ALSTON&BIRD LLP
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1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
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www.alston.com
DIRECT DIAL: 404-881-7872
PETER C. NOVEMBER E-MAIL:PNOVEMBER@ALSTON.COM
May 9, 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., we hereby
file, via EDGAR, Amendment No. 3 to the above-referenced Registration
Statement on Form S-1 ("Amendment No. 3"). Amendment No. 3 includes
revisions made in response to the comment letter dated February 25, 2005 from
the Staff. Amendment No. 3 also includes revisions made in response to the
comment letter from the Staff dated April 27, 2005.
We provide below additional responses to the Staff's comments, which have
been prepared by the Company with the assistance of its legal counsel. As
requested, these responses are keyed to correspond to the Staff's comment
letters. A copy of this letter, along with courtesy copies of Amendment No. 3
(marked to show changes) and other supplemental materials referenced herein, are
being sent to the Staff via overnight mail.
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, New York, NY 10016 Raleigh, NC 27604-1062 North Building, 10th Floor
Suite 4000 212-210-9400 919-862-2200 Washington, DC 20004-2601
Charlotte, NC 28280-4000 Fax: 212-210-9444 Fax: 919-862-2260 202-756-3300
704-444-1000 Fax: 202-756-3333
Fax: 704-444-1111
Mr. Jeffrey Reidler
May 9, 2005
Page 2
RESPONSES TO THE STAFF'S LETTER DATED FEBRUARY 25, 2005
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Risk Factors. p. 8
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"If we fail to complete the evaluation of our internal control " p. 18
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COMMENT
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1) We note your response to comment 8. Unless you have reason to believe that
you may not complete your evaluation on time, this risk factor is not
appropriate. If you have reason to believe the evaluation will not be
completed, then you should revise your risk factor discussion to indicate
that you have reason to believe the evaluation will not be completed in a
timely manner.
RESPONSE
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At the Staff's request, we have removed the references in the risk factor
relating to our evaluation not being completed in a timely manner. However, we
have retained those portions of the risk factor that relate to the possible
risks associated with a determination that we have a material weakness in our
internal control over financial reporting. While we have no current basis to
conclude that we will have a material weakness, we believe it is a risk that
should be considered by investors when investing in our common stock.
Non-GAAP Financial Measures. page 27
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COMMENT
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2) We note your response to comment 9. The company asserts that EBITDA is a
liquidity measure, as such please directly reconcile it to the most
directly comparable GAAP-based liquidity measure, without reconciling
EBITDA first to a performance measure. It appears that the company feels
that cash flow from operations is the most relevant liquidity measure,
reconcile EBITDA directly to cash flow from operations without reconciling
to net income.
RESPONSE
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We have removed all references to EBITDA in the Registration Statement.
Accordingly, we have also removed the EBITDA reconciliation.
COMMENT
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3) In addition, the discussion provided by the company about the usefulness
of this measure is very brief. Please provide a much more detailed
discussion of how
Mr. Jeffrey Reidler
May 9, 2005
Page 3
management uses this measure and what benefit is obtained by its inclusion
in the document.
RESPONSE
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We have removed all references to EBITDA in the Registration Statement.
Accordingly, we have removed all discussion regarding the usefulness of EBITDA.
COMMENT
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4) In the reconciliation on page 26 we note that the company removes two line
items "Impairment loss" and "Non-operating income, including gain on sale
of assets." The removal of these line items appears to have the affect of
presenting an "adjusted" EBITDA instead of just EBITDA which would only
remove depreciation/amortization, interest, and taxes. Please justify for
us the appropriateness of removing these additional charges that appear to
be recurring in nature.
RESPONSE
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We have removed all references to EBITDA in the Registration Statement.
Accordingly, we have also removed the EBITDA reconciliation.
Business, page 46
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COMMENT
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5) We note your response to comment 14. Please provide a more complete
analysis supporting your determination. Your analysis should address
revenues derived from each agreement, how many other providers are there
that would be capable of providing the same services and level of service
at a similar cost, and a description of the effects of any interruptions
for each agreement. Your analysis should address your dependence on the
joint ventures, cooperative endeavors, license leasing arrangements and
management services agreements.
RESPONSE
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During 2004 the individual contribution of each of our joint venture
relationships (including our equity joint ventures, cooperative endeavors,
license leasing arrangements and management services agreements) to our overall
net service revenue ranged from 0.0% to 9.1%. None of our cooperative endeavor
or management arrangements accounted for 5.0% or more of our net service
revenue, but instead ranged from 0.0% to 1.4% and 0.0% to 0.5%, respectively, of
our total net service revenue during 2004.
Mr. Jeffrey Reidler
May 9, 2005
Page 4
Of our two license leasing arrangements, only one of these arrangements
accounted for greater than 5.0% of our total net service revenue during 2004,
the other accounted for only 2.0%. We have filed as Exhibit 10.13 to Amendment
No. 3 the license leasing agreement related to the leasing arrangement that
exceeded more than 5.0% of our total net service revenue in 2004.
With respect to our equity joint ventures, our financial dependence ranges
from 0.1% to 8.8% of our total net service revenue, with only two of these
equity joint ventures, one for the ownership and operation of a home health
agency and the other for a long-term acute care hospital, accounting for greater
than 5.0% of our total net service revenue. We have filed these joint venture
agreements as Exhibits 10.14 and 10.15 to Amendment No. 3.
Critical Accounting Policies
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Revenues, pages 46-47
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COMMENT
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6) Refer to your response to comment 12. We note that the company increased
its disclosure here of how these estimates are calculated. Please revise
this disclosure to also quantify the impact that adjustments to these
estimates have had historically to allow an investor to better understand
the materiality of these estimates.
RESPONSE
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In 2002, 2003 and 2004, the net variance between our estimate of the
Medicare adjustments for our home nursing services provided and the actual
Medicare adjustments was approximately $13,481, ($48,629) and ($47,892),
respectively. Due to the immaterial nature of the variance, we have not revised
our disclosure in the Registration Statement to further quantify the impact that
adjustments have had on our Medicare adjustment estimates.
Accounts Receivable and Allowances for Uncollectible Accounts pages 47-48
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COMMENT
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7) Refer to your response to comment 13. We note that the company addresses
some key elements in the way that its payment structure is organized in
its response to us. Please revise the disclosure either here or in the
Business section to reflect the more detailed information about the
company's billing system and operations provided in this response.
Mr. Jeffrey Reidler
May 9, 2005
Page 5
RESPONSE
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We have revised our disclosure on pages 43 and 57 to include the
disclosure requested by the Staff.
Notes to the Consolidated Financial Statements
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General
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COMMENT
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8) The financial statements are now stale. Please update the audited
financial statements to include through the year ended December 31, 2004.
RESPONSE
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In Amendment No. 3 we filed audited financial statements that included the
year ended December 31, 2004. We also included unaudited interim financial
statements for the three months ended March 31, 2005.
2. Significant Accounting Policies
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Accounts Receivable and Allowances for Uncollectible Accounts, page F-10
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COMMENT
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9) Refer to your response to comment 19. It appears that these amounts
represent unearned revenue which seems to have different characteristics
than amounts owed to a third party. These balances would become payable
only in the instance that service was terminated. Please verify this
understanding of the way these prepayments function. If this is true, then
it appears that the appropriate balance sheet classification would be as
unearned revenue.
RESPONSE
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In calculating the December 31, 2002, 2003 and 2004 unearned revenue
balance, we reviewed each patient's episode of care and determined the amount of
cash received for that episode of care that exceeded the revenue earned. Based
on this calculation, as of December 31, 2002, 2003 and 2004 we had unearned
revenue of approximately $155,813, $152,052 and $162,002, respectively. We
believe that these amounts are immaterial for separate presentation on our
balance sheet and have continued to present accounts receivable net of these
amounts.
We would like to clarify the previous disclosure in our financial
statements related to amounts billed and received in advance and recorded as a
reduction to accounts
Mr. Jeffrey Reidler
May 9, 2005
Page 6
receivable (e.g., $4,986,000 at 12/31/03). These amounts represented the
total amount billed and received for all episodes of care where the
Company has not received final payment for the services rendered. These
amounts did not represent unearned amounts at 12/31/03. This disclosure
will be deleted as we have concluded it is not meaningful.
10. Commitments and Contingencies
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Contingencies, pages F-25 - F-26
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COMMENT
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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
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On March 4, March 25, April 7, April 19 and April 28, 2005 we submitted
letters to the Staff addressing comment No. 10.
RESPONSES TO COMMENTS 4, 5 AND 6 OF THE STAFF'S LETTER DATED APRIL 27, 2005
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COMMENT
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Requirement to Provide Article 11 of Regulation S-X Pro Forma Financial
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Information
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4. Please provide a robust discussion of the whether the company believes that
it is probable that the St. Landry will redeem their minority interest holdings
upon the completion of the initial public offering. Please base this analysis of
probability on the terms described in Financial Reporting Codification
506.02.c.ii.
RESPONSE
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The minority interest holders in St. Landry's are physicians who reside
and work in the local market in which the long-term acute care hospital operated
by St. Landry's is located. These physicians entered into the equity joint
venture on the basis of their belief that owning an interest in the
community-based hospital was important to their practice and the community.
Based on our ongoing conversations with these physicians regarding the operation
of the hospital, we believe that the physicians continue to believe it is
important to maintain an ownership interest. Therefore, we believe that
following our initial public offering the physicians will maintain their
ownership interest in the St. Landry's equity joint venture.
Mr. Jeffrey Reidler
May 9, 2005
Page 7
In addition, since the filing of our Registration Statement in November
2004, the physicians who hold minority interests in St. Landry's have been aware
of our initial public offering and their right to redeem their minority
interests upon completion of our initial public offering. Since November 2004,
none of the physicians have expressed an interest in exercising their redemption
rights. In order to avoid potential gun jumping issues, we have not polled the
physicians to determine their intent regarding the exercise of their redemption
rights.
Finally, we think it is worth noting that there are 15 individual minority
interest holders in St. Landry's. If the redemption rights are exercised it is
anticipated that the aggregate consideration received by the minority interest
holders would be approximately $1,100,000, based on an assumed average trading
price of $13 per share for the thirty days following our initial public
offering. Therefore, on average no physician owner would receive more than
$74,000 for the redemption of their membership interests. Given the relatively
insignificant amount to be received by the physicians, we believe their desire
to maintain ownership in the hospital for business and community reasons will
outweigh the economic value of redeeming their interests. It is also worth
noting that even if the physicians do not exercise their redemption rights they
will continue to receive a return on their investment via routine quarterly
distributions from the profits of the hospital.
For the reasons stated above, we do not believe that it is probable that
the minority interest holders in the St. Landry's equity joint venture will
exercise their redemption rights upon the completion of our initial public
offering.
COMMENT
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5. Refer to comment 11 of the April 19, 2005 response letter. Based one this
response, it appears that the company evaluated the need to provide pro forma
financial information on each step acquisition separately. If the company
determined that the St. Landry's step acquisition is probable, it appears that
each of these step acquisition: should be viewed as related businesses because
they will occur based on the outcome of a single event, initial public offering.
Please provide to us an analysis that addresses whether St. Landry, Beta, and
HTAT should be considered related businesses. If the St. Landry step acquisition
is not probable, address this issue for the HTAT and Beta step acquisitions.
Specifically address the criteria, discussed in Rule 3-05(a)(3)(iii) of
Regulation S-X.
RESPONSE
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In our letter to the Staff dated April 28, 2005, we included a table that
applied the three significance tests to the acquisitions of the minority
interests held in the St. Landry's, Beta and HTAT joint ventures. As a result of
discussions with the Staff, we have revised the table in the manner set forth on
Appendix A hereto. Based on this
Mr. Jeffrey Reidler
May 9, 2005
Page 8
revised table, we still believe the conclusions set forth in our response to
comment No. 5 in our letter dated April 28, 2005 are accurate.
You will note in the "Use of Proceeds" section of Amendment No. 3 we have
made reference to a non-binding letter of intent that we have entered into in
connection with the acquisition of certain home nursing agencies in West
Virginia. Although the Staff has not requested information regarding our
pro-forma financial statement analysis relating to this acquisition, we have
elected to anticipate the Staff's request and include the analysis in this
letter. First, at this time we do not believe the acquisition is probable. We
have not completed our due diligence, the parties have not completed the
negotiation of definitive agreements and our ability to complete the transaction
is contingent upon our satisfaction of certain certificate of need approval
requirements in West Virginia. These certificate of need requirements could
either substantially delay the acquisition or, if approval is not received,
could cause us to be unable to complete the acquisition. Regardless of the
probability of this acquisition, as set forth on Appendix A, the transaction
does not meet any of the three significance tests. Accordingly, for the
foregoing reasons, we do not believe the West Virginia transaction requires us
to include pro-forma financial statements.
If the Staff disputes our belief that this transaction is not probable, we
have also considered whether this transaction would be considered a "related
business" under Rule 3.05(a)(3) of Regulation S-X with the acquisitions of the
minority interests in the Beta, HTAT and St. Landry's joint ventures. Since
there is no common ownership or management between the West Virginia entity and
either Beta, HTAT or St. Landry's and because the West Virginia transaction is
not contingent upon the completion of our initial public offering or the closing
of the other acquisitions, we do not believe it is a "related business".
Accordingly, the West Virginia transaction should not impact the pro-forma
analysis for Beta, HTAT or St. Landry's.
COMMENT
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6. We note the proposed disclosure that the company included in its March 25,
2005 letter as Appendix B. Related to this disclosure, we have the following
comments:
a) Related to the $1.1 million that the company would be required to pay related
to the St. Landry agreement, consider disclosing the number of shares and the
stock price used to calculate this amount.
b) Consider disclosing this amount in the table at the end of the note instead
of the $0 disclosed there.
c) The paragraph that describes the company's accounting will need to be
adjusted to reflect the results of its analysis based on our discussions and the
company's analysis requested in other comments.
d) Please clearly indicate that the put options related to the HTAT and Beta
agreements are still outstanding related to the change of control provision and
that they
Mr. Jeffrey Reidler
May 9, 2005
Page 9
are only replaced related to the IPO contingency. It should be clear that there
are three puts and two forwards outstanding related to these minority interests.
e) Consider disclosing the reasons for entering into these exchange agreements
as well as a discussion of how the settlement amounts were determined.
f) The table indicates that the amounts disclosed in the last two columns
represent the "fair value" of these instruments. Is it more appropriate to
disclose these as the anticipated settlement amounts? g) Along the same thought
it seems that the put option values for Beta and HTAT would not be "N/A" but
some other amount given that the put options are still outstanding.
RESPONSE
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In Amendment No. 3 we have included this additional disclosure with the
changes proposed by the Staff as footnote No. 10 to our consolidated financial
statements.
If you have questions or comments about the matters discussed herein,
please call the undersigned at (404) 881-7872 or Steve Pottle at (404) 881-7554.
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
Appendix A
3-05 FINANCIAL STATEMENT REQUIREMENT ANALYSIS
Consolidated assets 47,519
Consolidated income from operations 9,027
SIGNIFICANCE TESTS
ASSETS
Amount Significance
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Acadian 1,180 2.5%
HTAT 275 0.6%
St. Landry 105 0.2%
Home Care Plus 1,317 2.8%
EARNINGS
Amount Significance
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Acadian 957 10.6%
HTAT (80) -0.9%
St. Landry 78 0.9%
Home Care Plus 35 0.4%
INVESTMENT
Amount Significance
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Acadian 8,149 17.1%
HTAT 884 1.9%
St. Landry 1,100 2.3%
Home Care Plus 4,500 9.5%