SecProbe.io

CORRESP
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filename1.htm

      Unassociated Document

    June
      22,
      2006

    Mr.
      Jeffrey P. Riedler

    Assistant
      Director

    Securities
      and Exchange Commission

    450
      Fifth
      Street, N.W.

    Mail
      Stop
      03-04

    Washington,
      D.C. 20549

              Re:

              AdCare
                Health Systems, Inc.

              Amendment
                No. 3 to Form SB-2

              File
                No. 333-131542

    Dear
      Mr.
      Riedler:

    Today
      we
      filed our third Amended Registration Statement for AdCare Health Systems, Inc.
      (“AdCare”) pursuant to EDGAR. As a courtesy, we are enclosing three (3) marked
      copies and three (3) clean copies of amended Registration Statement on Form
      SB-2
      of AdCare which incorporates, among other things, changes made to the
      Registration Statement as a result of comments contained in your letter of
      June
      6, 2006. The numbered paragraphs in this letter correspond to the numbered
      comments in your letter and the comments are provided in italics before each
      answer.

    Summary,
      page 1

            1.

              Please
                refer to the first comment in our last letter in which we asked you
                to
                revise the discussion of the revenues earned by the facilities you
                manage
                for third parties to explain the significance of this measure and
                the
                significance of the combined revenues of facilities you own and facilities
                you manage. We asked you to clarify how the revenues recognized by
                the
                facilities you manage for third parties affect your revenue. We noted
                your
                statement that the long-term care facilities you own had annual revenues
                of $21,900,360. We also asked you to disclose the revenues you recognized
                for managing facilities for third parties as well as where this amount
                appears on your income statement. In your response you indicate that
                you
                have deleted the discussion regarding revenues earned from facilities
                that
                you manage for third parties. However, the discussion we commented
                on
                remains in your document exactly as it appeared in the first amendment.
                Accordingly, we reissue the comment. Please note that we do not believe
                that deletion of a discussion of the revenue you receive from facilities
                you manage for third parties is an appropriate response to this comment.
                Please explain how the revenues earned by facilities you manage result
                in
                revenues for you. For example, are your management fee based on a
                percentage of these revenues, a percentage of profits, or are they
                determined using some other calculation. Please quantify the revenues
                you
                earned based on the third parties’ revenues of
                $39,048,000.

    We
      have
      revised the summary page beginning on page 1 of the Registration Statement
      to
      delete all revenue information. In the place of the revenue information, we
      have
      included a detailed discussion of the operation of our two business segments
      and
      how income/losses are generated within those business segments.

            2.

              Additionally,
                discussions of revenues should be balanced with a discussion of net
                income
                or net losses and expenses. You need to provide a balanced discussion
                of
                your financial condition. It is not appropriate to selectively discuss
                specific aspects of your finances. If you discuss your revenues in
                the
                summary, we think you also need to discuss you net losses and expenses
                in
                order to provide a balanced
                picture.

    Please
      see response to item 1 above.

            3.

              In
                light of your losses and existing defaults on some of the covenants
                in
                your debt agreements, we think you need to balance your discussion
                of your
                goals in the next to last paragraph of the summary with an equally
                detailed discussion of the potential impediments to your achievement
                of
                these goals. Please revise the disclosure
                accordingly.

    As
      indicated with respect to item 1 above, we have revised the summary beginning
      on
      page one of the registration statement. The third and fourth paragraphs of
      the
      new language which we added explain the historic financial position of the
      Company and the steps that are being taken to improve operations and
      parties.

            4.

              Under
                “Use of Proceeds” on page 2, please delete the phrase “our only recently
                having achieved profitable operations.” We note that you had losses in
                2005 and that your net income in 2003 and 2004 was due primarily
                to the
                gain recognized on the sale of real
                property.

    Per
      our
      discussions, the “only recently having achieved profitable operations” language
      is not included anywhere within the Registration Statement.

    Capitalization,
      page 14

            5.

              Refer
                to your response to comment 3. Please explain to us why the increase
                in
                equity in the line item “Common Stock” does not agree with the “Net
                Proceeds” disclosed in the “Use of Proceeds” portion of this
                document.

    There
      was
      a typographical error within Amendment 2 which has been corrected in Amendment
      3. This section, along with the “Use of Proceeds” sections has also been revised
      to reflect a reduction in the fees to be paid to the underwriter.

    Management’s
      Discussion and Analysis, page 15

    Overview,
      page 15

            6.

              We
                think you need to expand this discussion to include an explanation
                of how
                you generate revenue in each of your several segments. Also, please
                include a table that shows how much revenue was generated by each
                segment.
                The table should also include the expenses attributable to each segment,
                the net income of each segment and any other information necessary
                to show
                the financial contributions each segment makes to your overall financial
                condition.

    We
      have
      included new language in the third paragraph on page 16 of the Registration
      Statement which better explains the methods by which the registrant generates
      revenue. A table showing the net income (loss) of our business segment
      immediately follows this paragraph.

            7.

              In
                the second full paragraph of page 16 you state that your history
                of
                operating losses is primarily due to start-up costs and developing
                assisted living properties for your own account. Please disclose
                when you
                made the decision to change your focus and quantify the impact of
                that
                decision.

    We
      have
      included a new paragraph, immediately following the table referenced with
      respect to item 6 above, which explains the change of business focus beginning
      in 2003 and the resulting impact on the financial performance of the
      Company.

    Liquidity
      and Capital Resources, page 19

            8.

              Please
                expand the discussion at the top of page 22 of your failure to comply
                with
                certain financial covenants with WesBanco. Please identify the financial
                covenants you are not in compliance with. Disclose what the specific
                covenants require, and what your current status is in regards to
                each of
                them.

    We
      have
      included new language beginning on page 22 of the Registration Statement
      identifying financial covenants that are/were out of compliance and the current
      status of those covenants.

    Cash
      Flow, page 24

            9.

              Refer
                to your response to comment 4. We noted that the discussion of cash
                flows
                comparing fiscal 2005 to fiscal 2004 is no longer provided. Please
                revise
                your liquidity discussion to include a discussion of cash flows for
                each
                of the last two fiscal years. Refer to Item 303(b)(1)(ii) of Regulation
                S-B.

    We
      have
      revised the discussion of Cash Flow beginning on page 25 to include a comparison
      of 2005 and 2004.

    Business,
      page 25

            10.

              Please
                revise to explain the differences between owning facilities and managing
                them for third parties. At a minimum, the discussion should address
                how
                your revenues for managed facilities are determined and whether expenses
                are paid by you or the third party
                owners.

    We
      have
      added a new paragraph beginning on page 29 of the Registration Statement that
      explains the difference in revenues between the various components of our two
      business segments as well as the differences between our two business
      segments.

    Security
      Ownership of Certain Beneficial Owners and Management, page
      44

            11.

              In
                comment 5 we asked you to identify, in the registration statement,
                the
                natural person possessing voting and investment rights over the securities
                held by Capital City Partners, LLC. Your response indicates that
                it is
                included in footnote 8 on page 45. However, the footnote does not
                contain
                this information. Please revise the disclosure as we previously
                requested.

    We
      have
      revised footnote 8 on page 50 of the Registration Statement to clarify that
      Timothy Crawford, CEO of CCSM Partners, LLC, the manager of Capital City
      Partners, LLC, is the individual responsible for voting those
      shares.

    Alternate
      Prospectus Pages

            12.

              We
                remind you again that the blank spaces here must be completed prior
                to any
                request for effectiveness of the registration statement. Please include
                this information in your next amendment. You need to allow sufficient
                time
                for the staff to review this information prior to submitting your
                acceleration request.

    We
      have
      included information as to the names of the prospective sellers. The remaining
      information will be added prior to requesting effectiveness.

    Financial
      Statements, page F-1

    Consolidated
      Statements of Changes in Owner’s Equity, page F-5

            13.

              Refer
                to your response to comment 9. Please note that exposure drafts do
                not
                represent authoritative literature. Until the point in time that
                the
                exposure draft becomes approved, the current literature would appear
                to be
                paragraphs 14 and A5-A7 of SFAS 141. Please provide to us your analysis
                of
                the impact that applying current authoritative literature to these
                transactions would have to your financial
                statements.

    The
      payments referenced in this comment were treated as equity transactions pursuant
      to paragraph 14 of FAS 141. These payments were all made to individuals/entities
      under common control. Paragraph 14 calls for transactions with entities under
      common control to be treated as equity transactions. FAS 141, paragraph 11
      provides that purchase accounting should not be applied to transactions between
      entities under common control.

    Note
      1. Description of Business, page F-8

            14.

              Refer
                to your response to comment 10. Your assertion that this “is a contingent
                obligation, outside the control of the Company which is not certain
                to
                occur” does not appear to be a sufficient argument under the authoritative
                literature cited in our previous response. Please provide a detailed
                analysis of all of the authoritative guidance separately, and demonstrate
                how you determined that the option to purchase the Van Wert interests
                does
                or does not fall under the guidance. If you should determine that
                the
                options do fall under one of the guidance, please tell us how your
                accounting and disclosure complies with the guidance, or provide
                proposed
                language clarifying this fact. Further, if you decide that there
                is
                authoritative literature that is more applicable, please cite that
                literature and demonstrate how you have complied with
                it.

    The
      Company evaluated the obligation to offer to purchase the Van Wert interests
      as
      a potential imbedded derivative pursuant to the guidance in FAS 133. The Company
      has concluded that the offer is tantamount to an option and, as such, is subject
      to derivative accounting. The Company further concluded that because there
      is no
      obligation on the part of the interest holder to agree to sell the interest,
      and
      the purchase price will be fair value at the time of the offer, there is no
      value or cost to the Company associated with the option. The purchase price
      will
      be at fair value as the contract calls for the price to be the greater of
      original cost or fair value at the date of the offer. The primary underlying
      asset of Van Wert is as a long term care facility, including title to the real
      property. The company developed and built the facility in 1999 and currently
      operates it. Based on management’s knowledge of the long term care and real
      estate markets in which it operates, recent sales and appraisals of comparable
      properties, and an analysis of current replacement cost, they concluded that
      fair value currently exceeds cost and is expected to continue to do so. As
      a
      result, there is no fair value inherent in the option and therefore no
      accounting implication beyond disclosure in the notes to financial statements.
      The Note has been changed to include a discussion of the derivative accounting
      treatment.

    Note
      4.
      Discontinued Operations, page F-19

            15.

              Refer
                to your response to comment 12. Please provide to us a more detailed
                analysis of whether consummation as defined by paragraph 6 of SFAS
                66 has