Jeffrey A. Baumel
973.639.5904
Fax 973.297.3814
jbaumel@mccarter.com
July 7, 2005
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attn: David Roberts
CC: Owen Pinkerton
Howard Efron
Cicely Luckey
Re: American Caresource Holdings, Inc. (the "Company" or the "Registrant")
Registration Statement on Form SB-2 filed February 14, 2005
File No. 333-122820
Dear Mr. Roberts:
Filed today is Amendment No. 3 to the above referenced registration
statement (the "Registration Statement") marked to show changes from the
registration statement filed with the Commission on June 15, 2005. This letter
responds to the Commission's letter to the Company, dated June 29, 2005 (the
"SEC Letter"), regarding the Registration Statement. Set forth below is the text
of the comment contained in the SEC Letter and the Company's response thereto.
The heading and numbered paragraphs below correspond to the headings and
paragraph numbers in the SEC Letter. Page references in the Company's responses
to the SEC comments correspond to the page numbers in the enclosed marked copy
of the amended Registration Statement.
General
1. We note from your response to Comment 1 that your decision to change
accountants was made on January 31, 2004. Given that your decision to
change accounts was made during your two most recent fiscal years, please
provide the disclosure required by Item 304 of Regulation S-B or tell us
why you believe this disclosure is not required.
Since the Registrant's inception in November 2003, the Registrant has
retained McGladrey & Pullen LLP as its accountant. The Registrant has not
changed its accountants. However, its predecessor, American CareSource
Corporation, had previously retained BDO Seidman, LLP ("BDO").
Accordingly, to the extent that the Registrant has not changed auditors,
it would appear that the disclosure required by Item 304 of Registration
S-B is not required.
Securities and Exchange Commission
July 7, 2005
Page 2
2. We have reviewed your response to Comments 24 in which you state that,
"the resale of all shares listed in the table are being registered." This
does not appear to be consistent with the disclosure found throughout the
prospectus, including on the facing page, the cover page and selling
stockholders section. For example, your disclosure on the cover page
specifically refers to the resale of shares held by Patient Infosystems
("PATY") only. If you intend to register for resale all of the shares
being distributed to stockholders of Patient Infosystems, or certain
stockholders of PATY in addition to the shares being registered for resale
held by Patient Infosystems, please substantially revise your disclosure
to reflect this. In connection with this, please add a footnote to the
"Calculation of Registration Fee" table to reflect this, revise the cover
page and add all of the shareholders of Patient Infosystems who will be
selling their shares pursuant to this registration statement to the
Selling Shareholders table.
The Registration Statement has been revised at page 28 in response to the
Staff's comment above to make clear that only the shares held by Patient
Infosystems are being registered for resale. The Registration Statement
relates primarily to the distribution of the Registrant's shares by
dividend to all stockholders of Patient Infosystems. The stockholders of
Patient Infosystems will not hold restricted shares of the Registrant's
stock and would therefore generally not need a registration statement in
connection with the resale of their shares.
Facing Page
3. We note your response to Comment 2. Please check the box on the facing
page indicating that a portion of the proposed offering is being conducted
pursuant to Rule 415.
The appropriate box on the Facing Page of the Registration Statement has
been checked to indicate that a portion of the proposed offering is being
conducted pursuant to Rule 415.
Cover Page
4. Please include a fixed price at which selling shareholders will sell their
shares pursuant to this registration statement.
Additional information has been added to the Cover Page of the Prospectus
discussing the potential sale of shares by the selling stockholders in
accordance with the Staff's comment above.
Securities and Exchange Commission
July 7, 2005
Page 3
Summary Financial Information, page 6
Balance Sheet Data as of December 31, 2004 and 2003
5. The balance sheet information presented as of December 31, 2003 reflects
the financial position of American Caresource Holdings, Inc. and not that
of American CareSource Corporation. As such, please remove the term
predecessor from that section.
The Registration Statement has been revised at page 6 in response to the
Staff's comment above.
Risk Factors, page 6
ACS may incur increased expenses if the Transitional Services Agreement with
Patient Infosystems is terminated, page 12
6. You state that pursuant to the Transitional Services Agreement, Patient
Infosystems will provide you with services "for no fee in the initial term
of the agreement, and if the Transitional Services Agreement is extended,
$12,000 per annum for a second term, and, $24,000 per annum for a third
term and subsequent terms." Please revise to indicate how long a "term is
and when each of the terms noted about would expire.
The Registration Statement has been revised at page 11 in response to the
Staff's comment above. The initial term of the Transitional Services
Agreement will expire December 31, 2005. If the Transitional Services
Agreement is extended past the initial term, each subsequent term will be
for a one-year period.
Future sales of ACS common stock, or the perception that these sales may occur,
could depress the price of ACS' common stock, page 13
7. You state that "the issuance of a substantial number of additional shares
may be extremely dilutive to ACS shareholders and require substantial and
material charges to earnings which will impact net loss attributable to
common shareholders." Please advise us as to how the issuance of
additional shares could cause a material charge to earnings.
The Registration Statement has been revised at page 12 in response to the
Staff's comment above.
Securities and Exchange Commission
July 7, 2005
Page 4
Management's Discussion and Analysis or Plan of Operations
Liquidity and Capital Resources, page 17
8. Please disclose all material terms of the credit line you entered into
with Wells Fargo Bank including, but not necessarily limited to, the
information found in Note 3 to your financial statements.
The Registration Statement has been revised at page 18 in response to the
Staff's comment above to disclose the material terms of the credit line
that the Registrant entered into with Wells Fargo Bank.
Legal Proceedings, page 24
9. We note that you have removed disclosure regarding your former employee
who filed a lawsuit against you. Please advise us as to why you struck
this disclosure and as to the status of the case (i.e. - whether it was
dropped, dismissed or settled).
The disclosure was removed because the above referenced lawsuit, Schrier
v. American CareSource Corporation (Ind. Superior Ct.), settled on May 18,
2005 for $20,000.
Management
Employment Agreements, page 27
10. Please summarize the material terms of the employment agreements you have
with Messrs. Schellhammer and Boone, such as salaries/bonuses, termination
and change in control provisions. We note, for example, that you have
committed to pay them salaries of $250,000 and $200,000 respectively. We
refer to Item 402(g) of Regulation S-B.
The Registration Statement has been revised at pages 25-26 in response to
the Staff's comment above to include summaries of the material terms of
the employment agreements the Registrant has with Mr. Schellhammer and Mr.
Boone.
Securities and Exchange Commission
July 7, 2005
Page 5
Financial Statements
Intangible Assets, page F-11
11. We note your response to comment 29. Please disclose your estimated useful
life for provider contracts as a critical accounting policy within
Management's Discussion and Analysis or Plan of Operations. Refer to
interpretive guidance in SEC Release 33-8350.
The Management's Discussion and Analysis section has been revised at page
19 in response to the Staff's comment above.
12. Please help clarify for us how you were able to establish an estimated
life significantly in excess of the underlying contractual life using the
guidance in EITF 03-9. In addition, specifically address the following in
your response:
o Clarify if you account for your provider contracts on an individual
basis or as a pool of contracts.
o Tell us your accounting treatment upon cancellation of an individual
provider contract.
o Explain why you believe a straight-line amortization methodology
reflects the pattern in which the provider contracts contribute an
economic benefit to your Company. How does your historical attrition
data support a straight-line methodology.
As mentioned in the our previous response, the provider contracts are for
an initial one year period and are evergreen contracts after that time. In
gathering data for the independent appraiser who performed the valuation,
the Registrant analyzed the renewal rates of the contracts and found a low
cancellation rate of less than 5% per year, implying a twenty year life or
longer. Based on this information, the appraiser used a twenty year life
for the valuation of the provider contracts.
The Registrant considered the guidance in EITF 03-9 paragraph 5, that "
..the useful life...for amortization purposes should be consistent with
the estimated useful life considerations used in the determination of the
fair value for that asset" . Due to the short operating history, an
accurate cancellation rate over the long term cannot be determined. The
Registrant used a somewhat shorter life (15 years) than the appraiser
based on its belief that this better represented the useful life of the
provider base over the long term. Also, the Registrant is not aware of any
industry data that would be helpful in this analysis.
Securities and Exchange Commission
July 7, 2005
Page 6
The Registrant is accounting for the contracts on a pooled basis. The
Registrant will monitor the cancellation of contracts that were initially
valued and if the contracts are canceling faster than the anticipated 15
year life the amortization will be adjusted and/or an impairment charge
incurred. Due to the pooled accounting, there is no accounting treatment
upon the cancellation of an individual provider contract.
Renewal of contracts - In arriving at the fifteen-year life, the
Registrant considered the costs of renewing the contracts under paragraph
11(d) of FASB Statement 142. The costs of renewing the contracts are very
low. The contracts themselves are evergreen, so legal work is not required
and the adjustment of the payment rates is usually the major renewal item.
The renewal rates are typically indexed with Medicare rates and adjust
with inflation. The Registrant believes that the contracts will be renewed
without "substantial cost".
Amortization methodology - Statement No. 142 states, in part that "the
method of amortization shall reflect the pattern in which the economic
benefits of the intangible asset are consumed or otherwise used up. If
that pattern can not be reliably determined, a straight line amortization
method shall be used." The Registrant has used the straight-line method
because it does not believe that the pattern of economic benefit can be
reliably determined. As mentioned earlier, the Registrant has limited
history to work from, the Registrant is not aware of any industry data
that can be used and its actual history shows a very high renewal rate
which may not be sustainable over a long period of time. The most
"reliable" data the Registrant has is its actual experience and this data
seems too optimistic regarding future renewals to use in determining an
amortization method.
Line of Credit, page F-27
13. Disclose how you will account for the warrants issued to Mr. Schaffer and
Mr. Pappajohn for the purchase of 974,950 shares of common stock at a
strike price of $0.45 per share. Advise us of your basis in GAAP for your
accounting treatment of the warrants and their amortization and
specifically address the 190,657 amount recorded to Unearned Debt Issuance
Cost at March 31, 2005.
The issuance of warrants to Mr. Pappajohn and Dr. Schafer (both of whom
are directors and principal shareholders of the Registrant, Mr.Pappajohn
being the largest shareholder) was approved by the Board of Directors
after considering a number of financing alternatives. The options were
issued in exchange for a guarantee of the Company's debt for a period of
18 months, vested immediately and were exercisable 60 days after issuance.
Securities and Exchange Commission
July 7, 2005
Page 7
The options were valued at the grant date using the Black-Scholes model
and this fair value ($214,489) is being amortized over the 18 month life
of the guarantee. $214,489 was credited to additional paid-in capital and
debited to a contra-equity account titled "unearned debt issuance costs".
In the accompanying Amendment #3 the Registrant has changed the title to
"Deferred debt issuance costs" and added wording to Note 1 describing the
Registrant's accounting policy.
In determining the accounting for the "debit" part of this transaction the
Registrant considered whether the value of this guarantee should be
treated as an asset or contra-equity. Although they do not address the
specifics of this situation, EITFs 00-18 and 96-18 provide guidance that
the debit should be to an asset account, just as if the guarantee were
paid for in cash vs. warrants. This asset approach results in an immediate
increase in equity which will then be amortized over the next eighteen
months. Given the related party nature of this transaction and the
temporary nature of any equity that would be recorded using an asset
approach, the Registrant elected to adopt the more conservative approach
of recording the amounts as contra-equity.
Accounting for this item as contra-equity is akin to a deferred/unearned
compensation arrangement with employees under FASB Statement No. 123.
Although in an unearned compensation situation, the employee has not yet
earned the compensation, the amortization of the unearned amount tracks
the amount that is expensed through the income statement. In this case the
amount that will be expensed will come out of the contra-equity account
and the initial accounting for the transaction is equity neutral.
The Registrant also notes that paragraph 14 of EITF 00-18 notes an
inconsistency between 00-18 and Issue 85-1 with respect to the treatment
of shareholder notes or receivables and poses the question as to whether
the nature of the asset received in exchange for an equity instrument
should affect whether the asset is displayed as contra-equity. In this
instance, the Company received an intangible, non-operating asset.
Although the Registrant sees support for the recognition as an asset,
given that the transaction occurred with major shareholders, the
intangible, non-operating nature of the asset received and the temporary
nature of the increase to equity, the Registrant believes that the
accounting as a contra-equity is more appropriate.
Securities and Exchange Commission
July 7, 2005
Page 8
We appreciate your prompt response to our filing. If you have any
questions, or if we may be of any assistance, please contact the undersigned at
(973) 622-4444.
Very truly yours,
/s/ Jeffrey A. Baumel
Jeffrey A. Baumel
JAB:an