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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, 1996
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 Identification No.)
incorporation or organization)
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, $.01 par
value per share, as of August 7, 1996 was 20,897,347.
[Exhibit index begins on Page ]
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PART I. FINANCIAL INFORMATION
IDX SYSTEMS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Interim Financial Statements:
a) Condensed consolidated balance sheets as of
June 30, 1996 and December 31, 1995 (unaudited) 3
b) Condensed consolidated statements of income for
the three months ended June 30, 1996 and 1995 (unaudited) 4
c) Condensed consolidated statements of cash flows
for the six months ended June 30, 1996 and 1995 (unaudited) 5
d) Notes to condensed consolidated financial statements 6
ITEM 2. Management's discussion and analysis of financial
condition and results of operations 7
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings 16
ITEM 2. Changes in securities 16
ITEM 3. Defaults upon senior securities 16
ITEM 4. Submission of matters to a vote of security holders 16
ITEM 5. Other information 16
ITEM 6. Exhibits and reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,617 $ 33,262
Securities available-for-sale 69,899 46,514
Accounts receivable, net 34,898 28,013
Other current assets 1,779 2,081
Deferred tax asset 1,275 1,535
--------- ---------
Total current assets 123,468 111,405
Property and equipment, net 17,093 16,221
Other assets 797 785
--------- ---------
Total assets $ 141,358 $ 128,411
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 12,537 $ 14,124
Deferred revenue 7,587 7,766
--------- ---------
Total current liabilities 20,124 21,890
Long-term debt 2,700 2,907
Minority interest 1,514 1,182
Stockholders' equity 117,020 102,432
--------- ---------
Total liabilities and
stockholders' equity $ 141,358 $ 128,411
========= =========
See accompanying notes.
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
</TABLE>
3
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PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Software license fees $ 13,810 $ 11,862 $ 26,238 $ 20,966
Maintenance and service fees 17,734 15,729 34,514 29,949
Hardware sales 7,538 5,853 15,675 11,774
--------- --------- --------- ---------
Total revenues 39,082 33,444 76,427 62,689
OPERATING EXPENSES
Cost of license, maintenance
and service fees 13,205 12,855 25,984 24,783
Cost of hardware sales 6,145 4,519 12,757 9,087
Selling, general, and
administrative 8,337 6,885 15,828 11,988
Research and development 5,912 5,058 11,698 9,347
--------- --------- --------- ---------
33,599 29,317 66,267 55,205
Operating income 5,483 4,127 10,160 7,484
Interest and other (income)
expense (939) (234) (1,849) (488)
--------- --------- --------- ---------
Income before income taxes 6,422 4,361 12,009 7,972
Income tax provision 2,566 233 4,800 425
--------- --------- --------- ---------
Net income $ 3,856 $ 4,128 $ 7,209 $ 7,547
========= ========= ========= =========
Net income per share $ 0.18 $ 0.34
========= =========
Historical income before income
taxes $ 4,361 $ 7,972
Pro forma income taxes 1,745 3,189
--------- ---------
Pro forma net income $ 2,616 $ 4,783
========= =========
Pro forma net income per share $ 0.15 $ 0.28
========= =========
Average shares outstanding 21,420 17,439 21,351 17,439
========= ========= ========= =========
See accompanying notes.
</TABLE>
4
<PAGE>
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1996 1995
---- ----
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,209 $ 7,547
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,306 1,803
Increase in allowance for doubtful accounts 54 283
Minority interest 332 183
Changes in operating assets and liabilities:
Accounts receivable (6,904) (7,241)
Prepaid expenses 149 149
Accounts payable (55) 2,950
Accrued expenses 2,171 3,647
Deferred revenue (179) 1,138
Other, net 371 196
-------- -------
Net cash provided by operating activities 5,454 10,655
INVESTING ACTIVITIES
Purchase of property and equipment, net (3,177) (1,956)
Purchase of securities available-for-sale, net (80,032) (496)
Sale of securities available-for-sale 56,466 635
-------- -------
Net cash used in investing activities (26,743) (1,817)
FINANCING ACTIVITIES
Proceeds from sale of common stock 3,851 982
S Corporation distribution (1,979)
Distributions from affiliates (225)
Issuance of notes receivable to related parties 9
Repayment of advances to related parties 1,161
Payments on long-term debt related to real estate (207) (387)
-------- -------
Net cash provided by (used in) financing
activities 3,644 (439)
-------- -------
Increase (decrease) in cash and cash
equivalents (17,645) 8,399
Cash and cash equivalents at beginning of
period 33,262 6,830
-------- -------
Cash and cash equivalents at end of period $ 15,617 $15,229
======== =======
See accompanying notes.
</TABLE>
5
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PART I. FINANCIAL INFORMATION
Notes to Condensed Consolidated Financial Statements
Note 1 - Interim Statement Presentation
The unaudited condensed 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, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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 - Pro Forma Net Income and Net Income Per Share Information
Pro forma net income represents actual historical pre-tax earnings in 1995 less
the tax provision which the Company would have recognized had it been taxed as a
"C" Corporation in 1995. Prior to October 1, 1995, the Company was taxed as an
"S" Corporation. Pro forma net income per share is computed using pro forma net
income and the weighted average number of Common and dilutive Common Stock
equivalent shares. Common Stock equivalents are attributable to stock options
using the treasury stock method and, for the three-month and six-month periods
ended June 30, 1995, include the weighted average estimated number of shares
which was necessary to fund the payment of undistributed S Corporation earnings
in excess of the previous twelve months net income. Common Stock and Common
Stock equivalent shares issued during the twelve-month period prior to the
effective date of the Company's initial public offering consummated on November
22, 1995 have been included in the calculation as if they were outstanding for
the three-month and six-month periods ended June 30, 1995 using the treasury
stock method. The initial public offering price was used in the determination
of Common Stock equivalents for all periods presented up to the effective date
of the initial public offering. After that date, the market prices of Common
Stock were used for computing Common Stock equivalents. Primary and fully
diluted pro forma net income per share are the same for the three-month and six-
month periods ended June 30, 1995 and primary and fully diluted net income per
share are the same for the three-month and six-month periods ended June 30,
1996.
Note 3 - Reclassifications
Certain amounts in 1995 have been reclassified to conform with current period
presentations.
6
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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
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
REVENUES
The Company's total revenues increased to $39.1 million during the three months
ended June 30, 1996 from $33.4 million in the corresponding period in 1995, an
increase of $5.7 million or 16.9%. Revenues from software license fees
increased to $13.8 million during the three months ended June 30, 1996 (35.3% of
total revenues) from $11.9 million (35.5% of total revenues) in the
corresponding period in 1995, an increase of $1.9 million or 16.4%. The
increase was primarily due to an increase in installations of certain of the
Company's software products from its Ambulatory Suite and Group Practice
Management software. Revenues from maintenance and service fees increased to
$17.7 million during the three months ended June 30, 1996 (45.4% of total
revenues) from $15.7 million (47.0% of total revenues) in the corresponding
period in 1995, an increase of $2.0 million or 12.7%. 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. Hardware revenues increased to $7.6 million during the three months ended
June 30, 1996 (19.3% of total revenues) from $5.8 million (17.5% of total
revenues) in the corresponding period in 1995, an increase of $1.8 million or
28.8%. The increase in hardware revenues was principally due to shipments for
new customer contracts and customers upgrading their hardware systems. The
Company anticipates the level of hardware sales will vary considerably from
period to period and not necessarily in a consistent relationship with other
revenue.
COST OF LICENSE, MAINTENANCE AND SERVICE FEES
The cost of license, maintenance and service fees increased to $13.2 million
during the three months ended June 30, 1996 from $12.8 million in the
corresponding period in 1995, an increase of $0.4 million or 2.7%. The gross
profit margin on license, maintenance and service fees increased to 58.1% during
the three months ended June 30, 1996 from 53.4% in the corresponding period in
1995. The increase in profit margin was principally due to the Company reducing
the number of installations performed by third party consultants, which reduced
the cost of installations.
COST OF HARDWARE SALES
The cost of hardware sales increased to $6.1 million during the three months
ended June 30, 1996 from $4.5 million in the corresponding period in 1995, an
increase of $1.6 million or 36.0% The gross profit margin on hardware sales
decreased to 18.5% of hardware revenues during the three months ended June 30,
1996, from 22.8% in the corresponding period in 1995. The decrease was
principally due to pricing pressure on hardware in the marketplace.
7
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PART I. FINANCIAL INFORMATION
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $8.4 million during
the three months ended June 30, 1996 from $6.9 million in the corresponding
period in 1995, an increase of $1.5 million or 21.1%. As a percentage of total
revenues, selling, general and administrative expenses increased to 21.3% during
the three months ended June 30, 1996 from 20.6% in the corresponding period in
1995. The increase in selling, general and administrative expenses during the
three months ended June 30, 1996 was principally due to an increase in the
Company's sales and marketing staff.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $5.9 million during the three
months ended June 30, 1996 from $5.1 million in the corresponding period in
1995, an increase of $0.8 million or 16.9%. The increase was due to an increase
in staff to support the development of additional products for the Company. As
a percentage of total revenues, research and development expenses remained
unchanged at 15.1% during the three months ended June 30, 1996 compared to 15.1%
in the corresponding period in 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
REVENUES
The Company's total revenues increased to $76.4 million during the six months
ended June 30, 1996 from $62.7 million in the corresponding period in 1995, an
increase of $13.7 million or 21.9%. Revenues from software license fees
increased to $26.2 million during the six months ended June 30, 1996 (34.3% of
total revenues) from $21.0 million (33.4% of total revenues) in the
corresponding period in 1995, an increase of $5.2 million or 25.1%. The
increase was primarily due to an increase in installations of certain of the
Company's software products from its Ambulatory Suite and Group Practice
Management software. Revenues from maintenance and service fees increased to
$34.5 million during the six months ended June 30, 1996 (45.2% of total
revenues) from $29.9 million (47.8% of total revenues) in the corresponding
period in 1995, an increase of $4.6 million or 15.2%. 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. Hardware revenues increased to $15.7 million during the six months ended
June 30, 1996 (20.5% of total revenues) from $11.8 million (18.8% of total
revenues) in the corresponding period in 1995, an increase of $3.9 million or
33.1%. The increase in hardware revenues was principally due to new contracts
and customers upgrading their hardware systems.
COST OF LICENSE, MAINTENANCE AND SERVICE FEES
The cost of license, maintenance and service fees increased to $26.0 million
during the six months ended June 30, 1996 from $24.8 million in the
corresponding period in 1995, an increase of $1.2 million or 4.8%. The gross
profit margin on license, maintenance and service fees increased to 57.2% during
the six months ended June 30, 1996 from 51.3% in the corresponding period in
1995. The increase in profit margin was principally due to the growth in
software revenue without a corresponding increase in related costs due to the
fixed nature of a significant portion of the Company's revenue-related costs.
8
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PART I. FINANCIAL INFORMATION
COST OF HARDWARE SALES
The cost of hardware sales increased to $12.8 million during the six months
ended June 30, 1996 from $9.1 million in the corresponding period in 1995, an
increase of $3.7 million or 40.4% The gross profit margin on hardware sales
decreased to 18.6% of hardware revenues during the six months ended June 30,
1996, from 22.8% in the corresponding period in 1995. The decrease was
principally due to pricing pressure on hardware in the marketplace.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $15.8 million during
the six months ended June 30, 1996 from $12.0 million in the corresponding
period in 1995, an increase of $3.8 million or 32.0%. As a percentage of total
revenues, selling, general and administrative expenses increased to 20.7% during
the six months ended June 30, 1996 from 19.1% in the corresponding period in
1995. The majority of these additional expenses during the six months ended
June 30, 1996 were due to an increase in the Company's sales and marketing staff
over the same period in 1995.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $11.7 million during the six
months ended June 30, 1996 from $9.3 million in the corresponding period in
1995, an increase of $2.4 million or 25.2%. The increase was due to an increase
of staff to support the development of additional products. As a percentage of
total revenues, research and development expenses increased to 15.3% during the
six months ended June 30, 1996 from 14.9% in the corresponding period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1969, the Company has funded its operations, working
capital needs and capital expenditures primarily from operations.
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, deferred revenue, accounts payable and accrued expenses.
Accounts receivable from customers have been collected consistently in the 65 to
85 day range.
Cash and cash equivalents at June 30, 1996 were $15.6 million, a decrease of
$17.6 million from December 31, 1995. The majority of this decrease was due to
the investment of excess funds along with the proceeds of from the Company's
initial public offering of common stock which was consummated on November 22,
1995 in investment grade securities.
The Company has a revolving line of credit with a bank allowing the Company to
borrow up to $2.0 million bearing interest at the prime rate. The were no
borrowings as of June 30, 1996.
The Company has no significant commitments for capital expenditures at this
time.
9
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PART I. FINANCIAL INFORMATION
INCOME TAXES
From July 1, 1987 to November 1, 1995, the Company was treated for federal and
certain state income tax purposes as an S Corporation under the Internal Revenue
Code of 1986, as amended (the "Code"). As a result, the Company's stockholders,
rather than the Company, were required to pay federal and certain state income
taxes based upon the Company's earnings whether or not the earnings were
distributed to such stockholders. On November 1, 1995, the Company terminated
its S corporation status and, accordingly, has become subject to federal and
state income taxes.
For purposes of financial statement presentations, the Company's financial
statements reflect pro forma financial information for 1995 as if the Company
had been taxed as a C corporation. For the quarter ended June 30, 1996, the
Company provided for taxes at a rate of approximately 40% of pre-tax income.
FACTORS AFFECTING FUTURE RESULTS
This report, and other reports, proxy statements and other communications to
stockholders, as well as oral statements made by the Company's officers or its
agents, may contain forward-looking statements with respect to, among other
things, the Company's future revenues, operating income, earnings per share, or
plans and objectives of management, including plans or objectives relating to
products or services of the Company. There are a number of factors of which the
Company is aware that may cause the Company's actual results to vary materially
from those forecast or projected in any such forward-looking statement. The
following are certain, but not necessarily all, of the factors which the
management of the Company presently believes could cause the Company's actual
operating results to be materially less than forecast or projected in any
forward-looking statement.
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 its customers, 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 client resources and complexity of
the needs of the client 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
health care organizations. Accordingly, the sales cycle for the Company's
systems is typically three to 18 months or more from initial contact to contract
execution, and the installation cycle is typically three to 18 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
relatively fixed, a variation in the timing of systems
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PART I. FINANCIAL INFORMATION
sales and installations 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's revenues have historically followed seasonal patterns with a lower
level of sales and installations occurring in the fiscal quarter ending
September 30 and a greater level of sales and installations occurring in the
fiscal quarter ending June 30 (formerly the fiscal year end of the Company).
The Company believes that such seasonal fluctuation is attributable to a number
of factors, including the Company's former sales and installation compensation
program, which was formerly based significantly on fiscal year sales and
installation goals, and the vacation schedules of its clients. In 1995, the
Company changed its fiscal year end from June 30 to December 31. The Company is
not able to predict what impact, if any, the change will have on the seasonality
of the Company's business. 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 seasonal and quarterly fluctuations will continue and will
not have a material adverse effect on the Company's results of operations,
financial condition or business.
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 health care 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 health care 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.
Health care providers demand the highest level of reliability and quality from
their information systems. The Company devotes substantial resources to meet
these demands in developing its software. The Company's products may, from time
to time, contain undetected errors or bugs. Errors or bugs in software products
may result in loss of, or delay in, market acceptance of the products. Delays
or difficulties associated with new product introductions or product
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PART I. FINANCIAL INFORMATION
enhancements could have a material adverse effect on the Company's results of
operations, financial condition or business.
The Company currently derives a significant percentage of its revenues from
sales of financial and administrative 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.
The market for health care information systems is highly competitive. The
Company's competitors vary in size, and in the scope and breadth of the products
and services which they offer. The Company competes with different companies in
each of its target markets. Many of the Company's competitors have greater
financial, development, technical, marketing and sales resources than the
Company. In addition, other entities not currently offering products and
services similar to those offered by the Company, including claims processing
organizations, hospitals, third-party administrators, insurers, healthcare
organizations and others, may enter certain markets in which the Company
competes. There can be no assurance that future competition will not have a
material adverse effect on the Company's results of operations, financial
condition or business. There can also be no assurance that the Company will be
able to compete successfully in the future.
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 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 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
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PART I. FINANCIAL INFORMATION
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 Company's success is dependent to a significant extent on its ability to
maintain the confidentiality of the software incorporated in its current
products and other products as they are released. The Company depends upon a
combination of trade secret, copyright and trademark laws, license agreements,
nondisclosure and other contractual provisions and various security measures to
protect its proprietary rights in its products. The Company distributes its
products under software license agreements which grant clients a nonexclusive
license to the Company's products and contain terms and conditions prohibiting
the unauthorized reproduction or transfer of the Company's products. In
addition, the Company attempts to protect its trade secretes and other
proprietary information through agreements with employees and consultants. The
Company also seeks to protect the source code of its products as an unpublished
copyright work. There can be no assurance that the legal protections afforded
to the Company or the precautions taken by the Company will be adequate to
prevent misappropriation of the Company's technology. In addition, these
protections do not prevent independent third-party development of functionally
equivalent or superior technologies, products or services. Any infringement or
misappropriation of the Company's proprietary software would disadvantage the
Company in its efforts to retain and attract new clients in a highly competitive
market and could cause the Company to lose revenue or incur substantial
litigation expense. Although the Company believes that its products, trademarks
and other proprietary rights do not infringe upon the proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future and that such claims will
not have a material adverse effect on the Company's results of operations,
financial condition or business.
The health care industry in the United States is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of health care organizations. The Company's products are designed to
function within the structure of the health care financing and reimbursement
system currently being used in the United States. During the past several
years, the health care 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 health
care system have been considered by Congress. These proposals, if enacted, may
increase government involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's clients. Health
care 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 health care reforms might have on its
results of operations, financial condition or business.
13
<PAGE>
PART I. FINANCIAL INFORMATION
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 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. In addition,
such 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, 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 health care
settings. The FDA, if it chooses to regulate such software, can impose
extensive requirements governing pre- and post-market conditions such as device
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.
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 health care 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.
14
<PAGE>
PART I. FINANCIAL INFORMATION
Market prices for securities of companies such as the Company are highly
volatile. Factors such as announcements of technological innovations or new
products or services by the Company or its competitors, proprietary rights
developments and market conditions for health care or technology stocks in
general could have a significant impact on the future market price of the
Company's Common Stock.
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.
15
<PAGE>
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
On Monday, May 6, 1996, at the Annual Meeting of Stockholders of the
Company, Messrs. Richard E. Tarrant, Paul L. Egerman and Larry D.
Grandia were elected to serve for a term of three years as Class I
Directors. The remaining terms of Henry M. Tufo, M.D., Stuart H.
Altman, Ph.D., Steven M. Lash and Robert H. Hoehl continued after the
meeting. The number of votes cast for each of Mssrs. Tarrant, Egerman
and Grandia was 17,563,894; the number of votes cast against them was
0; and the number of abstentions and the broker non-votes as to each
was 52,015 and 165, respectively. In addition, holders of 17,612,099
shares of the 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 2,715 shares voted against
ratifying such selection and 2,715 abstained from voting, with 165
broker non-votes.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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.
16
<PAGE>
SIGNATURES
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, 1996 By: /s/ John A. Kane
_________________________________
John A. Kane,
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
Exhibit Index
The following exhibits are filed as part of this Quarterly Report on Form
10-Q:
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- --------------- ----
<S> <C> <C>
11 Statement regarding computation of per share earnings for 19
the three months ended June 30, 1996.
12 Statement regarding computation of per share earnings for 20
the six months ended June 30, 1996.
</TABLE>
18
<PAGE>
EXHIBIT 11
IDX SYSTEMS CORPORATION
SCHEDULES OF NET INCOME PER SHARE AND
PRO FORMA NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 20,683 13,903 20,683 13,903
Net dilutive effect of stock options-based
on the treasury stock method using the
IPO price until the effective date and
average price thereafter for primary
and ending price, if higher, for fully
diluted 737 1,555 737 1,555
Effect of final S corporation distribution 1,789 1,789
Effect of common and common stock equivalent
shares issued by the Company during the
twelve month period immediately preceding
the Company's initial public offering
in November 1995, as if they were
outstanding for all periods presented prior
to the initial public offering, using the
treasury stock method, as described above 192 192
------- ------- ------- -------
Total shares 21,420 17,439 21,420 17,439
======= ======= ======= =======
Net income $ 3,856 $ 3,856
======= =======
Net income per share $ 0.18 $ 0.18
======= =======
Pro forma net income $ 2,616 $ 2,616
======= =======
Pro forma net income per share $ 0.15 $ 0.15
======= =======
</TABLE>
<PAGE>
EXHIBIT 12
IDX SYSTEMS CORPORATION
SCHEDULES OF NET INCOME PER SHARE AND
PRO FORMA NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 20,546 13,903 20,546 13,903
Net dilutive effect of stock options-based
on the treasury stock method using the
IPO price until the effective date and
average price thereafter for primary
and ending price, if higher, for fully
diluted 805 1,471 805 1,555
Effect of final S corporation distribution 1,789 1,789
Effect of common and common stock equivalent
shares issued by the Company during the
twelve month period immediately preceding
the Company's initial public offering
in November 1995, as if they were
outstanding for all periods presented prior
to the initial public offering, using the
treasury stock method, as described above 192 192
------- ------- ------- -------
Total shares 21,351 17,355 21,351 17,439
======= ======= ======= =======
Net income $ 7,209 $ 7,209
======= =======
Net income per share $ 0.34 $ 0.34
======= =======
Pro forma net income $ 4,783 $ 4,783
======= =======
Pro forma net income per share $ 0.28 $ 0.28
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's condensed consolidated balance sheet and statement of income
taxes qualifed in its entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 15,617 15,229
<SECURITIES> 69,899 5,752
<RECEIVABLES> 35,477 27,528
<ALLOWANCES> (579) (500)
<INVENTORY> 0 0
<CURRENT-ASSETS> 123,468 48,993
<PP&E> 33,970 27,680
<DEPRECIATION> 16,877 13,016
<TOTAL-ASSETS> 141,358 76,396
<CURRENT-LIABILITIES> 20,124 21,792
<BONDS> 2,700 2,900
0 0
0 0
<COMMON> 209 150
<OTHER-SE> 116,810 50,557
<TOTAL-LIABILITY-AND-EQUITY> 141,358 76,396
<SALES> 15,675 11,774
<TOTAL-REVENUES> 76,427 62,689
<CGS> 12,757 9,087
<TOTAL-COSTS> 66,267 55,205
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 51 120
<INTEREST-EXPENSE> 67 120
<INCOME-PRETAX> 12,009 7,972
<INCOME-TAX> 4,800 425
<INCOME-CONTINUING> 7,209 7,547
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,209 7,547
<EPS-PRIMARY> .34 .28
<EPS-DILUTED> .34 .28
</TABLE>
