-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WGMRW8dgawm7F2suWv2ttaCnuBAgdiYNWw9MDIArJPD2b5KzEeqPPx7NNNSQuaql RibfZ+B7qOA3wuCU7fjnfw== 0001001185-98-000068.txt : 19980814 0001001185-98-000068.hdr.sgml : 19980814 ACCESSION NUMBER: 0001001185-98-000068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDX SYSTEMS CORP CENTRAL INDEX KEY: 0001001185 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 030222230 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26816 FILM NUMBER: 98685168 BUSINESS ADDRESS: STREET 1: 1400 SHELBURNE RD STREET 2: PO BOX 1070 CITY: SOUTH BURLINGTON STATE: VT ZIP: 05403 BUSINESS PHONE: 8028621022 MAIL ADDRESS: STREET 1: 1400 SHELBURNE RD STREET 2: PO BOX 1070 CITY: SOUTH BURLINGTON STATE: VT ZIP: 05403 10-Q 1 FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1998 ------------------------------- Commission File Number 0-26816 IDX SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) Vermont 03-0222230 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 Shelburne Road South Burlington, VT 05403 (Address of principal executive offices) Registrant's telephone number, including area code: (802-862-1022) Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports). Yes X No ---- ---- Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The number of shares outstanding of the registrant's common stock as of August 7, 1998 was 26,424,943. [Exhibit index begins on Page 21] -- IDX SYSTEMS CORPORATION FORM 10-Q For the Quarterly Period Ended June 30, 1998 TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION ITEM 1. Interim Financial Statements: a) Condensed consolidated balance sheets as of June 30, 1998 and December 31, 1997 (unaudited)................3 b) Condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 1998 and 1997 (unaudited)..........4 c) Condensed consolidated statements of cash flows for the three and six months ended June 30, 1998 and 1997 (unaudited)....................................................5 d) Notes to condensed consolidated financial statements...........6 ITEM 2. Management's discussion and analysis of financial condition and results of operations...............................8 PART II. OTHER INFORMATION ITEM 1. Legal proceedings.................................................18 ITEM 2. Changes in securities.............................................18 ITEM 3. Defaults upon senior securities...................................18 ITEM 4. Submission of matters to a vote of security holders...............18 ITEM 5. Other information.................................................19 ITEM 6. Exhibits and reports on Form 8-K..................................19 SIGNATURES.................................................................20 EXHIBIT INDEX..............................................................21
Page 2 of 21 PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements IDX SYSTEMS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
JUNE 30 DECEMBER 31 1998 1997 ---- ---- ASSETS Cash and securities $ 118,007 $ 115,887 Accounts receivable, net 76,874 66,587 Other current assets 10,601 14,718 --------- --------- Total current assets 205,482 197,192 Property and equipment, net 29,711 28,277 Capitalized software costs, net 789 368 Other assets 14,704 11,480 --------- --------- 45,204 40,125 --------- --------- Total assets $ 250,686 $ 237,317 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities $ 29,755 $ 34,748 Deferred revenue 17,556 21,538 ---------- --------- Total current liabilities 47,311 56,286 ---------- --------- Long term debt - 2,508 Minority interest 8,440 1,919 Stockholders' equity 194,935 176,604 ---------- --------- 203,375 181,031 ---------- --------- Total liabilities and stockholders' equity $ 250,686 $ 237,317 ========== =========
See Notes to the Condensed Consolidated Financial Statements NOTE: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. Page 3 of 21 PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements IDX SYSTEMS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES Systems sales $ 43,719 $ 29,886 $ 82,685 $ 63,326 Maintenance and service fees 35,645 27,546 69,416 53,665 --------- --------- --------- --------- Total revenues 79,364 57,432 152,101 116,991 OPERATING EXPENSES Cost of sales 40,408 31,061 77,656 61,025 Selling, general and administrative 14,947 12,575 28,699 25,306 Research and development 11,762 8,607 22,078 17,085 Write-off of acquired in-process research and development costs 3,201 2,290 ---------- --------- --------- --------- Total operating expenses 67,117 52,243 131,634 105,706 Operating income 12,247 5,189 20,467 11,285 Interest and other income, net (1,259) (1,479) (2,381) (2,674) ---------- ---------- --------- -------- Income before income taxes 13,506 6,668 22,848 13,959 Income tax provision 5,400 2,793 10,340 5,587 ---------- --------- --------- -------- Net income $ 8,106 $ 3,875 $ 12,508 $ 8,372 ========== ========= ========= ======== Unrealized gain on securities available-for-sale 45 10 42 23 ---------- --------- --------- -------- Comprehensive income $ 8,151 $ 3,885 $ 12,550 $ 8,395 ========== ========= ========= ======== Basic earnings per share $ 0.31 $ 0.15 $ 0.48 $ 0.33 ========== ========= ========= ======== Basic weighted average shares outstanding 26,294 25,570 26,225 25,528 ========== ========= ========= ======== Diluted earnings per share $ 0.30 $ 0.15 $ 0.46 $ 0.32 ========== ========= ========= ======== Diluted weighted average shares outstanding 27,181 26,488 27,094 26,357 ========== ========= ========= ========
See Notes to the Condensed Consolidated Financial Statements Page 4 of 21 PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements IDX SYSTEMS CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30 1998 1997 ---- ---- OPERATING ACTIVITIES Net income $ 12,508 $ 8,372 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,197 3,883 Deferred tax benefit (517) 1,506 Increase in allowance for doubtful accounts 88 411 Minority interest 21 (170) Write-off of acquired in-process research and development costs 3,201 2,290 Changes in operating assets and liabilities: Accounts receivable (10,375) (7,007) Prepaid expenses and other assets 3,489 (8,370) Accounts payable and accrued expenses (4,412) 437 Federal and state taxes payable 3,007 1,158 Deferred revenue (3,982) 6,192 Short-term debt 1,373 --------- -------- Net cash provided by operating activities 8,225 10,075 INVESTING ACTIVITIES Purchase of property and equipment, net (6,552) (7,564) Purchase of securities available-for-sale, net (47,168) (56,601) Sale of securities available-for-sale 43,430 53,438 Purchase of certain net assets (5,778) 1,779 -------- -------- Net cash used in investing activities (16,068) (8,948) FINANCING ACTIVITIES Proceeds from sale of common stock 5,917 3,084 Increase in minority interest 6,500 Principal repayments of long-term debt (6,097) (148) -------- -------- Net cash provided by financing activities 6,320 2,936 -------- -------- Decrease in cash and cash equivalents (1,523) 4,063 Cash and cash equivalents at beginning of period 14,061 12,326 -------- -------- Cash and cash equivalents at end of period $ 12,538 $ 16,389 ======== ========
See Notes to the Condensed Consolidated Financial Statements Page 5 of 21 PART I. FINANCIAL INFORMATION Notes to Condensed Consolidated Financial Statements Note 1 - Basis of Presentation All financial information for previously reported periods included in the accompanying interim unaudited condensed consolidated financial statements of IDX Systems Corporation ("Company" or "IDX") has been restated to reflect the combined operations of IDX and PHAMIS, Inc. ("PHAMIS") as a result of the merger, more fully described in Note 2, which has been accounted for as a pooling of interests in the quarter ended September 30, 1997. No adjustments were required to conform the financial reporting policies of IDX and PHAMIS for the periods presented. The interim unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with generally accepted accounting principles. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed. In the opinion of management, all necessary adjustments have been made to provide a fair presentation. The operating results for the three and six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Note 2 - Business Acquisitions On February 23, 1998, the Company recorded charges of $3.2 million related to the acquisition of a contract management system technology from Trego Systems, Inc. for cash of $4.0 million. The acquisition was accounted for under the purchase method. The charges were expensed as in-process research and development in connection with the Company's development of a healthcare contract management system. In July 1997, the Company completed the Merger with PHAMIS which became a wholly-owned subsidiary of the Company. The transaction was accounted for as a pooling-of-interests and accordingly, the accompanying financial statements include the accounts of PHAMIS for all periods presented. Note 3 - Income Taxes The provision for income taxes for the quarter ended June 30, 1998 was provided for at the taxable income rate of 40%. The provision for income taxes for the six months ended June 30, 1998 was provided for at the taxable income rate of approximately 45% which is more than the Company's historical rate of 40%. This higher rate is due to a portion of the charges incurred in the first quarter ended March 31, 1998 in the acquisition of Trego Systems, Inc. being non-deductible for income tax purposes. Page 6 of 21 PART I. FINANCIAL INFORMATION Note 4 - Earnings Per Share Information In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which the Company adopted on December 31, 1997. At that time, the Company changed the method used to compute earnings per share and restated all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options is excluded. The following sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended June 30 June 30 1998 1997 1998 1997 ---- ---- ---- ---- Numerator: Net income $ 8,106 $ 3,875 $12,508 $ 8,372 ------- ------- ------- ------- Numerator for basic and diluted earnings per share $ 8,106 $ 3,875 $12,508 $ 8,372 Denominator: Denominator for basic earnings per share--weighted-average shares 26,294 25,570 26,225 25,528 Effect of employee stock options 887 918 869 829 ------- ------- ------- ------- Denominator for diluted earnings per share 27,181 26,448 27,094 26,357 ------- ------- ------- ------- Basic earning per share $0.31 $0.15 $0.48 $0.33 ======= ======= ======= ======= Diluted earnings per share $0.30 $0.15 $0.46 $0.32 ======= ======= ======= =======
Note 5 - Reclassifications Certain prior period amounts have been reclassified to conform with current period presentations. Page 7 of 21 PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company reported net income of $8.1 million, or $0.30 per share for the three months ended June 30, 1998 as compared to $3.9 million, or $0.15 per share for the three months ended June 30, 1997. For the six months ended June 30, 1998 the Company reported net income of $12.5 million, or $0.46 per share, as compared to net income of $8.4 million, or $0.32 per share, for the same period in 1997. This Management's Discussion and Analysis of Financial Conditions and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties including those discussed below that could cause actual results to differ materially from historical results or those anticipated. Words such as "believes," "may," "plans," "anticipates," "expects," "intends," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. In addition, the disclosures in the section on page 13 under the caption "Factors Affecting Future Results" consists principally of a discussion of risks which may affect future results and, are thus, in their entirety forward-looking in nature. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997. REVENUES The Company's total revenues increased to $79.4 million during the three months ended June 30, 1998 from $57.4 million in the corresponding period in 1997, an increase of $22.0 million or 38.2%. Revenues from systems sales increased to $43.7 million during the three months ended June 30, 1998 (55.1% of total revenues) from $29.9 million (52.0% of total revenues) in the corresponding period in 1997, an increase of $13.8 million or 46.3%. The increase was primarily due to an increase in installations of certain of the Company's IDXtend and LastWord systems. Revenues from maintenance and service fees increased to $35.7 million during the three months ended June 30, 1998 (44.9% of total revenues) from $27.5 million (48.0% of total revenues) in the corresponding period in 1997, an increase of $8.2 million or 29.4%. The increase in revenues from maintenance and service fees was due principally to additional maintenance revenues resulting from the continued growth in the Company's installed client base. COST OF SALES The cost of sales and services increased to $40.4 million during the three months ended June 30, 1998 from $31.0 million in the corresponding period in 1997, an increase of $9.4 million or Page 8 of 21 PART I. FINANCIAL INFORMATION 30.1%. The gross profit margin on systems sales and services increased to 49.1% during the three months ended June 30, 1998 from 45.9% in the corresponding period in 1997. The increase in gross profit was due primarily to an increase in the installations of certain of the Company's IDXtend and LastWord systems. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $14.9 million during the three months ended June 30, 1998 from $12.6 million in the corresponding period in 1997, an increase of $2.3 million or 18.9%. As a percentage of total revenues, selling, general and administrative expenses decreased to 18.8% during the three months ended June 30, 1998 from 21.9% in the corresponding period in 1997. The increase in selling, general and administrative expenses during the three months ended June 30, 1998 was principally due to an increase in the Company's sales and marketing staff which management believes is necessary to support the continued growth of the Company. RESEARCH AND DEVELOPMENT Research and development expenses increased to $11.8 million during the three months ended June 30, 1998 from $8.6 million in the corresponding period in 1997, an increase of $3.2 million or 36.7%. The increase is attributed to an increase in personnel expenses and outside consultants to support the development of additional products for the Company. As a percentage of total revenues, research and development expenses decreased slightly to 14.8% during the three months ended June 30, 1998 from 15.0% for the three months ended June 30, 1997. Software development costs incurred subsequent to the establishment of technological feasibility until general release of the related products are capitalized. Prior to the merger, technological feasibility was determined differently by IDX and PHAMIS. Subsequent to the merger the Company's determination of technological feasibility for all product development is based on the completion of a working model which has been approved for beta site testing. Historically costs incurred during beta site testing have not been material. Although the Company presently expects costs to complete beta site testing in the future to be insignificant, as the Company develops products to operate using other technologies as well as more comprehensive clinical systems, the time and effort required to complete beta site testing may be significantly more extensive. Consequently, capitalized software development costs may become material in future reporting periods. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 REVENUES The Company's total revenues increased to $152.1 million during the six months ended June 30, 1998 from $117.0 million in the corresponding period in 1997, an increase of $35.1 million or 30.0%. Revenues from systems sales increased to $82.7 million during the six months ended June 30, 1998 (54.4% of total revenues) from $63.3 million (54.1% of total revenues) in the corresponding period in 1997, an increase of $19.4 million or 30.6%. The increase was primarily due to an increase in installations of certain of the Company's IDXtend and LastWord systems. Revenues from maintenance and service fees increased to $69.4 million during the six months ended June 30, 1998 (45.6% of total revenues) from $53.7 million (45.9% of total revenues) in the corresponding period in 1997, an increase of $15.7 million or 29.4%. The increase in Page 9 of 21 PART I. FINANCIAL INFORMATION revenues from maintenance and service fees was due principally to additional maintenance revenues resulting from the continued growth in the Company's installed client base. COST OF SALES The cost of sales and services increased to $77.6 million during the six months ended June 30, 1998 from $61.0 million in the corresponding period in 1997, an increase of $16.6 million or 27.3%. The gross profit margin on systems sales and services increased to 48.9% during the six months ended June 30, 1998 from 47.8% in the corresponding period in 1997. The increase in gross profit was due primarily to an increase in the installations of certain of the Company's IDXtend and LastWord systems. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $28.7 million during the six months ended June 30, 1998 from $25.3 million in the corresponding period in 1997, an increase of $3.4 million or 13.4%. As a percentage of total revenues, selling, general and administrative expenses decreased to 18.9% during the six months ended June 30, 1998 from $21.6 million in the corresponding period in 1997. The increase in selling, general and administrative expenses during the six months ended June 30, 1998 was principally due to an increase in the Company's sales and marketing staff which management believes is necessary to support the continued growth of the Company. RESEARCH AND DEVELOPMENT Research and development expenses increased to $22.1 million during the six months ended June 30, 1998 from $17.1 million in the corresponding period in 1997, an increase of $5.0 million or 29.2%. The increase is attributed to an increase in personnel expenses and outside consultants to support the development of additional products for the Company. As a percentage of total revenues, research and development expenses decreased slightly to 14.5% during the six months ended June 30, 1998 from 14.6% in the corresponding period in 1997. Software development costs incurred subsequent to the establishment of technological feasibility until general release of the related products are capitalized. WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT On February 23, 1998, the Company recorded nonrecurring charges of $3.2 million related to the acquisition of contract management technology from Trego Systems, Inc. for cash of $4.0 million. The acquisition was accounted for under the purchase method. The charges were expensed as in-process research and development in connection with the Company's development of a healthcare contract management system. INCOME TAXES The provision for income taxes for the quarter ended June 30, 1998 was provided for at the taxable income rate of approximately 40%. The provision for income taxes for the six months ended June 30, 1998 was provided for at the taxable income rate of approximately 45%, which is Page 10 of 21 PART I. FINANCIAL INFORMATION more than the Company's historical rate of 40%. This higher rate is due to a portion of the charges incurred in the acquisition of Trego Systems, Inc. which are non-deductible for income tax purposes. For 1998, the Company anticipates an effective tax rate of approximately 40% of pre-tax income. LIQUIDITY AND CAPITAL RESOURCES Since its inception in 1969, the Company has funded its operations, working capital needs and capital expenditures primarily from operations, except for real estate owned by certain partnerships and trusts financed through industrial development bonds. The proceeds from its initial public offering in 1995 were (i) distributed to stockholders of the Company in connection with the Company's prior status as an S corporation under the Internal Revenue Code of 1986, as amended, and (ii) used for general corporate purposes, including working capital purposes, payment of current expenses and strategic transactions, including acquisitions of businesses, products and technologies. Cash flows from operations are principally comprised of net income and depreciation and are primarily affected by the net effect of the change in accounts receivable, accounts payable and accrued expenses. Due to the nature of the Company's business, accounts receivable, deferred revenue and accounts payable fluctuate considerably due to, among other things, the length of the sales cycle and installation efforts which are dependent upon the size of the transaction, the changing business plans of the customer, the effectiveness of customers' management and general economic conditions. In general accounts receivable from customers have been collected consistently within 90 days. Cash flows related to investing activities have principally been related to the purchase of computer and office equipment, leasehold improvements, and the purchase and sale of investment grade marketable securities. The Company expects these activities to continue. investing activities may also include purchases of interests in and acquisitions of complementary products, technologies and businesses. There can be no assurance that the Company will be able to successfully complete any such purchases or acquisitions in the future. Cash, cash equivalents and marketable securities at June 30, 1998 were $118.0 million, an increase from the June 30, 1997 balance of $96.5 million. The Company has a revolving line of credit with a bank allowing the Company to borrow up to $5.0 million bearing interest at the prime rate. There were no borrowings as of June 30, 1998 or 1997. The Company expects that its requirements for office facilities and other office equipment will grow as staffing requirements dictate. The Company's operating lease commitments consist primarily of office leasing for the Company's operating facilities. The Company plans to continue increasing the number of its professional staff during 1998 to meet anticipated sales volume and to support research and development efforts. To the extent necessary to support increases in staffing, the Company intends to obtain additional office space. The Company believes that current operating funds will be sufficient to finance its operating requirements at least through the next twelve months. To date, inflation has not had a material impact on the Company's revenues or income. Page 11 of 21 PART I. FINANCIAL INFORMATION NEW ACCOUNTING STANDARDS In October, 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, Software Revenue Recognition, revising certain aspects of SOP 91-1, which the Company adopted on January 1, 1998. SOP97-2 did not materially affect the Company's revenue recognition policies with respect to software license fees which are based upon vendor-specific objective information and relate principally to its proprietary systems software which generally requires no significant production, modification or customization. License revenue, accordingly, is deferred and recognized as customer payments become due based upon specified milestones and due dates including delivery, installation and final systems acceptance. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 and No. 131, "Reporting Comprehensive Income" and "Disclosures About Segments of an Enterprise and Related Information," which the Company adopted on January 1, 1998. The adoption of these new accounting standards did not have a material impact on the Company's financial statements. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which the Company adopted on December 31, 1997. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is not materially different from the previously reported fully diluted earnings per share. YEAR 2000 The Company has assessed its internal use systems and its currently supported products, including tools, equipment and software supplied by others, for possible problems in processing, reporting, displaying, functioning with and otherwise handling date data containing the year 2000 and beyond ("Year 2000 problems"). The Company believes it has formulated and is in the process of implementing or has completed all plans to make Year 2000 ready all of its critical internal use systems and facilities and all of its currently supported products, including tools, equipment, and software supplied by others. The Company is in the process of formulating contingency plans in the event that it might not be successful in implementing all of its plans to make Year 2000 ready all of its systems, facilities and products. At December 31, 1997, substantially all of the core databases and data processing functions of the Company's significant products were Year 2000 ready. All such products installed after such date, and many of the Company's products installed prior to such date, were Year 2000 ready at the time of installation. The Company expects that the elements of the Company's products that were not Year 2000 ready at December 31, 1997, such as certain screens and reports and some tools, equipment, and software supplied by others, will be Year 2000 ready in 1998. Page 12 of 21 PART I. FINANCIAL INFORMATION The Company has expensed amounts incurred as of December 31, 1997 to make its products Year 2000 ready, and such amounts have not been material. The additional costs to make all such remaining systems and products, including tools, equipment, and software supplied by others, Year 2000 ready by the end of 1998 will be expensed as incurred, are expected to be incurred in 1998 and are not expected to be material. The Company under its maintenance agreements commenced delivery to its installed customers of Year 2000 ready versions of all of its significant products in 1998 and expects to complete most installations of such versions by mid 1999. The costs to install Year 2000 ready versions of the Company's products at customer sites, as well as the ability of the Company to assist customers in the installation of Year 2000 ready versions of its products, will depend in part on the readiness, ability, and cooperation of customers to install such versions. Any of the Company's internal use systems, and facilities, and any of the products supplied by the Company to its customers, including tools, equipment, facilities and software supplied by others, could have Year 2000 problems. Any failure of the Company to make Year 200 ready its internal use systems and facilities could cause significant operational problems for the Company. Any failure of a customer to be ready or able to timely install Year 2000 ready versions of the Company's products, including tools, equipment, and software supplied by others, or any other products used by such customers in connection with the Company's products, could cause significant operational problems for the customer. Further, a failure of the Company to timely make available Year 2000 ready versions of its products, including tools, equipment, and software supplied by others, or a failure of the Company to timely provide adequate resources to assist its customers in installing Year 2000 ready versions of its products, including tools, equipment, and software supplied by others, could result in claims by or liability to customers, which may have a material adverse effect on the business, operations, and future financial results of the Company. FACTORS AFFECTING FUTURE RESULTS The Company's revenues and operating results can vary significantly from quarter to quarter as a result of a number of factors, including the volume and timing of systems sales and installations, and length of sales cycles and installation efforts. The timing of revenues from systems sales is difficult to forecast because the Company's sales cycle can vary depending upon factors such as the size of the transaction, the changing business plans of the customer, the effectiveness of customer's management and general economic conditions. In addition, because revenue is recognized at various points during the installation process, the timing of revenue recognition varies considerably based on a number of factors, including availability of personnel, availability of the customer's resources and complexity of the needs of the customer's organization. The Company's initial contact with a potential customer depends in significant part on the customer's decision to replace, expand, or substantially modify its existing information systems, or modify or add business processes or lines of business. How and when to implement, replace, expand or substantially modify an information system or modify or add business processes or lines of business, are major decisions for healthcare organizations. Accordingly, the sales cycle for the Company's systems is typically three to eighteen months or more from contract execution to completion of installation. During the sales cycle and the installation cycle, the Company expends substantial time, effort and funds preparing contract proposals, negotiating the contract and implementing the system. Because a significant percentage of the Company's expenses are Page 13 of 21 PART I. FINANCIAL INFORMATION relatively fixed, a variation in the timing of systems sales and installation can cause significant variations in operating results from quarter to quarter. The Company's future operating results may fluctuate as a result of these and other factors, such as customer purchasing patterns, and the timing of new product and service introductions and product upgrade releases. The Company believes that quarterly results of operations will continue to be subject to significant fluctuations and that its results of operations for any particular quarter or fiscal year may not be indicative of results of operations for future periods. There can be no assurance that future period to period fluctuations will continue and will not have a material adverse effect on the Company's results of operations, financial condition or business. The Company intends to continue to grow in part through acquisitions of complementary products, technologies and businesses or alliances with complementary businesses. The Company's ability to expand successfully through acquisitions or alliances depends on many factors, including the successful identification and acquisition of products, technologies or businesses and management's ability to effectively integrate and operate the acquired or aligned products, technologies or businesses. There is significant competition for acquisition and alliance opportunities in the healthcare information systems industry, which may intensify due to consolidation in the industry, thereby increasing the costs of capitalizing on such opportunities. The Company competes for acquisition and alliance opportunities with other companies that have significantly greater financial and management resources. There can be no assurance that the Company will be successful in acquiring or aligning with any complementary products, technologies or businesses; or, if acquired or aligned with, that the Company will be able to successfully integrate any such products, technologies or businesses into its current business and operations. The failure to successfully integrate any significant products, technologies or businesses could have a material adverse effect on the Company's results of operations, financial condition or business. Integrating the operations and management of the Company and PHAMIS has been a time-consuming process, and will require the dedication of management resources, which has and may continue to temporarily distract attention from the day-to-day business of the combined Company. There can be no assurance that this integration will be completed smoothly or successfully, and the inability of management to successfully integrate the operations or management of the two companies could have a material adverse effect on the business, results of operations or financial condition of the combined Company. As previously discussed in the section "Merger and Related Costs" the Company has incurred significant merger and related costs. Additional unanticipated expenses may be incurred in connection with the continued integration of the business of the Company and PHAMIS. The stock market has, from time to time, experienced extreme price and volume fluctuations, particularly in the high technology and healthcare information technology sectors, which have often been unrelated to the operating performance of particular companies. The Company experiences fluctuations in its stock price related to these general market swings as well as announcements of technological innovations, new product introductions by the Company or its competitors, market conditions in the computer software or hardware industries and healthcare reform measures. These fluctuations could have a significant impact on the future market price of the Company's Common Stock. Page 14 of 21 PART I. FINANCIAL INFORMATION As a developer of information systems, the Company must anticipate and adapt to evolving industry standards and new technological developments. The market for the Company's products is characterized by continued and rapid technological advances in both hardware and software development, requiring ongoing expenditures for research and development and the timely introduction of new products and enhancements to existing products. The establishment of standards is largely a function of user acceptance. Therefore, such standards are subject to change. The Company's future success will depend in part upon its ability to enhance its existing products, to respond effectively to technology changes, to migrate its clients to new technologies, to sell additional products to its existing client base and to introduce new products and technologies to meet the evolving needs of its clients in the healthcare information systems market. The Company is currently devoting significant resources toward the development of enhancements to its existing products and the migration of existing products to new hardware and software platforms. There can be no assurance that the Company will successfully complete the development of these products or this migration in a timely fashion or that the Company's current or future products will satisfy the needs of the healthcare information systems market. Further, there can be no assurance that products or technologies developed by others will not adversely affect the Company's competitive position or render its products or technologies noncompetitive or obsolete. Any of the Company's internal use systems and any of the products supplied by the Company to its customers could fail to adequately or properly process, display, report, or otherwise handle date data containing the Year 2000 and beyond. Any failure of a customer to be ready or able to timely install Year 2000 ready versions of the Company's products could cause significant operational problems for the customer. Further, a failure of the Company to timely make available Year 2000 ready versions of its products, or a failure of the Company to timely provide adequate resources to assist its customers in installing Year 2000 ready versions of its products, could result in claims by customers, which may have a material adverse effect on the results of operations, financial condition or business of the Company. The Company currently derives a significant percentage of its revenues from sales of financial and administrative healthcare information systems and related services. As a result, any factor adversely affecting sales of these products and services could have a material adverse effect on the Company's results of operations, financial condition or business. Although the Company has experienced increasing annual sales, revenues associated with existing products may decline as a result of several factors, including price competition. There can be no assurance that the Company will continue to be successful in marketing its current products or any new or enhanced products or maintaining the current pricing for its existing products. Certain of the Company's products provide applications that relate to patient medical histories and treatment plans. Any failure by the Company's products to provide accurate, secure and timely information could result in product liability claims against the Company by its clients or their affiliates or patients. The Company maintains insurance that it believes is adequate to protect against claims associated with the use of its products, but there can be no assurance that its insurance coverage would adequately cover any claim asserted against the Company. A successful claim brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's results of operations, financial condition or business. Even unsuccessful claims could result in the expenditure of funds in litigation, as well as Page 15 of 21 PART I. FINANCIAL INFORMATION diversion of management time and resources. There can be no assurance that the Company will not be subject to product liability claims, that such claims will not result in liability in excess of its insurance coverage or that the Company's insurance will cover such claims or that appropriate insurance will continue to be available to the Company in the future at commercially reasonable rates. The success of the Company is dependent to a significant degree on its key management, sales and marketing, and technical personnel. The Company believes that its continued future success will also depend upon its ability to attract, motivate and retain highly skilled, managerial, sales and marketing, and technical personnel, including software programmers and systems architects skilled in the computer languages in which the Company's products operate. Competition for such personnel in the software and information services industries is intense. The loss of key personnel, or the inability to hire or retain qualified personnel, could have a material adverse effect on the Company's results of operations, financial condition or business. Although the Company has been successful to date in attracting and retaining skilled personnel, there can be no assurance that the Company will continue to be successful in attracting and retaining the personnel it requires to successfully develop new and enhanced products and to continue to grow and operate profitably. The healthcare industry in the United States is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare organizations. The Company's products are designed to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. During the past several years, the healthcare industry has been subject to increasing levels of governmental regulation of, among other things, reimbursement rates and certain capital expenditures. From time to time, certain proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may increase government involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for the Company's clients. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for the Company's products and services. The Company cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on its results of operations, financial condition or business. The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy for the regulation of certain computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act (the "FDC Act") and has recently indicated it may modify such draft policy or create a new policy. To the extent that computer software is a medical device under the policy, the manufacturers of such products could be required, depending on the product, to (i) register and list their products with the FDA, (ii) notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products, or (iii) obtain FDA approval by demonstrating safety and effectiveness before marketing a product. Depending upon the intended use of a device, IDX could be required by the FDA to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires such data, IDX would be required to obtain approval of an investigational device exemption before undertaking clinical trials. Clinical trials can take extended periods of time to complete and there can be no assurance Page 16 of 21 PART I. FINANCIAL INFORMATION that the FDA will approve or clear a device after the completion of such trials. In addition, such products would be subject to FDC Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, the Company expects that, whether or not the draft is finalized or changed, the FDA is likely to become increasingly active in regulating computer software that is intended for use in healthcare settings. The FDA can impose extensive requirements governing pre- and post-market conditions such as service investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes. There can be no assurance that actions taken by the FDA to regulate computer software products will not have a material adverse effect on the Company's results of operations, financial condition or business. Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results. Page 17 of 21 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES None. Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its 1998 Annual Meeting of Shareholders on May 18, 1998. Of the 26,263,353 shares of common stock outstanding and entitled to vote at this meeting, 21,770,204 shares were represented at the meeting, in person or by proxy. The following matters were voted upon at the Annual Meeting. 1. Robert H. Hoehl, Stuart H. Altman, Ph.D. and Malcolm A. Gleser, M.D.,Ph.D. were elected to serve for a term of three years as Class III Directors. The remaining terms of Richard E. Tarrant, Henry M. Tufo, M.D., Paul L. Egerman, Steven M. Lash and Frank T. Sample continued after the meeting. The result of the vote with respect to each nominee for office was as follows: Votes "Against" Broker Nominee Votes "For" or "Withheld" Abstained Non-Votes Robert H. Hoehl 21,764,434 0 5,670 100 Stuart H. Altman, Ph.D. 21,762,079 0 8,025 100 Malcolm A. Gleser, M.D., Ph.D. 21,760,818 0 9,286 100 2. Holders of 21,746,427 shares of common stock of the Company voted to ratify the selection of Ernst & Young LLP as the Company's independent auditors for the current fiscal year. Holders of 5,088 shares voted against ratifying such selection and 18,589 shares abstained from voting, with 100 broker non-votes. Page 18 of 21 PART II. OTHER INFORMATION Item 5. OTHER INFORMATION Shareholders Proposals for 1999 Annual Meeting As set forth in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders, shareholders proposals submitted pursuant to Rule 14a-8 under the Exchange Act for inclusion in the Company's proxy materials for its 1999 Annual Meeting of Shareholders must be received by the Secretary of the Company at the principal offices of the Company no later than December 18, 1998. In addition, in accordance with recent amendments to Rules 14a-4, 14a-5 and 14a-8 under the Exchange Act, written notice of shareholder proposals submitted outside the processes of Rule 14a-8 for consideration at the 1999 Annual Meeting of Shareholders must be received by the Company on or before March 1, 1999 in order to be considered timely for purposes of Rule 14a-4. The persons designated in the Company's proxy statement and management proxy card will be granted discretionary authority with respect to any shareholder proposal with respect to which the Ccompany does not receive timely notice. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The exhibits filed as part of this Form 10-Q are listed on the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference. (b) No Current Reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. Page 19 of 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IDX SYSTEMS CORPORATION Date: August 13, 1998 By:/s/ John A. Kane ------------------ John A. Kane, Vice President, Finance and Administration, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Page 20 of 21 Exhibit Index ------------- The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description Page - ----------- ----------- ---- 27 Financial Data Schedule 22
Page 21 of 21 EX-27 2 FDS -- ARTICLE 5 FDS FOR 2ND QUARTER 98 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME TAXES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001001185 IDX SYSTEMS CORPORATION 1,000 U.S. DOLLARS 6-MOS 6-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 JUN-30-1998 JUN-30-1997 1 1 12,537 16,389 105,470 104,259 78,230 57,354 (1,356) (1,197) 0 0 205,482 190,805 60,393 51,928 30,682 26,014 250,686 224,205 47,311 47,010 0 0 0 0 0 0 263 227 194,672 169,812 250,686 224,205 152,101 116,991 152,101 116,991 77,656 61,025 53,978 44,681 0 0 88 411 43 64 22,848 13,959 10,340 5,587 12,508 8,372 0 0 0 0 0 0 12,508 8,372 0.48 0.33 0.46 0.32
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