Mail Stop 4-6
January 21, 2005
Craig A. Parker
General Counsel and Secretary
Emageon Inc.
1200 Corporate Drive, Suite 200
Birmingham, Alabama 35242
Re: Emageon, Inc.
Amendment No. 1 to Form S-1
File No. 333-120621
Dear Mr. Parker:
We have reviewed your responses and amendment to Form S-1 and
have the following comments. Where indicated, we think you should
revise your document 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 may
ask
you to provide us with supplemental information so we may better
understand your disclosure. After reviewing this information, we
may
or may not raise additional comments.
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 filing.
We welcome any questions you may have about our comments or on any
other aspect of our review and look forward to working with you.
Feel free to call us at the telephone numbers listed at the end of
this letter.
General
1. See prior comment 3. We are reviewing the graphics you propose
for the inside front and back covers of the prospectus. We may
have
further comment.
Summary
2. See prior comment 4. We do not understand how the information
regarding the Industry Data is considered a key aspect of the
offering as required under Item 503 of Regulation S-K. As the
plain
English principles outlined in Rule 421(d) apply to the front and
back cover pages, the summary and risk factors section, this
information should be moved to a location in the prospectus after
risk factors.
3. See prior comment 9. Please clarify in the prospectus that
your
basis for including this partial list of customers is that they
represent multi-facility healthcare providers with ten or more
facilities.
Risk Factors
4. See prior comment 12. We note the risk factor disclosure on
pages
7-8 to which you refer in your supplemental response. In light of
the revised MD&A disclosure that recognizes that a specific risk
associated with the trend toward perpetual licenses is "greater
volatility" in operating results, we continue to believe that risk
factor disclosure singling out the effect of this deliberate move
toward perpetual licenses is warranted. To the extent that this
move
toward perpetual licenses is inconsistent with any industry trend,
disclosure regarding why the company has opted for perpetual over
term licenses would be appropriate.
5. See prior comment 13. We note your response on the
consideration
given to including separate risk factor disclosure regarding
contracted backlog and your revised disclosure under two risk
factors. Please confirm, if true, that your calculation of backlog
is
not subject to any material uncertainties. For example, does this
number include any renewal options that have not been formally
renewed? Is backlog adjusted on a quarterly basis to reflect
modifications or renewals of existing contracts or awards of new
contracts?
Management`s Discussion and Analysis
Backlog
6. See prior comments 18 and 53. We have reviewed your disclosure
in
response to prior comment no. 18 and believe you should further
expand your disclosure related to existing contractual backlog to
quantify by fiscal year the amount you will recognize in periods
beyond fiscal year 2005. Also clarify that your backlog amounts
include the $25 million of guaranteed fees from Ascension Health,
that will be recognized when separate "order addendum" are
provided
and when your predetermined revenue recognition policies are met.
Sources of Revenue
7. We note your disclosure that the trend toward perpetual
licenses
has improved the company`s cash flows. Please expand the
disclosure
to explain further how the license type affects cash flows, e.g.,
that the improvement relates to short-term liquidity, if true.
Revenue Recognition and Deferred Revenue
8. See prior comment 19. Your response indicates that your
software
license fee is based on estimates of annual study volumes.
Clarify
how you are able to accurately estimate historical experience,
particularly where you have a new customer licensing your
software.
Supplementally tell us the accuracy of your historical experience
surrounding your estimates of annual study volumes. Your response
indicates that the fee is not subject to change based on actual
study
volumes; however, if volumes substantially exceed the estimates,
explain why you do not require additional license fees from your
users. Also, confirm that in circumstances where use by the
licensee
falls below the estimated volume, you have not offered return
rights,
refunds and/or concessions as it relates to future licenses.
9. Prior comment 22. Guarantees: Your revised disclosures
surrounding your guarantees on pages 31, 32 and F-14 do not appear
to
address the system and component guarantees you describe on page
52.
Expand your discussions to describe your accounting for system and
component guarantees and the penalty provisions in your
agreements.
10. See prior comment 23. We note your response that
approximately
$4,000,000 of the balance in current deferred revenue balance at
September 30, 2004 relates to two contracts where revenue was
deferred in accordance with SOP 97-2. Further expand your
disclosure
to describe any other events that led to the almost $11,000,000
increase in deferred revenue from December 31, 2003 to September
30,
2004. Also, as previously requested, quantify the amounts of
deferred revenues associated with the nature of services to be
performed (i.e., support services, up-front services,
implementation,
etc.).
Results of Operations
11. See prior comment 26. We note the addition to your
disclosures
relating to the average contract size and mix of perpetual versus
term licenses. While that information is critical to an
understanding of your financial performance, we believe the
disclosures should be further enhanced to provide the context in
which the information should be analyzed. Specifically, how would
the results of operations have been different if your revenue
model
had not changed? Does your increase in revenue truly represent an
increase in sales or is it the result of up-front revenue
recognition
caused by a shift to perpetual licenses? Please advise and revise
to
clarify.
12. See prior comment 27. We note your revised disclosure stating
that while the impact of perpetual licenses has "generally
improved
our cash flows," the effect "could also cause greater volatility
in
our operating results. . . ." This disclosure is vague with
regard
to what the company`s actual experience has been. If the company
has
in fact experienced increased volatility in operating results due
to
license type, this should be specified and quantified to the
extent
possible.
13. See prior comment 28. On page 35, you revised your disclosure
to
state that $160,000 of commission expense have been deferred to
periods extending beyond September 30, 2004. Is this disclosure
intended to suggest that you have paid commissions that have been
deferred on your balance sheet? If so, how is the deferral of
commissions consistent with your representation in your response
that
you recognize the expense when incurred, which appears to be when
paid? Please advise and revise to clarify.
14. Help us understand why you believe it is appropriate to record
the commission expense in the period "when paid" under both of the
commission structures you describe in your response. For your
prior
policy, we understand the only contingency related to the second
payment is that the sales person remains an employee at the time
payment is otherwise due. If it is probable that the sales person
will remain an employee during the ninety-day period, explain why
you
do not accrue amounts associated with this payment over the
ninety-
day period in which the payment is earned. Refer by analogy to
the
guidance set forth in paragraphs 15 through 17 of APB 28.
Similarly
address the four payments set forth in your new commission
structure
and explain why it is appropriate to record the expense "when
paid."
15. See prior comment 30. You state that you believe the current
disclosures of revenue from system sales and revenue from support
services are the proper quantification of your material sources of
revenue and are meaningful to investors. SEC Release 33-8350
states
that the purpose of MD&A, among other things, is to provide
information about the quality of, and potential variability of, a
company`s earnings and cash flow, so that investors can ascertain
the
likelihood that past performance is indicative of future
performance.
Tell us why you believe investors have clear and transparent
information to ascertain the likelihood that past performance is
indicative of future performance if a distinction is not made, and
information not provided, between recurring revenue streams, such
as
maintenance and one-time revenue streams such as installation.
Include in your response how management measures performance with
respect to revenue generated from your various sources. Does
management look only to the broad categories of "system sales" and
"support service" or is a more detailed approach employed? Please
advise and revise as necessary.
Liquidity
16. See prior comment 33. The revised paragraph on pages 38-39
describing the covenants associated with your subordinated debt
agreement does not appear to be complete. What, for instance, are
the restrictions incorporated by reference from the April 30, 2004
loan and security agreement? Similarly, you refer to "certain
covenants" regarding minimum tangible net worth and quick ratio
calculations. Remove the vague reference to certain covenants and
replace it with a brief summary of the specific covenants
contained
in the agreement.
Management
17. Please update the executive compensation information through
December 31, 2004. See Telephone Interpretation J.8.B.of the
Corporation Finance Manual of Publicly Available Telephone
Interpretations, July 1997.
18. Also, the beneficial ownership table, which currently provides
information through October 31, 2004, should be updated as of the
most recent practicable date. See Item 403 of Regulation S-K.
19. See prior comment 45. Briefly expand the disclosure that
bonus
targets are dependent on your "revenue and earnings performance."
Note that you need not disclose corporate performance targets that
must be achieved to earn the bonuses.
Financial Statements
Statements of Operations
20. See prior comment 50. We have reviewed your response to prior
comment no. 50; however, we continue to believe that Rule 5-
03(b)(1)
of Regulation S-X requires you to separately present net sales of
tangible products on the face of your statements of operations and
the respective cost of tangible product sales. Please revise to
comply with Rule 5-03(b)(1) of Regulation S-X.
Revenue Recognition, page F-10
21. See prior comment 51. Your response indicates that you have
revised your revenue recognition accounting policy consistent with
your changes to MD&A and critical accounting policies and
estimates;
however, the marked copy of the Form S-1 indicates that no changes
have been made. Please revise your revenue recognition accounting
policies to address all of our comments we issued in our comment
letter dated December 18, 2004 as they related to revenue
recognition
disclosures in MD&A and critical accounting policies and
estimates.
For example, your accounting for specified upgrades should be
provided in your audited revenue recognition accounting policy.
Exhibits
22. See prior comment 64. We disagree that the agreements cited
in
our prior comment need not be filed on the basis that they will
soon
terminate as material contracts to be filed in the registration
statement may include contracts to be performed at the time of
filing
as well as contracts entered into not more than two years before
such
filing. As to the market promotion agreement with Ascension, tell
us
the basis for your conclusion that the agreement with a 35%
customer
is not a material agreement.
You may contact Steven Williams at 202-824-5540 or Lisa
Mitrovich, Assistant Chief Accountant, at 202-942-1836, if you
have
questions regarding comments on the financial statements and
related
matters. Please address all other comments to Maryse Mills-
Apenteng
at 202-942-1861. If you require further assistance you may
contact
the undersigned at 202-942-1800.
Sincerely,
Barbara C. Jacobs
Assistant Director
cc: Via facsimile: 404-815-6555
Daniel T. Falstad, Esq.
Martin R. Tilson, Esq.
Matthew Morrison, Esq.
Kilpatrick Stockton LLP
1100 Peachtree Street
Atlanta, Georgia 30309