on the per share
public offering price.
SFAS No. 150 defines a freestanding financial instrument as "a
financial instrument that is entered into separately and apart from any of the
entity's other financial instruments or equity transactions, or that is entered
into in conjunction with some other
Mr. Jeffrey Reidler
March 4, 2005
Page 4
transaction and is legally detachable and separately exercisable." We believe
that the exchange contracts are not freestanding financial instruments (i.e.,
they cannot be transacted for separately) and therefore fall outside the scope
of SFAS No. 150. SFAS No. 150 also notes that to the extent any of the
instruments described in SFAS No. 150 are deemed not to be freestanding, other
guidance would continue to apply, such as SFAS No. 133 and EITF No. 00-6. EITF
No. 00-6 notes it would still be applicable when evaluating embedded
derivatives for purposes of Statement 133.
EITF No. 00-6 paragraph 8a states that: "If a parent enters into a
forward contract to purchase outstanding common shares (that is, minority
interest) of its subsidiary at a future date, the Task Force reached a
consensus that the parent should not record the acquisition of shares until the
forward contract is settled and the shares are received. The Task Force also
reached a consensus that during the period of the contract, the parent should
continue to allocate subsidiary income or loss to the minority interest to be
acquired." EITF No. 00-6 has a status update with respect to paragraph 8a which
discusses the accounting for forward contracts that fall within the scope of
SFAS No. 150. As noted above, we believe that these forward contracts do not
fall within the scope of SFAS No. 150. Accordingly, the status update would not
apply to our exchange agreements.
Based on the foregoing analysis, we believe that our exchange
agreements represent forward contracts to purchase minority interests that are
contingent on our planned IPO and should be accounted for under EITF No. 00-6,
paragraph 8a. Accordingly, the exchange agreements and their terms should be
disclosed in the notes to the financial statements, but should not be recorded
until the forward contracts are settled in connection with the initial public
offering and the minority interests are purchased. The purchase of the minority
interests would then follow purchase accounting in accordance with SFAS No. 141
(i.e., the exchange agreements are akin to business combination agreements).
Additionally, we reviewed our disclosures surrounding the buy-sell
feature of certain of our joint venture agreements and believe our disclosure
may not have provided a clear understanding of these agreements. The joint
venture agreements actually allow either member to offer to purchase the other
member's interests. In some instances, the purchase offer must be for an amount
equal to or greater than an established multiple of the joint venture's twelve
month trailing EBITDA multiplied by such member's interest in the joint
venture. The offer to purchase must also contain an offer to sell all of the
offering member's interest to the non-offering member on the same terms and
conditions contained in the purchase offer, except that the purchase price
shall be equal to the established multiple of the EBITDA of the joint venture
multiplied by the offering member's interest. Upon receipt of the offer notice,
the member receiving the offer shall be required to either sell its interest or
purchase the other member's interest for the amounts set forth in the offer.
Mr. Jeffrey Reidler
March 4, 2005
Page 5
Until we receive an offer from the other member, or submit an offer to
the other member, under the buy/sell option, we are under no obligation to buy
the other member's interest or to sell our interest to the other member in the
applicable joint venture. That is, the "option" does not represent a put
feature on the minority interest, and at no time can we be required to purchase
the minority member's interest. Thus, the provision does not create a liability
or obligation requiring recognition in the financial statements.
If you have questions or comments about the matters discussed herein,
please call the undersigned at (404) 881-7872.
Sincerely,
/s/ Peter C. November
Peter C. November
cc: Zafar Hasan
Tabatha Akins
James Atkinson
Keith G. Myers
R. Barr Brown
Steven L. Pottle
Nilene R. Evans