-----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, TSzFx5/7VLDy/vEoturThqHgCMMff1b42D8sVUzK8tLeECeDyM3EZ+cxtbXdFYDm wo7MXarQnwge7oMEimWx3w== 0001001185-99-000054.txt : 19990816 0001001185-99-000054.hdr.sgml : 19990816 ACCESSION NUMBER: 0001001185-99-000054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688903 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 10Q ================================================================================ 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, 1999 ------------------------------- 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 11, 1999 was 27,773,439. ================================================================================ [Exhibit index begins on Page 24] IDX SYSTEMS CORPORATION FORM 10-Q For the Quarterly Period Ended June 30, 1999 TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION ---- ITEM 1. Interim Financial Statements: a) Condensed consolidated balance sheets as of June 30, 1999 and December 31, 1998 (unaudited).................................3 b) Condensed consolidated statements of operations for the three and six months ended June 30, 1999 and 1998 (unaudited)...........4 c) Condensed consolidated statements of cash flows for the six months ended June 30, 1999 and 1998 (unaudited)..................5 d) Notes to condensed consolidated financial statements (unaudited)..6 ITEM 2. Management's discussion and analysis of financial condition and results of operations.............................................9 PART II. OTHER INFORMATION ITEM 1. Legal proceedings.................................................22 ITEM 2. Changes in securities.............................................22 ITEM 3. Defaults upon senior securities...................................22 ITEM 4. Submission of matters to a vote of security holders...............22 ITEM 5. Other information.................................................22 ITEM 6. Exhibits and reports on Form 8-K..................................22 SIGNATURES.................................................................23 EXHIBIT INDEX..............................................................24
Page 2 of 24 PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements IDX SYSTEMS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
June 30, December 31, 1999 1998 --------- ------------ ASSETS Cash and marketable securities $ 70,619 $ 125,132 Accounts receivable, net 111,795 102,179 Income taxes receivable 4,703 - Other current assets 11,684 5,403 Deferred tax asset 4,720 4,720 --------- --------- Total current assets 203,521 237,434 Property and equipment, net 50,573 35,949 Capitalized software costs, net 525 665 Other assets 17,178 12,868 Deferred tax asset 2,307 2,307 --------- --------- Total assets $ 274,104 $ 289,223 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities $ 44,914 $ 38,484 Short term debt - 5,611 Income taxes - 5,429 Deferred revenue 18,313 18,239 --------- --------- Total current liabilities 63,227 67,763 Long term debt - 2,261 Minority interest 9,235 8,988 Stockholders' equity 201,642 210,211 --------- -------- Total liabilities and stockholders' equity $ 274,104 $ 289,223 ========= =========
See Notes to the Condensed Consolidated Financial Statements Page 3 of 24 PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements IDX SYSTEMS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------- ------- ------ REVENUES Systems sales $37,727 $43,719 $ 60,579 $82,685 Maintenance and service fees 53,528 42,443 100,326 82,286 ------- ------- ------- ------- Total revenues 91,255 86,162 160,905 164,971 OPERATING EXPENSES Cost of sales 56,295 48,094 105,098 92,461 Selling, general and administrative 21,212 16,189 41,199 31,163 Research and development 13,423 11,938 27,188 22,438 Nonrecurring charge 4,045 - 4,045 3,201 ------- ------- ------- ------- Total operating expenses 94,975 76,221 177,530 149,263 Operating income (loss) (3,720) 9,941 (16,625) 15,708 Interest and other income, net 790 1,025 1,259 1,996 Loss on impairment of asset - - (1,642) - ------- ------- ------- ------- Income (loss) before income taxes (2,930) 10,966 (17,008) 17,704 Income tax provision (benefit) (680) 5,400 ( 6,180) 10,340 ------- ------- -------- ------- Net income (loss) $(2,250) $ 5,566 $(10,828) $ 7,364 ======= ======= ======== ======= Basic earnings (loss) per share $ (0.08) $ 0.20 $ (0.39) $ 0.27 ======= ======= ======== ======= Basic weighted average shares outstanding 27,682 27,294 27,668 27,225 ======= ======= ======== ======= Diluted earnings (loss) per share $ (0.08) $ 0.20 $ (0.39) $ 0.26 ======= ======= ======= ======= Diluted weighted average shares outstanding 27,682 28,181 27,668 28,094 ======= ======= ======= =======
See Notes to the Condensed Consolidated Financial Statements Page 4 of 24 PART I. FINANCIAL INFORMATION Item 1. Interim Financial Statements IDX SYSTEMS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Six Months Ended June 30, 1999 1998 ------- -------- OPERATING ACTIVITIES Net income (loss) $(10,828) $ 7,364 Adjustments to reconcile net income(loss) to net cash provided by (used in ) operating activities: Depreciation and amortization 7,094 6,076 Deferred tax benefit, net of acquisitions - (517) Increase in allowance for doubtful accounts 109 88 Minority interest 247 21 Loss on investment 1,642 - Write-off of acquired in-process research & development costs - 3,201 Changes in operating assets and liabilities, net of business acquisitions: Accounts receivable (9,725) (11,069) Other current assets (2,347) 3,424 Accounts payable and accrued expenses 6,331 (3,780) Income taxes payable (10,132) 3,007 Deferred revenue 74 (3,906) ------- ------- Net cash (used in) provided by operating activities (17,535) 3,909 INVESTING ACTIVITIES Purchase of property and equipment, net (19,180) (7,429) Purchase of securities available-for-sale, net (129,372) (47,168) Sale of securities available-for-sale 179,462 43,430 Business acquisitions (6,500) - Other assets, net (5,683) (5,778) ------- ------- Net cash provided by (used in) investing activities 18,727 (16,945) FINANCING ACTIVITIES Proceeds from sale of common stock 2,460 7,767 Contributions to affiliates, net - 6,500 Proceeds from debt issuances 3,501 5,342 Principal repayments of debt (11,373) (7,738) ------- ------ Net cash (used in) provided by financing activities (5,412) 11,871 ------- ------- Decrease in cash and cash equivalents (4,220) (1,165) Cash and cash equivalents at beginning of period 11,558 14,741 ------- ------- Cash and cash equivalents at end of period $ 7,338 $13,576 ======= =======
See Notes to the Condensed Consolidated Financial Statements Page 5 of 24 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 EDiX Corporation ("EDiX") as a result of the merger, more fully described in Note 3, which has been accounted for as a pooling of interests in the quarter ended June 30, 1999. No adjustments were required to conform the financial reporting policies of IDX and EDiX for 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 six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes included in the Company's latest annual report on Form 10-K. Note 2 - New Accounting Standards In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which the Company adopted as of December 31, 1998. SOP 98-1 requires capitalization of certain costs incurred in connection with developing or obtaining internal use software. In the prior year, the Company expensed such costs as incurred. This accounting change had no effect on net income (loss) for the three months ended June 30, 1999 and June 30, 1998 and for the six month periods ended June 30, 1999 and June 30, 1998. Note 3 - Business Acquisitions On February 23, 1998, the Company recorded charges of $3.2 million related to the acquisition of 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. On April 23, 1999, the Company acquired EDiX Corporation ("EDiX"), a provider of medical transcription outsourcing services to hospitals and large physician group practices. The terms of the agreement provided for the shareholders and optionholders of EDiX to receive approximately 1,000,000 shares of IDX common stock. Based on the closing price of the IDX common stock on April 23, 1999, the transaction is valued at approximately $16.7 million, plus the assumption of EDiX debt of approximately $14.0 million. This transaction is not expected to dilute earnings per share in 1999 compared to 1998. The EDiX organization will operate as EDiX, a division of IDX Systems Corporation. The acquisition has been accounted for as a pooling of interests for the quarter ended June 30, 1999 and all historical information of the Company for all periods presented has been restated to include EDiX's operating results. During the second quarter ended June 30, 1999, the Company recorded charges of $4.0 million related to the acquisition of EDiX. The charges were comprised of transaction costs of $2.4 million, write-offs and adjustments for long-lived assets, principally computer equipment, of $1.4 million and other merger related costs of $0.2 million, principally related to integration costs incurred during the period and the termination of leases and other contractual obligations. On April 1, 1999, the Company acquired an 80% interest in ChannelHealth, Inc. for $6.5 million and may pay an additional $3.0 million, contingent upon certain performance goals. The acquisition will be accounted for under the purchase method. Page 6 of 24 PART I. FINANCIAL INFORMATION On June 23, 1999, the Company acquired all of the assets of DietSite.com, Inc. for $1.5 million. DietSite.com is a website which includes disease-oriented dietary information with extensive proprietary content on diets, vitamins, herbals and nutritionals. ChannelHealth, Inc. and DietSite.com will be managed and operated with the Company's other web technology initiatives as a separate business unit or tracking division, within the Company. Note 4 - Income taxes The tax benefit in 1999 is lower than that expected based on the statutory rate principally due to the non-deductible nature of certain transaction costs related to business acquisitions. The 1998 tax provision is higher than that expected based on the statutory rate principally due to losses of EDiX for which no tax benefit has been recognized. Note 5 - Comprehensive Income As of January 1, 1998, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income". SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Total comprehensive income (loss) for the quarter ended June 30, 1999 amounted to ($2.3) million compared to $5.4 million in the same period in 1998. Total comprehensive income (loss) for the six months ended June 30, 1999 amounted to ($10.9) million compared to $7.3 million in the same period in 1998. Note 6- Segment Information In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company adopted SFAS No. 131 effective with the fiscal year ended December 31, 1998. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about major customers, products and services, and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. Up to and including the first quarter of 1999, the Company has viewed its operations and managed its business as principally one segment, healthcare information solutions that include software, hardware and related services. During the second quarter of 1999, the Company acquired two companies which have separate and distinct financial information and operating characteristics. When applicable, the information for the reportable segments has been restated for the prior year in order to conform to the 1999 presentation. The Company's three business units have separate management teams and infrastructures that offer different products and services, and as such, have been classified as three reportable segments (information systems and services, internet initiatives, and medical transcription services). Information Systems and Services: This reportable segment consists of IDX Systems Corporation's healthcare information solutions that include software, hardware and related services. IDX solutions enable healthcare organizations to redesign patient care and other workflow processes in order to improve efficiency and quality. The principal markets for this segment include physician groups, management service organizations, hospitals, and integrated delivery networks primarily located in the United States. IDX.com - Internet Initiatives: This reportable segment consists of an 80% interest in ChannelHealth, an internet web-portal for physicians combined with a marketing site for pharmaceutical products, including the website DietSite.com which provides nutritional analysis and information, and various other web enabled products. IDX.com strategy is to deliver comprehensive web technology-based services. The principal markets for this segment include pharmaceutical companies, healthcare product distributors, healthcare providers including physicians, hospitals, and integrated delivery networks, and patients primarily located in the United States. Page 7 of 24 PART I. FINANCIAL INFORMATION Medical Transcription Services: This reportable segment contains EDiX, a provider of medical transcription outsourcing services. The principal markets for this segment include hospitals and large physician group practices primarily located in the United States. The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements filed in the 1998 form 10-K. The Company evaluates the performance of its operating segments based on revenue and operating income. Intersegment sales are immaterial. No one customer accounts for greater than 10% in revenue for any reportable segment, with the exception of EDiX. During the quarter ended June 30, 1999 and June 30, 1998, EDiX's sales to one major customer amounted to 37% and 36% of total revenue respectively. During the six months ended June 30, 1999 and June 30, 1998, EDiX's sales to the same customer amounted to 40% and 35% of total revenue respectively. Summarized financial information concerning the Company's reportable segments is shown in the following table (in millions):
IDX Healthcare Information IDX.com - Systems and Internet Services Initiatives EDiX Total -------------------------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, 1999 Net operating revenues $ 77,514 $ 2,561 $ 11,180 $ 91,255 Operating income (loss) 3,054 (2,739) (4,035) (3,720) Identifiable operating assets 260,060 1,768 12,276 274,104 FOR THE SIX MONTHS ENDED JUNE 30, 1999 Net operating revenues $ 137,695 $ 2,561 $ 20,649 $160,905 Operating loss (8,810) (2,739) (5,076) (16,625) Identifiable operating assets 260,060 1,768 12,276 274,104 FOR THE THREE MONTHS ENDED JUNE 30, 1998 Net operating revenues $ 79,364 $ 6,798 $ 86,162 Operating income (loss) 12,247 (2,306) 9,941 Identifiable operating assets 250,686 9,257 259,943 FOR THE SIX MONTHS ENDED JUNE 30, 1998 Net operating revenues $ 152,101 $ 12,870 $164,971 Operating income (loss) 20,467 (4,759) 15,708 Identifiable operating assets 250,686 9,257 259,943
Substantially all of the Company's operations are in the United States. As a result, the financial information disclosed herein represents all of the material financial information related to the Company's principal operating segments. Page 8 of 24 PART I. FINANCIAL INFORMATION Note 6 - Earnings Per Share Information The Company utilizes SFAS No. 128 to compute earnings per share. Under SFAS No. 128, 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, 1999 1998 1999 1998 ----- ----- ----- ----- Numerator: Net income (loss) $(2,250) $ 5,566 $(10,828) $ 7,364 ------- ------- --------- ------- Numerator for basic and diluted earnings (loss) per share $(2,250) $ 5,566 $(10,828) $ 7,364 Denominator: Denominator for basic earnings (loss) per share-- weighted-average shares 27,682 27,294 27,668 27,225 Effect of employee stock options - 887 - 869 ------ ------ ------- ------- Denominator for diluted earnings (loss) per share 27,682 28,181 27,668 28,094 ------ ------ ------- ------ Basic earnings (loss) per share $ (0.08) $ 0.20 $ (0.39 $ 0.27 ======= ======= ======= ======= Diluted earnings (loss) per share $ (0.08) $ 0.20 $ (0.39) $ 0.26 ======= ======= ======= =======
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 This Management's Discussion and Analysis of Financial Condition 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 14 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. The Company reported a net loss of ($2.2) million, or ($0.08) per share, for the second quarter of 1999 as compared to net income of $5.6 million or $0.20 per share, for the second quarter of 1998. Excluding the effect of the nonrecurring charge for the acquisition of EDiX Corporation of $4.0 million, the net income for the quarter ended June 30, 1999 was $0.7 million or $0.02 per share. The Company reported a net loss of ($10.8) million, or ($0.39) per share, for the first six months of 1999 as compared to net income of $7.4 million or $0.26 per diluted share, for the first six months of 1998. Page 9 of 24 PART I. FINANCIAL INFORMATION Excluding the effect of the nonrecurring charge for the acquisition of EDiX Corporation of $4.0 million, the net loss for the six months ended June 30, 1999 was ($7.0) million or ($0.25) per share. Excluding nonrecurring expenses in the prior year for costs associated with the acquisition of Trego Systems, Inc., the Company reported net income of $9.3 million, or $0.33 per share, for the first six months of 1998. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 REVENUES The Company's total revenues increased to $91.3 million during the three months ended June 30, 1999 from $86.2 million in the corresponding period in 1998, an increase of $5.1 million or 5.9%. Revenues from systems sales decreased to $37.7 million during the three months ended June 30, 1999 (41.3% of total revenues) compared to $43.7 million (50.7% of total revenues) in the corresponding period in 1998, a decrease of $6.0 million or (13.7%). The decrease was primarily due to a delay in current and potential customers' purchasing decisions combined with a decrease in installations of certain of the Company's IDXtend and LastWord systems. Revenues from maintenance and service fees increased to $53.5 million during the three months ended June 30, 1999 (58.7% of total revenues) from $42.4 million (49.3% of total revenues) in the corresponding period in 1998, an increase of $11.1 million or 26.1%. The increase in revenues from maintenance and service fees was due to additional maintenance revenues resulting from the continued growth in the Company's installed client base and increased transcription service fee revenue from EDiX. During the quarter ended June 30, 1999, certain of the Company's large customers delayed making purchasing decisions with respect to certain of the large software systems comprised of multiple products, resulting in longer sales cycles for such systems. Management believes such delays are due to a number of factors, including customer organizational changes, governmental approvals, product complexity, competition and customer preoccupation with internal Year 2000 issues. The Company is unable to determine whether such factors constitute a trend and will continue into future periods. COST OF SALES The cost of sales and services increased to $56.3 million during the three months ended June 30, 1999 from $48.1 million in the corresponding period in 1998, an increase of $8.2 million or 17.1%. The gross profit margin on systems sales and services decreased to 38.3% during the three months ended June 30, 1999 from 44.2% in the corresponding period in 1998. The decrease in gross profit was primarily due to fixed costs and overhead expenses in relation to decreased revenue from installations of the Company's systems which typically include a greater percentage of software than services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $21.2 million during the three months ended June 30, 1999 from $16.2 million in the corresponding period in 1998, an increase of $5.0 million or 31.0%. As a percentage of total revenues, selling, general and administrative expenses increased to 23.2% during the three months ended June 30, 1999 from 18.8% in 1998. The increase in total selling, general and administrative expenses during the three months ended June 30, 1999 was primarily due to an increase in the Company's sales, marketing and administrative staff infrastructure which management believes is necessary to support the long-term growth of the Company. RESEARCH AND DEVELOPMENT Research and development expenses increased to $13.4 million during the three months ended June 30, 1999 from $11.9 million in the corresponding period in 1998, an increase of $1.5 million or 12.4%. The increase is primarily due to the hiring of additional staff and outside consultants to support the development of additional products including IDXsite and web technology applications, and for the costs of efforts to address Year 2000 issues. As a percentage of total revenues, Page 10 of 24 PART I. FINANCIAL INFORMATION research and development expenses increased to 14.7% during the three months ended June 30, 1999 from 13.9% for the three months ended June 30, 1998. The increase as a percentage of sales for the three months ended June 30, 1999 as compared to the prior year, is due to additional personnel and consulting expenses. INTEREST AND OTHER INCOME Interest income decreased to approximately $1.3 million during the second quarter of 1999 compared to $1.5 million for the comparable period in 1998. Interest expense remained comparable at approximately $0.2 million during the second quarters of 1999 and 1998. INCOME TAXES Income taxes for the quarter ended June 30, 1999 were benefited at 23.2 % which is lower than the Company's historical statutory rate of 40.0 % due to certain charges related to the acquisition of EDiX which are non-deductible for income tax purposes. The provision for income taxes for the three months ended June 30, 1998 was provided for at approximately 49.2 %. The higher rate in the prior year is due to the combined financial statement, including a net loss for EDiX for which no tax benefit was recognized. In addition, a portion of the charges incurred in the first quarter ended March 31, 1998 related to the acquisition of Trego Systems, Inc. were nondeductible for income tax purposes. The Company anticipates an effective tax rate of approximately 40.0 % for the remainder of the year ending December 31, 1999. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 REVENUES The Company's total revenues decreased to $160.9 million during the six months ended June 30, 1999 compared to $165.0 million in the corresponding period in 1998, a decrease of $4.1 million or (2.5%). Revenues from systems sales decreased to $60.6 million during the six months ended June 30, 1999 (37.6% of total revenues) compared to $82.7 million (50.1% of total revenues) in the corresponding period in 1998, a decrease of $22.1 million or (26.7%). The decrease was primarily due to a delay in current and potential customers' purchasing decisions combined with a decrease in installations of certain of the Company's LastWord and IDXtend systems. Revenues from maintenance and service fees increased to $100.3 million during the six months ended June 30, 1999 (62.4% of total revenues) from $82.3 million (49.9% of total revenues) in the corresponding period in 1998, an increase of $18.0 million or 21.9%. The increase in revenues from maintenance and service fees was due to additional maintenance revenues resulting from the continued growth in the Company's installed client base and increased transcription service fee revenue from EDiX. During the six months ended June 30, 1999, certain of the Company's large customers delayed making purchasing decisions with respect to certain of the large software systems comprised of multiple products, resulting in longer sales cycles for such systems. Management believes such delays are due to a number of factors, including customer organizational changes, governmental approvals, product complexity, competition and customer preoccupation with internal Year 2000 issues. The Company is unable to determine whether such factors constitute a trend and will continue into future periods. COST OF SALES The cost of sales and services increased to $105.1 million during the six months ended June 30, 1999 from $92.5 million in the corresponding period in 1998, an increase of $12.6 million or 13.7%. The gross profit margin on systems sales and services decreased to 34.7% during the six months ended June 30, 1999 from 44.0% in the corresponding period in 1998. Page 11 of 24 PART I. FINANCIAL INFORMATION The decrease in gross profit was primarily due to fixed costs and overhead expenses in relation to decreased revenue from installations of the Company's LastWord and IDXtend systems which typically include a greater percentage of software than of services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $41.2 million during the six months ended June 30, 1999 from $31.2 million in the corresponding period in 1998, an increase of $10.0 million or 32.2%. As a percentage of total revenues, selling, general and administrative expenses increased to 25.6% during the six months ended June 30, 1999 from 18.9% in 1998. The increase in total selling, general and administrative expenses during the six months ended June 30, 1999 was principally due to an increase in the Company's sales, marketing and administrative staff infrastructure which management believes is necessary to support the long-term growth of the Company. RESEARCH AND DEVELOPMENT Research and development expenses increased to $27.2 million during the six months ended June 30, 1999 from $22.4 million in the corresponding period in 1998, an increase of $4.7 million or 21.2%. The increase is primarily due to the hiring of additional staff and outside consultants to support the development of additional products including IDXsite and web technology applications, and for the costs of efforts to address Year 2000 issues. As a percentage of total revenues, research and development expenses increased to 16.9% during the six months ended June 30, 1999 from 13.6% for the six months ended June 30, 1998. The increase as a percentage of sales for the six months ended June 30, 1999 as compared to the prior year, is due to the additional personnel and consulting expenses. NONRECURRING CHARGE - MERGER AND RELATED COSTS During the first six months ended June 30, 1999, the Company recorded charges of $4.0 million related to the acquisition of EDiX. The charges were comprised of transaction costs of $2.4 million, write-offs and adjustments for long-lived assets, principally computer equipment, of $1.4 million and other merger related costs of $0.2 million, principally related to integration costs incurred during the period and the termination of leases and other contractual obligations. NONRECURRING CHARGE - 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. INTEREST AND OTHER INCOME (EXPENSE) Interest income decreased to approximately $2.7 million during the first six months of 1999 compared to $3.0 million for the same period in 1998. Interest expense increased to $0.9 million during the first two quarters of 1999 compared to $0.4 million for the same period in the prior year. The increase in interest expense is primarily due to EDiX Corporation. LOSS ON IMPAIRMENT OF ASSET Other expense included the write-off of an investment of $1.6 million in the quarter ended March 31, 1999. INCOME TAXES Income taxes for the six months ended June 30, 1999 were benefited at 36.3% which is lower than the Company's historical statutory rate of 40.0% primarily due to certain charges related to the acquisition of EDiX which are non-deductible for income tax purposes. The provision for income taxes for the six months ended June 30, 1998 was provided at approximately 58.4%. The higher rate in the prior year is due to the combined financial statement, including a net loss for EDiX for which no tax benefit was recognized. In addition, a portion of the charges incurred in the first quarter ended March 31, 1998 related to the acquisition of Trego Systems, Inc. were non-deductible for income tax purposes. The Company anticipates an effective tax rate of approximately 40% for the remainder of the year ending December 31, 1999. Page 12 of 24 PART I. FINANCIAL INFORMATION LIQUIDITY AND CAPITAL RESOURCES Since its inception in 1969, the Company has funded its operations, working capital needs and capital expenditures primarily from operations. The proceeds from its initial public offering in 1995 have been used for general corporate purposes. Cash flows from operations are principally comprised of net income (loss), depreciation and amortization, 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 installation efforts which are dependent upon, among other things, 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 within 85 to 112 days. Cash flows related to investing activities have principally been related to the purchase of computer and office equipment, leasehold improvements, the acquisition of complementary products, businesses, technology and the purchase and sale of investment grade marketable securities. The Company expects these activities to continue. During the six months ended June 30, 1999, the Company acquired two buildings in South Burlington, Vermont for approximately $7.5 million with approximately 66,000 square feet that will be used for additional office space. On April 23, 1999 the Company acquired EDiX Corporation ("EDiX"). The terms of the agreement provided for the shareholders and optionholders of EDiX to receive approximately 1,000,000 shares of IDX common stock. Based on the closing price of the IDX common stock on April 23, 1999, the transaction is valued at approximately $16.7 million, plus the assumption of EDiX debt of approximately $14.0 million that was paid off during the six months ended June 30, 1999. Additionally, the Company acquired an 80% interest in ChannelHealth, Inc. on April 1, 1999 for $6.5 million and may pay an additional $3.0 million, contingent upon certain performance goals. On June 23, 1999, the Company acquired all of the assets of DietSite.com, Inc. for $1.5 million. ChannelHealth, Inc. and DietSite.com will be managed and operated with the Company's other web technology initiatives as a separate business unit or, tracking division,within the Company. It is anticipated that this division will lose approximately $10.0 million pretax during 1999. There can be no assurance that the Company will be able to successfully complete other purchases or acquisitions in the future. Cash flows from financing activities historically relate to the sale of common stock through the exercise of employee stock options and in connection with the employee stock purchase plan. During 1998 other financing activities related to the recapitalization of the real estate affiliate from debt to equity. Cash, cash equivalents and marketable securities at June 30, 1999 were $70.6 million, a decrease from the December 31, 1998 balance of $125.1 million. This decrease is primarily due to the investing activities referred to above combined with a use of cash for operations due to the operating loss of $10.8 million for the six months ended June 30, 1999. 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, 1999 or 1998. 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 1999 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. The Company has announced plans to expand its facilities at Shelburne Road in South Burlington, Vermont and is considering various options, including the purchase of additional land and the construction of additional office space. To date, the Company has made no lease or purchase commitments other than the two building purchases mentioned above. Page 13 of 24 PART I. FINANCIAL INFORMATION YEAR 2000 INTRODUCTION Software applications that use only two digits to identify a year in the date field may fail or create errors in the year 2000 ("Year 2000 Issues"). The Company has taken significant steps to address Year 2000 Issues. The Company's internally used computer equipment, software and devices with embedded technology--including both information systems and non-information systems (together, "Internal Use Systems")--may fail to operate properly or as expected due to Year 2000 Issues. This could result in a system failure or miscalculations causing disruption of the Company's operations, including among other things, a temporary inability to process transactions, send invoices, conduct communications, or engage in similar normal business activities. In addition, computer software products sold, marketed, and supported by the Company ("Company Software Products") and the products of third parties that are distributed by the Company or others or may be necessary for operation of Company Software Products ("Third Party Products"), may fail to operate properly or as expected due to Year 2000 Issues. Such failures could result in system failures or miscalculations causing disruption of customers' operations, including among other things, a temporary inability to process transactions, send invoices, conduct communications, treat patients, or engage in similar normal business activities. Further, products and services used by the Company's customers, but not supplied by the Company, could fail to operate properly or as expected due to Year 2000 Issues. Customers' efforts to plan for such events could result in the deferral, delay or cancellation by customers of current installations of and plans to purchase Company Software Products. STATE OF READINESS The Company has undertaken various initiatives intended to address Year 2000 Issues with respect to Internal Use Systems, Company Software Products, and Third Party Products. The Company has established working groups whose primary functions are to: (i) develop and implement the Company's definition of Year 2000 readiness; (ii) assess Internal Use Systems, Third Party Products and Company Software Products for Year 2000 Issues; (iii) monitor development, testing and remediation efforts with respect to Company Software Products; (iv) monitor testing of Company Software Products and Third Party Products, (v) review customer preparations to implement Year 2000 releases of Company Software Products; (vi) monitor and coordinate the Company's deployment plans and results with respect to Year 2000 releases of Company Software Products; (vii) monitor and coordinate contingency plans with respect to Internal Use Systems, Company Software Products and Third Party Products; and (viii) provide centralization, accuracy and consistency of the Company's communications regarding Year 2000 Issues. The Company has engaged independent experts to assist in its efforts with respect to Year 2000 Issues. The Company has employed such experts to independently evaluate and verify its methodologies and state of readiness. In addition, the Company has employed experts to independently evaluate certain critical Internal Use Systems. Although the Company's efforts to address Year 2000 issues do not fall precisely into sequential phases, generally these efforts are comprised of an assessment phase, a development phase (only with respect to Company Software Products), a deployment or remediation phase, a preliminary contingency planning phase, and a final stage contingency planning phase. Internal Use Systems. Based upon the Company's assessment efforts to date, the Company believes that certain Internal Use Systems will require replacement or modification, and to date the Company has replaced or modified some Internal Use Systems. In addition, in the ordinary course of replacing and upgrading Internal Use Systems, the Company attempts to obtain replacements that it believes will not fail as a result of Year 2000 Issues. The Company has substantially completed its assessment efforts with respect to Internal Use Systems and expects that its remediation efforts will be completed by the fourth quarter of 1999. The Company is currently engaged in but has not completed contingency planning to address personnel, resource and technical Year 2000 Issues relating to foreseeable scenarios that may develop despite its current and planned remediation efforts. The Company estimates that as of June 30, 1999 it had completed approximately 88% of its efforts in connection with Year 2000 Issues relating to its Internal Use Systems. The projects Page 14 of 24 PART I. FINANCIAL INFORMATION comprising the remaining 12% of such efforts are in process and are expected to be substantially completed on or about the fourth quarter of 1999. The majority of the remaining work is associated with finalizing the Company's contingency plan, analyzing landlord's responses for facilities leased by IDX, completing evaluation of the possible need for upgrades on non-IDX desktop applications and plan validation. The Company has mailed letters or otherwise communicated with many of its significant vendors of Internal Use Systems and related service providers to determine the extent to which Year 2000 Issues affect products and services of such vendors and providers. As of June 30, 1999, the Company had received responses from approximately 95% of such third parties, and 92% of these companies have provided written assurances that they expect to successfully address their significant Year 2000 Issues on a timely basis. The Company is engaged in but has not completed efforts to communicate with other vendors and service providers involved in its Internal Use Systems to request more responses to its communications and to verify the responses received. Due to uncertainties associated with vendors and service providers, the Company is unable to predict whether Year 2000 Issues involved in its Internal Use Systems will have a material adverse effect on the Company's business, results of operations, or financial condition, despite the Company's current assessment to the contrary. Third Party Products. The Company works closely with vendors of significant Third Party Products and has communicated with them to determine the extent to which their products and services are or will be Year 2000 compliant. In addition, the Company is testing or plans to test Year 2000 releases of certain Third Party Products. Based upon its current assessment, the Company believes it has received adequate assurances that significant Third Party Product vendors expect to successfully address their significant Year 2000 Issues on a timely basis. Due to uncertainties associated with Third Party Product vendors, the Company is unable to predict whether a material adverse effect on business, results of operations, or financial condition may result from Year 2000 Issues related to Third Party Products, despite the Company's current assessment to the contrary. Company Software Products. The Company began development of Year 2000 versions of some Company Software Products in 1997 and continues to progress through development cycles with respect to some Company Software Products. The Company began deploying Year 2000 releases of Company Software Products in 1998 and expects to complete deployment of such releases during the second half of 1999. The Company continues to test and monitor performance of Year 2000 releases of Company Software Products in customer environments. The Company expects to deliver and deploy maintenance releases of Company Software Products in the ordinary course of business to remediate any Year 2000 Issues as identified during and after deployment of Year 2000 releases of Company Software Products. Based on the Company's assessment, the Company believes continuing efforts will be required to assist customers in deploying and testing Year 2000 releases of Company Software Products in their unique environments. The Company expects an increase in service and support effort levels as the year 2000 approaches and into the early months of the year 2000. The Company develops, markets and supports many different products, and the amount of effort applied with respect to individual products varies from product to product. The Company estimates that as of June 30, 1999 it had completed approximately 91% of the development efforts relating to Year 2000 versions of all of the Company Software Products, including 90% of such efforts related to EDiX. The projects comprising the remaining 9% of these efforts are in process and expected to be substantially completed in the third quarter of 1999. The Company estimates that as of June 30, 1999, it had completed approximately 86% of the deployment efforts relating to Year 2000 versions of all Company Software Products, including 50% of deployment efforts related to EDiX's products. The projects comprising the remaining 14% of these efforts are in process and are expected to be substantially completed in the third quarter of 1999, but the Company expects to continue efforts to remediate and maintain Year 2000 versions of Company Software Products in customer environments and to support customers' efforts relating to Year 2000 Issues through the early part of 2000. Page 15 of 24 PART I. FINANCIAL INFORMATION The Company is currently engaged in but has not completed contingency planning to address company-wide personnel, resource, technical and communication issues relating to its service and remediation efforts. The Company expects that its development, remediation, testing, deployment and contingency planning efforts with respect to Company Software Products will continue up to and beyond December 31, 1999, but expects the level of development and deployment will decrease in the second half of 1999. Contingency Plans and Risks. The Company has begun, but not yet completed, a comprehensive analysis of the company-wide operational, business and financial problems (including possible loss of revenue), if any, that would be reasonably likely to result from the impact of unresolved Year 2000 Issues, including possible: (i) failure by the Company and vendors of Third Party Products to complete efforts to avoid or minimize Year 2000 Issues on a timely basis, including failure of Internal Use Systems, Company Software Products and Third Party Products to be Year 2000 ready; (ii) failure of Customers to be ready to or cooperate in the deployment of Year 2000 ready versions of Company Software Products and Third Party Products on a timely basis; and (iii) delay, deferral or cancellation by customers of current installations and prospective purchase decisions with respect to Company Software Products. The Company has not yet completed its contingency plans relating to Year 2000 scenarios it deems sufficiently probable to merit contingency planning, but it has substantially completed its preliminary phase of contingency planning and expects to substantially complete its contingency planning by the third quarter of 1999. Such contingency final stage planning will encompass "worst case" scenarios that assume the failure of significant communications and computing infrastructures of the Company, its customers and suppliers, together with failures of governmental and utility infrastructures, including those related to transportation and energy. COSTS The Company estimates that the cost of its efforts to successfully address Year 2000 Issues will be approximately $17.8 million, of which approximately $5.2 million relates to Internal Use Systems, $0.6 million relates to EDiX, and $12.0 million relates to Company Software Products. Because the Company develops, markets, and supports many different products, the amount of effort applied with respect to individual products varies from product to product. All expenditures to fund Year 2000 Issue efforts have been and will continue to be recognized as operating expenses for fiscal years 1997 through early 2000, except for $0.8 million, which is expected to be incurred and capitalized in 1999. As of June 30, 1999, the Company had incurred approximately $12.7 million related to its Year 2000 Issue assessment, remediation, testing, and contingency planning efforts identification, which is approximately 71% of the total projected costs of such efforts. Of the amount of costs incurred as of June 30, 1999, approximately $3.3 million relates to Internal Use Systems, which is approximately 57% of the total of estimated costs for such efforts, and $9.4 million relates to Company Software Products, which is approximately 78% of the total of estimated costs for such efforts. Unless all material Year 2000 Issues are timely and properly identified, assessed, and remediated, and unless adequate contingency plans are properly formulated, Year 2000 Issues may materially adversely impact the Company's business, financial condition and results of operations, or adversely affect the Company's relationships with customers, suppliers or others. The Company believes that Year 2000 Issues could cause failures in important elements of the computing and communications infrastructures of the Company, its customers and suppliers and also Company Software Products and Third Party Products. Further, the Company expects that it and its customers and suppliers may experience failures of such systems the causes of which will be difficult to determine, requiring the application of resources for diagnostic purposes. If the Company has not developed adequate contingency plans and means to address such contingencies, Year 2000 Issues could materially adversely impact the Company's business, financial condition and results of operations, or adversely affect the Company's relationships with customers, suppliers or others. The costs, timing and scheduling of deployment and installation of Year 2000 versions of Company Software Products and Third Party Products, as well as the ability of the Company to assist customers in the installation of Company Software Products, will depend in part on the readiness, ability and cooperation of customers and their suppliers. Due to uncertainties associated with customers' readiness, cooperation and sources of products and services, there can be no assurance that Year 2000 Issues will not materially adversely affect the Company's business, results of operations, or financial condition, or adversely affect the Company's relationships with customers, vendors or others. Page 16 of 24 PART I. FINANCIAL INFORMATION Some customers and prospects of the Company operate in complex computing environments that include products and services not supplied by the Company. The costs, timing and scheduling by customers of work related to Year 2000 Issues involving such products and services may cause some customers and prospects to defer current projects or prospective purchase decisions regarding Company Software Products. If Year 2000 Issues cause customers and prospects to defer current projects or prospective purchase decisions, the Company's financial, business and operational goals may be deferred or may not be realized at all, with the result that the Company's business, results of operations, or financial condition could be materially adversely affected. Due to uncertainties associated with customers and prospects, there can be no assurance that Year 2000 Issues will not materially adversely affect the Company's business, results of operations, or financial condition or adversely affect the Company's relationships with customers, vendors or others. The costs of the Company's Year 2000 identification, assessment, remediation, testing, deployment and contingency planning efforts, and the dates on which the Company believes it will complete such efforts, are based upon management's current best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans, and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability of and cost of personnel trained in Year 2000 Issues, the ability to correctly and effectively identify, assess, remediate, and test all relevant computer codes, equipment, and embedded technology, and similar uncertainties, the ability of the Company to timely install and deploy Year 2000 releases of Company Software Products, a failure of the Company to provide, obtain or make available adequate resources to assist customers in installing Year 2000 releases of Company Software Products and Third Party Products. As a result of any of such factors alone or in combination, the Company may experience an increase in warranty and other claims. In addition, since there is no uniform definition of "compliance with Year 2000," and since the Company sells a myriad of different combinations of products and services under varying contractual terms, the Company is not able to assess or estimate the possible impact of such possible claims. No assurance can be given that the aggregate cost of defending and resolving such claims, if any, will not materially adversely affect the Company's results of operations. Although some of the Company's agreements with manufacturers and others from whom it purchases products for resale contain provisions requiring such parties to indemnify the Company under some circumstances, there can be no assurance that such indemnification arrangements will cover all of the Company's liabilities and costs related to claims by third parties related to Year 2000 Issues. FACTORS AFFECTING FUTURE RESULTS IDX Stock Prices May Continue to be Volatile. IDX has experienced, and expects to continue to experience fluctuations in its stock price due to a variety of factors including: . delay in customers purchasing decisions due to a variety of factors such as consolidation, management changes and year 2000 problems; . market prices of competitors such as McKesson HBOC, Inc.; . announcements of technological innovations, including Internet delivery of information and use of relational database technology; . new product introductions by IDX or its competitors; . market conditions particularly in the computer software and hardware industries; and . healthcare reform measures, such as those contemplated by the Balanced Budget Act of 1997. Page 17 of 24 PART I. FINANCIAL INFORMATION These fluctuations could have a significant impact on future market prices of IDX's common stock. On March 5, 1999 IDX announced that it expected a loss of ($0.22) - ($0.28) per share in the quarter ending March 31, 1999. Following this announcement, the IDX share price declined. On April 30, 1999, the last reported sale price of IDX common stock on the Nasdaq National Market was $16.25 per share and on June 30, 1999, such price was $22.5625. On December 31, 1998, the last reported sale price of IDX common stock on the Nasdaq National Market was $44.00. These prices represent declines of 63% and 49%, respectively, in the value of IDX stock since December 31, 1998. Variation in Financial Trends in Net Income and Cash from Operations May Continue. Year over year net income and cash from operations have fluctuated since 1995. IDX's net income was $20.6 million in 1995. Net income fell to $16.7 million in 1996 and $8.0 million in 1997. Net income increased to $30.2 million in 1998. Cash from operations was $21.7 million in 1995, $10.4 million in 1996, $9.8 million in 1997, and $23.4 million in 1998. On March 5, 1999 IDX announced that based on currently available information, the after tax loss for the first quarter ending March 31, 1999 was expected to be ($5.0) to ($7.0) million. If these negative trends were to continue, IDX may have difficulty in financing future growth and funding its operating initiatives including future acquisitions. IDX Expects its Quarterly Operating Results to Fluctuate and its Customer Sales and Installation Requirements to Change. IDX expects its quarterly results of operations to continue to fluctuate. Because a significant percentage of IDX's expenses are relatively fixed, the following factors could cause these fluctuations: . delay in customers purchasing decisions due to a variety of factors such as consolidation, management changes and year 2000 problems; . the volume and timing of systems sales and installations; . recognizing revenue at various points during the installation process; . the sales and implementation cycles of IDX's customers; and . general reductions in spending by IDX's customers and healthcare reform measures. In addition, the timing of new product and service introductions and product upgrade releases and general economic conditions can impact IDX's quarterly operating results. In light of the above, IDX believes that its results of operations for any particular quarter or fiscal year are not necessarily meaningful or reliable indicators of future performance. Future period-to-period fluctuations may have a material adverse effect on IDX's results of operations, financial condition or business. IDX May Experience Challenges and Incur Substantial Costs in Integrating the Operations of EDiX. EDiX may present IDX operational challenges, and IDX expects to incur significant pre-tax charges in association with the merger. If IDX fails to successfully integrate the operations or management of the two companies, it could have a material adverse effect on the combined entity's results of operations, financial condition or business. IDX May Not be Successful in Implementing its Acquisition Strategy. IDX intends to continue to grow in part through either acquisitions of complementary products, technologies and businesses or alliances with complementary businesses. IDX may not be successful in these acquisitions or alliances, or in integrating any such acquired or aligned products, technologies or businesses into its current business and operations. Factors which may affect IDX's ability to expand successfully include: . the successful identification and acquisition of products, technologies or businesses; Page 18 of 24 PART I. FINANCIAL INFORMATION . effective integration and operation of the acquired or aligned products, technologies or businesses despite technical difficulties, geographic limitations and personnel issues; and . overcoming significant competition for acquisition and alliance opportunities from companies that have significantly greater financial and management resources, such as McKesson HBOC, Inc. and Shared Medical Systems Corporation. The failure to successfully integrate any significant products, technologies or businesses could have a material adverse effect on IDX's results of operations, financial condition or business. IDX's Success Depends on New Product Development and Its Ability to Respond to Rapidly Changing Technology. To be successful, IDX must enhance its existing products, respond effectively to technology changes and help its clients adopt new technologies. In addition, IDX must sell additional products to its existing client base and introduce new products and technologies to meet the evolving needs of its clients in the healthcare information systems market. IDX may have difficulty in accomplishing this because of factors including: . evolving industry standards, for example, Health Level Seven; . new technological developments, for example, the web technology. IDX is currently devoting significant resources toward the development of enhancements to its existing products, particularly in the announced area of web-based functionality and the migration of existing products to new hardware and software platforms including relational database technology and object-oriented programming. However, IDX may not successfully complete these product developments or the adaptation in a timely fashion, and IDX's current or future products may not satisfy the needs of the healthcare information systems market. Any of these developments may adversely affect IDX's competitive position or render its products or technologies noncompetitive or obsolete. IDX May Be Adversely Affected by Year 2000 Problems. In the year 2000 software applications that use only two digits to identify a year in the date field may fail or create errors. IDX uses computer equipment, software and devices with embedded technology, including both information systems and non-information systems, that may not be year 2000 compliant despite IDX's continuing efforts to assess, remediate, and test such equipment, software and devices. This could result in a system failure or miscalculations causing disruption of IDX's operations, including among other things, a temporary inability to: . process transactions; . send invoices; . conduct communications; or . engage in similar normal business activities. In addition, IDX sells computer software products and distributes the products of third parties that may not be year 2000 compliant despite IDX's continuing efforts to assess and test these products. This could result in system failures or miscalculations causing disruption of customers' operations, including, in addition to the types of disruptions described above, a temporary disruption in their ability to treat patients. Further, products and services used by IDX's customers, but not supplied by IDX, may not be year 2000 compliant. Customers may defer current installations of and plans to purchase IDX products until they have completed their own year 2000 assessment. Any of these problems could have a material adverse effect on IDX's results of operations, financial condition or business. Page 19 of 24 PART I. FINANCIAL INFORMATION IDX does not believe that the year 2000 issues will pose significant operational problems for IDX. However, if year 2000 issues are not properly identified, assessed and resolved, it could have a material adverse effect on the results of operations, financial condition or business of IDX. In addition if actual year 2000 remediation costs are higher than IDX estimated costs, it could materially adversely affect IDX's results of operations, financial condition or business. The nature of IDX's business and its relationships with its customers make it difficult to assess the magnitude of IDX's potential exposure as a result of year 2000 issues. IDX is engaged in the business of developing, marketing and supporting computer software. IDX's software is often used by its customers in conjunction with other vendors' products and services. The ability of IDX to assist its customers in the development and installation of year 2000 compliant versions of IDX software products will depend in part on the readiness, ability and cooperation of its customers and their suppliers. In addition, the purchasing patterns of IDX customers and potential customers may be affected by year 2000 issues. The cost, timing and scheduling by customers of work related to year 2000 issues involving IDX's products and services may cause some customers to defer or forego projects or purchase decisions. IDX sells a number of different combinations of products and services under varying contractual terms. There is no widely accepted definition of year 2000 compliance. Certain of IDX's customers may assert breach of warranty or other claims against IDX relating to year 2000 compliance. Any of these factors may adversely affect the results of operations. Product Sales Within the Healthcare Industry May Decline Causing IDX to Suffer Financially. IDX currently derives substantially all of its revenues from sales of financial, administrative and clinical healthcare information systems and related services within the healthcare industry. As a result, any factor adversely affecting this industry and these sales could have a material adverse effect on IDX. In addition, even though IDX's annual sales have increased, future revenues associated with existing products may decline as a result of factors like price competition. IDX may not be able to continue its success in marketing its current, new or enhanced products. Moreover, IDX may be unable to maintain its current pricing for existing products. IDX May Be Faced With Product Liability Claims Exceeding Its Insurance Coverage. Any failure by IDX's products that provide applications relating to patient medical histories and treatment plans could expose IDX to product liability claims. These potential claims may exceed IDX's current insurance coverage. A successful claim brought against IDX in excess of its insurance coverage could have a material adverse effect on IDX's results of operations. Even unsuccessful claims could be costly to defend and divert management time and resources. In addition, IDX cannot assure you that it will continue to have appropriate insurance available to it in the future at commercially reasonable rates. IDX's Success is Significantly Dependent on Key Personnel. The success of IDX is dependent to a significant degree on its key management, sales, marketing, and technical personnel. To be successful IDX must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including programmers, consultants, and systems architects skilled in the technical environments in which IDX'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 IDX's results of operations. IDX does not maintain "key man" life insurance policies on its executives. Not all IDX personnel have executed noncompetition agreements. IDX May Be Adversely Affected By Changes in the Healthcare Industry and by Government Healthcare Reform Proposals. IDX'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 capital expenditures. From time to time, Congress has considered and adopted proposals to reform the healthcare system. These proposals may increase government involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for IDX's clients. Legislation such as the Balanced Budget Act of 1997 will lower reimbursement rates and may result in reduced spending by certain healthcare organizations. Healthcare organizations may react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for IDX's products and services. IDX cannot predict with any certainty what impact these proposals or healthcare reforms, such as the Balanced Budget Act of 1997 might have on its results of operations, financial condition or business. Page 20 of 24 PART I. FINANCIAL INFORMATION Governmental Regulation May Impose New Burdens and Costs on IDX's Operations. The United States Food and Drug Administration has promulgated a draft policy for the regulation of computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To the extent that computer software is a medical device under the policy, IDX, as a manufacturer of such products, could be required, depending on the product, to: . register and list its products with the FDA; . notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products; or . obtain FDA approval by demonstrating safety and effectiveness before marketing a product. Depending on the intended use of a device, the FDA could require IDX to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires this 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. IDX cannot provide assurances that the FDA will approve or clear a device after the completion of such trials. In addition, these products would be subject to the 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, IDX expects that the FDA is likely to become increasingly active in regulating computer software intended for use in healthcare settings regardless of whether the draft is finalized or changed. The FDA can impose extensive requirements governing pre-and post-market conditions like service investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes. In order to ensure continued compliance with changing government standards and regulations, IDX monitors regulations affecting its business including those mandated by the Health Insurance Portability and Accountability Act of 1996. IDX May Have Conflicts of Interests With Some of its Executives Which May Adversely Affect IDX. Richard E. Tarrant, Chief Executive Officer and Director, and Robert H. Hoehl, Chairman of the Board of Directors, indirectly own, through various entities, real estate which IDX leases in connection with its operations. During 1998, IDX paid an aggregate of approximately $4.2 million in connection with these leases. In November 1998, IDX announced tentative plans to expand one of its facilities located on land owned by these executives, however the Company has not yet made any commitments to finalize those plans. In connection with these arrangements, the economic interests of these executives and directors and IDX may diverge. In response, IDX has created the Committee on Independent Director Transactions to review and approve transactions of this nature. IDX believes that these arrangements were entered into on an arm's length basis on terms that were no less favorable to IDX than could have been obtained from unaffiliated third parties. 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 21 of 24 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On June 11, 1999, a lawsuit was served on the Company. Eleven other companies engaged in various aspects of the healthcare information systems business have also been sued in the same lawsuit. The lawsuit was brought in the United States District Court for the Northern District of Texas Fort Worth Division and is entitled Allcare Health Management System, Inc. v. Cerner Corporation, et al., and claims damages for patent infringement. The Company is investigating the claims made in the lawsuit and will respond accordingly. Based upon a preliminary investigation to date, the Company believes the lawsuit is without merit and intends to vigorously defend against it. The Company is from time to time involved in routine litigation incidental to the conduct of its business. The Company believes that no such currently pending routine litigation to which it is party will have a material adverse effect on its financial condition or results of operations. 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. None. Item 5. OTHER INFORMATION None. 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. Page 22 of 24 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, 1999 By: /S/ JOHN A. KANE ------------------------------- John A. Kane, Vice President, Finance and Administration, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Page 23 of 24 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 25
Page 24 of 24 EX-27 2 FDS -- ARTICLE 5 FDS FOR 2ND QUARTER 99 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS 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-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 JUN-30-1998 1 1 7,338 13,576 63,281 105,469 114,519 82,231 (2,724) (1,842) 0 0 203,521 210,251 94,093 65,530 43,520 31,371 274,104 259,943 63,227 56,202 0 0 0 0 0 0 357 273 201,285 192,619 274,104 259,943 160,905 164,971 160,905 164,971 105,098 92,461 72,432 56,802 4,045 3,201 246 301 858 434 (17,008) 17,704 (6,180) 10,340 (10,828) 7,364 0 0 0 0 0 0 (10,828) 7,364 (0.39) 0.27 (0.39) 0.26
EX-27 3 FDS -- ARTICLE 5 FDS FOR 2ND QUARTER 99 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001001185 IDX SYSTEMS CORPORATION 1,000 U.S. DOLLARS 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 APR-01-1999 APR-01-1998 JUN-30-1999 JUN-30-1998 1 1 7,338 13,576 63,281 105,469 114,519 82,231 (2,724) (1,842) 0 0 203,521 210,251 94,093 65,530 43,520 31,371 274,104 259,943 63,227 56,202 0 0 0 0 0 0 357 273 201,285 192,619 274,104 259,943 91,255 86,162 91,255 86,162 56,295 48,094 38,680 28,127 0 0 116 139 221 240 (2,930) 10,966 (680) 5,400 (2,250) 5,566 0 0 0 0 0 0 (2,250) 5,566 (0.08) 0.20 (0.08) 0.20
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