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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
-------------------------------
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, 1997 was 25,738,751.
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[Exhibit index begins on Page 20]
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IDX SYSTEMS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Interim Financial Statements:
a) Condensed consolidated balance sheets as of
June 30, 1997 and December 31, 1996 (unaudited).............3
b) Condensed consolidated statements of income for the six
months ended June 30, 1997 and 1996 (unaudited).............4
c) Condensed consolidated statements of cash flows
for the six months ended June 30, 1997 and 1996
(unaudited).................................................5
d) Notes to condensed consolidated financial statements........6
ITEM 2. Management's discussion and analysis of financial
condition and results of operations...................................8
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings...................................................17
ITEM 2. Changes in securities...............................................17
ITEM 3. Defaults upon senior securities.....................................17
ITEM 4. Submission of matters to a vote of security holders.................17
ITEM 5. Other information...................................................18
ITEM 6. Exhibits and reports on Form 8-K....................................18
SIGNATURES...................................................................19
EXHIBIT INDEX................................................................20
Page 2 of 22
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PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
JUNE 30 DECEMBER 31
1997 1996
---- ----
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ASSETS
Cash and securities $ 96,502 $ 94,554
Accounts receivable, net 46,041 39,092
Other current assets 6,679 5,221
-------- --------
Total current assets 149,222 138,867
Property and equipment, net 20,722 17,188
Other assets 2,499 2,520
-------- --------
Total assets $172,443 $158,575
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 20,857 $ 17,555
Deferred revenue 9,342 8,951
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Total current liabilities 30,199 26,506
Long term debt 2,500 2,600
Minority interest 1,909 2,079
Stockholders' equity 137,835 127,390
--------- --------
Total liabilities and
stockholders' equity $172,443 $158,575
======= =======
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
NOTE: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date.
Page 3 of 22
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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)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
---- ---- ---- ----
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REVENUES
Software license fees $14,724 $ 13,810 $31,784 $26,238
Maintenance and service fees 22,736 17,734 43,449 34,514
Hardware sales 10,088 7,538 17,373 15,675
------- -------- ------- -------
Total revenues 47,548 39,082 92,606 76,427
OPERATING EXPENSES
Cost of license, maintenance
and service fees 16,665 13,205 32,598 25,984
Cost of hardware sales 7,727 6,145 13,290 12,757
Selling, general and administrative 9,259 8,337 18,806 15,828
Research and development 6,722 5,912 13,761 11,698
Write-off of acquired in-process
research and development costs 2,290
-------- -------- -------- --------
40,373 33,599 80,745 66,267
Operating income 7,175 5,483 11,861 10,160
Interest and other income, net (1,187) (939) (2,167) (1,849)
-------- -------- -------- --------
Income before income taxes 8,362 6,422 14,028 12,009
Income tax provision 3,345 2,566 5,611 4,800
-------- -------- -------- --------
Net income $ 5,017 $ 3,856 $ 8,417 $ 7,209
======== ======== ======== ========
Net income per share $ 0.23 $ 0.18 $ 0.39 $ 0.34
======== ======== ======== ========
Average shares outstanding $ 21,639 $ 21,420 $ 21,589 $ 21,351
======== ======== ======== ========
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
Page 4 of 22
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30
1997 1996
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OPERATING ACTIVITIES
Net income $ 8,417 $ 7,209
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. 3,126 2,306
Increase in allowance for doubtful
accounts 205 54
Minority interest (170) 332
Write-off of acquired in-process
research & development costs 2,290
Changes in operating assets and
liabilities, net of effects of
acquired business
Accounts receivable (6,708) (6,904)
Prepaid expenses (1,363) 149
Accounts payable (3,252) (55)
Accrued expenses 2,651 (160)
Federal and state taxes payable 2,528 2,331
Deferred revenue 391 (179)
Short-term debt 1,375 (3)
Other, net (310) 374
----- ---
Net cash provided by operating activities 9,180 5,454
INVESTING ACTIVITIES
Purchase of property and equipment, net (6,660) (3,177)
Purchase of securities available-for-sale, net (28,887) (80,032)
Sale of securities available-for-sale 26,675 56,466
Purchase of certain net assets (2,500)
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Net cash used in investing activities (11,372) (26,743)
FINANCING ACTIVITIES
Proceeds from sale of common stock 2,005 3,851
Payments on long-term debt related to real estate (100) (207)
------ ------
Net cash provided by financing activities 1,905 3,644
------ ------
Decrease in cash and cash equivalents (287) (17,645)
Cash and cash equivalents at beginning of period 12,326 33,262
------ ------
Cash and cash equivalents at end of period $12,039 $15,617
======= =======
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
Page 5 of 22
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PART I. FINANCIAL INFORMATION
Notes to Condensed Consolidated Financial Statements
Note 1 - Interim Statement Presentation
The 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, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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 - Business Acquisitions
On July 10, 1997 (the "Closing Date"), pursuant to an Agreement and Plan of
Merger dated as of March 25, 1997 (the "Merger Agreement") by and among IDX
Systems Corporation, a Vermont corporation ("IDX"), Penguin Acquisition
Corporation, a Washington corporation and wholly-owned subsidiary of IDX
("Penguin") and PHAMIS, Inc., a Washington corporation ("PHAMIS"), IDX acquired
PHAMIS by means of a merger (the "Merger") of Penguin with and into PHAMIS, with
PHAMIS remaining as the surviving corporation in the Merger. As a result of the
Merger, PHAMIS became a wholly-owned subsidiary of IDX. PHAMIS offers healthcare
information solutions that are part of a complete software and hardware system
strategy design for integrated healthcare delivery enterprises. Penguin was
formed solely for the purpose of effecting the Merger.
Pursuant to the Merger Agreement, each outstanding share of PHAMIS Common Stock
was converted into .73 of a share of IDX Common Stock. Based upon the
capitalization of PHAMIS as of the Closing Date, IDX issued approximately 4.6
million shares of IDX Common Stock to former PHAMIS stockholders in the Merger.
No fractional shares were issued in the Merger. PHAMIS stockholders otherwise
entitled to receive a fraction of a share of IDX Common Stock in the Merger
instead received an amount of cash equal to such fraction multiplied by the
price per share of IDX Common Stock on the Nasdaq National Market, as reported
by Nasdaq, on the business day immediately preceding the Closing Date.
MANAGEMENT EXPECTS THAT THE MERGER WILL BE ACCOUNTED FOR UNDER THE POOLING OF
INTERESTS METHOD COMMENCING WITH THE QUARTER ENDING SEPTEMBER 30, 1997. ALL
PREVIOUSLY REPORTED OPERATING RESULTS WILL BE RESTATED TO REFLECT THE COMBINED
OPERATIONS OF IDX AND PHAMIS.
All options to purchase PHAMIS Common Stock outstanding immediately prior to the
Merger were effectively assumed by IDX pursuant to the Merger Agreement. IDX
registered on a Registration Agreement on Form S-8 approximately 865,568 shares
of IDX Common Stock for issuance upon the exercise of stock options formerly
exercisable for shares of PHAMIS Common Stock and in connection with the PHAMIS
Salary Savings and Deferral Plan.
Page 6 of 22
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PART I. FINANCIAL INFORMATION
Note 3 - Earnings Per Share Information
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. Earnings per share as calculated under Statement
128 is not materially different from the primary and fully diluted earnings per
share amounts contained herein.
Note 4 - Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentations.
Page 7 of 22
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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
GENERAL
- -------
This Management's Discussion and Analysis of Financial Conditions and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
including those discussed below that could cause actual results to differ
materially from historical results or those anticipated. The Company has
identified by italics or all capital letters, various sentences within this
Quarterly Report which contain such forward-looking statements, and 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 10 under the caption "Factors Affecting Future Results,"
which is not italicized for improved readability, consists principally of a
discussion of risks which may affect future results and, are thus, in their
entirety forward-looking in nature. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect
the Company's business.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996.
REVENUES
The Company's total revenues increased to $47.5 million during the three months
ended June 30, 1997 from $39.1 million in the corresponding period in 1996, an
increase of $8.4 million or 21.7%. Revenues from software license fees increased
to $14.7 million during the three months ended June 30, 1997 (31.0% of total
revenues) from $13.8 million (35.3% of total revenues) in the corresponding
period in 1996, an increase of $.9 million or 6.6%. The increase was primarily
due to an increase in installations of certain of the Company's software
products from its Ambulatory Suite. Revenues from maintenance and service fees
increased to $22.7 million during the three months ended June 30, 1997 (47.8% of
total revenues) from $17.7 million (45.4% of total revenues) in the
corresponding period in 1996, an increase of $5.0 million or 28.2%. 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 $10.1 million during the
three months ended June 30, 1997 (21.2% of total revenues) from $7.6 million
(19.3% of total revenues) in the corresponding period in 1996, an increase of
$2.5 million or 33.8%. 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.
Page 8 of 22
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PART I. FINANCIAL INFORMATION
COST OF LICENSE, MAINTENANCE AND SERVICE FEES
The cost of license, maintenance and service fees increased to $16.7 million
during the three months ended June 30, 1997 from $13.2 million in the
corresponding period in 1996, an increase of $3.5 million or 26.2%. The gross
profit margin on license, maintenance and service fees decreased to 55.5% during
the three months ended June 30, 1997 from 58.1% in the corresponding period in
1996. The decrease in gross profit was due primarily to the decrease in software
license fees as a percentage to total revenue.
COST OF HARDWARE SALES
The cost of hardware sales increased to $7.7 million during the three months
ended June 30, 1997 from $6.1 million in the corresponding period in 1996, an
increase of $1.6 million or 25.7%. The gross profit margin on hardware sales
increased to 23.4% of hardware revenues during the three months ended June 30,
1997, from 18.5% in the corresponding period in 1996. The increase was
principally due to the sale of higher margin hardware configurations and
hardware operating systems during the quarter ended June 30, 1997. THIS GROSS
PROFIT MARGIN TREND IS NOT ANTICIPATED TO CONTINUE IN THE FUTURE.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $9.3 million during
the three months ended June 30, 1997 from $8.4 million in the corresponding
period in 1996, an increase of $.9 million or 11.1%. As a percentage of total
revenues, selling, general and administrative expenses decreased to 19.5% during
the three months ended June 30, 1997 from 21.3% in the corresponding period in
1996. The increase in selling, general and administrative expenses during the
three months ended June 30, 1997 was principally due to an increase in the
Company's sales and marketing staff.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $6.7 million during the three
months ended June 30, 1997 from $5.9 million in the corresponding period in
1996, an increase of $.8 million or 13.7%. The increase was due to an increase
of staff and outside consultants to support the development of additional
products for the Company. As a percentage of total revenues, research and
development expenses decreased to 14.1% during the three months ended June 30,
1997 compared to 15.1% in the corresponding period in 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES
The Company's total revenues increased to $92.6 million during the six months
ended June 30, 1997 from $76.4 million in the corresponding period in 1996, an
increase of $16.2 million or 21.2%. Revenues from software license fees
increased to $31.8 million during the six months ended June 30, 1997 (34.3% of
total revenues) from $26.2 million (34.3% of total revenues) in the
corresponding period in 1996, an increase of $5.6 million or 21.1%. The increase
was primarily due to an increase in installations of certain of the Company's
software products from its Ambulatory Suite. Revenues from maintenance and
service fees increased to $43.4 million during the six months ended June 30,
1997 (46.9% of total revenues) from $34.5 million (45.2%
Page 9 of 22
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PART I. FINANCIAL INFORMATION
of total revenues) in the corresponding period in 1996, an increase of $8.9
million or 25.9%. 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
$17.4 million during the six months ended June 30, 1997 (18.8% of total
revenues) from $15.7 million (20.5% of total revenues) in the corresponding
period in 1996, an increase of $1.7 million or 10.8%. The increase in hardware
revenues was principally due to shipments for new customer contracts and
customers upgrading their hardware systems.
COST OF LICENSE, MAINTENANCE AND SERVICE FEES
The cost of license, maintenance and service fees increased to $32.6 million
during the six months ended June 30, 1997 from $26.0 million in the
corresponding period in 1996, an increase of $6.6 million or 25.5%. The gross
profit margin on license, maintenance and service fees decreased to 56.7% during
the six months ended June 30, 1997 from 57.2% in the corresponding period in
1996. The slight decrease in gross profit was due primarily to the unchanged
percentage to total revenue of software license fees during the six months ended
June 30, 1997 compared to the corresponding period in 1996.
COST OF HARDWARE SALES
The cost of hardware sales increased to $13.3 million during the six months
ended June 30, 1997 from $12.8 million in the corresponding period in 1996, an
increase of $.5 million or 4.2%. The gross profit margin on hardware sales
increased to 23.5% of hardware revenues during the six months ended June 30,
1997, from 18.6% in the corresponding period in 1996. The increase was
principally due to the sale of higher margin hardware configurations and
hardware operating systems during the six months ended June 30, 1997. THIS GROSS
PROFIT MARGIN TREND IS NOT ANTICIPATED TO CONTINUE IN THE FUTURE.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $18.8 million during
the six months ended June 30, 1997 from $15.8 million in the corresponding
period in 1996, an increase of $3.0 million or 18.8%. As a percentage of total
revenues, selling, general and administrative expenses decreased slightly to
20.3% during the six months ended June 30, 1997 from 20.7% in the corresponding
period in 1996. The increase in selling, general and administrative expenses
during the six months ended June 30, 1997 was principally due to an increase in
the Company's sales and marketing staff.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $13.8 million during the six
months ended June 30, 1997 from $11.7 million in the corresponding period in
1996, an increase of $2.1 million or 17.6%. The increase was due to an increase
in staff and outside consultants to support the development of additional
products for the Company. As a percentage of total revenues, research and
development expenses decreased slightly to 14.9% during the six months ended
June 30, 1997 from 15.3% in the corresponding period in 1996.
Page 10 of 22
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PART I. FINANCIAL INFORMATION
SIGNIFICANT AGREEMENTS
On July 10, 1997 (the "Closing Date"), pursuant to an Agreement and Plan of
Merger dated as of March 25, 1997 (the "Merger Agreement") by and among IDX
Systems Corporation, a Vermont corporation ("IDX"), Penguin Acquisition
Corporation, a Washington corporation and wholly-owned subsidiary of IDX
("Penguin") and PHAMIS, Inc., a Washington corporation ("PHAMIS"), IDX acquired
PHAMIS by means of a merger (the "Merger") of Penguin with and into PHAMIS, with
PHAMIS remaining as the surviving corporation in the Merger. As a result of the
Merger, PHAMIS became a wholly-owned subsidiary of IDX. PHAMIS offers healthcare
information solutions that are part of a complete software and hardware system
strategy design for integrated healthcare delivery enterprises. Penguin was
formed solely for the purpose of effecting the Merger.
Pursuant to the Merger Agreement, each outstanding share of PHAMIS Common Stock
was converted into .73 of a share of IDX Common Stock. Based upon the
capitalization of PHAMIS as of the Closing Date, IDX issued approximately 4.6
million shares of IDX Common Stock to former PHAMIS stockholders in the Merger.
No fractional shares were issued in the Merger. PHAMIS stockholders otherwise
entitled to receive a fraction of a share of IDX Common Stock in the Merger
instead received an amount of cash equal to such fraction multiplied by the
price per share of IDX Common Stock on the Nasdaq National Market, as reported
by Nasdaq, on the business day immediately preceding the Closing Date.
MANAGEMENT EXPECTS THAT THE MERGER WILL BE ACCOUNTED FOR UNDER THE POOLING OF
INTERESTS METHOD COMMENCING WITH THE QUARTER ENDING SEPTEMBER 30, 1997. ALL
PREVIOUSLY REPORTED OPERATING RESULTS WILL BE RESTATED TO REFLECT THE COMBINED
OPERATIONS OF IDX AND PHAMIS.
All options to purchase PHAMIS Common Stock outstanding immediately prior to the
Merger were effectively assumed by IDX pursuant to the Merger Agreement. IDX
registered on a Registration Agreement on Form S-8 approximately 865,568 shares
of IDX Common Stock for issuance upon the exercise of stock options formerly
exercisable for shares of PHAMIS Common Stock and in connection with the PHAMIS
Salary Savings and Deferral Plan.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1969, the Company has funded its operations, working
capital needs and capital expenditures primarily from operations, except for
real estate owned by certain partnerships and trusts financed through industrial
development bonds.
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 payable and accrued expenses. Due to the seasonality of the Company's
business, accounts receivable, deferred revenue and accounts payable fluctuate
considerably but almost completely due to the volume of business and timing of
the recognition of revenue. In general, accounts receivable from customers have
been collected consistently within 90 days.
Cash flows related to investing activities have principally been related to the
purchase of computer and office equipment, leasehold improvements, and the
purchase and sale of investment grade marketable securities. MANAGEMENT EXPECTS
THESE ACTIVITIES TO CONTINUE. INVESTING ACTIVITIES MAY ALSO INCLUDE PURCHASES OF
INTERESTS IN AND ACQUISITIONS OF COMPANIES WITH COMPLEMENTARY PRODUCTS,
TECHNOLOGIES AND BUSINESSES.
Page 11 of 22
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PART I. FINANCIAL INFORMATION
Cash and cash equivalents at June 30, 1997 were $12.0 million, a decrease of
$3.6 million from December 31, 1996. The majority of the decrease was due to the
purchase of investment grade marketable 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. There were no borrowings as of June 30, 1997
or 1996.
The Company's operating lease commitments consist primarily of office leasing
for the Company's operating facilities. THE COMPANY EXPECTS THAT ITS
REQUIREMENTS FOR OFFICE FACILITIES AND OTHER OFFICE EQUIPMENT WILL GROW AS
STAFFING REQUIREMENTS DICTATE. THE COMPANY PLANS TO CONTINUE INCREASING THE
NUMBER OF ITS PROFESSIONAL STAFF DURING 1997 TO MEET ANTICIPATED SALES VOLUME
AND TO SUPPORT RESEARCH AND DEVELOPMENT EFFORTS. TO THE EXTENT NECESSARY TO
SUPPORT INCREASES IN STAFFING, THE COMPANY ANTICIPATES OBTAINING ADDITIONAL
OFFICE SPACE.
THE COMPANY BELIEVES THAT CURRENT OPERATING FUNDS WILL BE SUFFICIENT TO FINANCE
ITS OPERATING REQUIREMENTS AT LEAST THROUGH DECEMBER 1997. To date, inflation
has not had a material impact on the Company's revenues or income.
INCOME TAXES
FOR THE FORESEEABLE FUTURE, THE COMPANY ANTICIPATES AN EXPECTED TAX RATE OF
APPROXIMATELY 40% OF PRE-TAX INCOME.
NEW ACCOUNTING STANDARDS
At its August 6, 1997 meeting, the American Institute of Certified Public
Accountants cleared a Standard Operating Procedure ("SOP") revising certain
aspects of SOP91-1. The SOP will be effective for transactions occurring in
years beginning after December 15, 1997. THE COMPANY DOES NOT EXPECT THE SOP
WILL MATERIALLY AFFECT ITS REVENUE RECOGNITION POLICIES WITH RESPECT TO SOFTWARE
LICENSE FEES WHICH ARE PRINCIPALLY RECOGNIZED IN CONNECTION WITH THE FULFILLMENT
OF CONTRACTUAL OBLIGATIONS BASED UPON ACHIEVEMENTS OF MILESTONES.
FACTORS AFFECTING FUTURE RESULTS
As announced on July 10, 1997, the Company completed its acquisition of PHAMIS,
Inc. ("PHAMIS"). The operations of IDX and PHAMIS involve the creation, sale and
support of computer systems for healthcare clients. Such operations differ
primarily with respect to the nature of each of IDX's and PHAMIS's clientele and
product technologies. Integrating the operations (including product development,
installation of information and software systems, client services, marketing
plans and activities, employee hiring and training, and expansion strategy) and
management of the two companies will be a time-consuming process, and there can
be no assurance that this integration will result in the achievement of any of
the anticipated synergies and other benefits expected to be realized from the
Merger. Moreover, the integration of these organizations will require the
dedication of management resources, which may temporarily distract attention
from the day-to-day business of the Company. The inability of management to
successfully integrate the operations of the two companies could have a material
adverse effect on the business and operating results of the operations of IDX
and PHAMIS after the Merger. The Company expects to incur Merger related pre-tax
charges covering the costs of the Merger, the costs of restructuring the
combined operations, and for other related costs principally in the quarter in
which the Merger is consummated. Additional unanticipated
Page 12 of 22
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PART I. FINANCIAL INFORMATION
expenses may be incurred in connection with the integration of the business of
the Company and PHAMIS.
The Company's revenues and operating results can vary significantly from quarter
to quarter as a result of a number of factors, including the volume and timing
of systems sales and installations, and length of sales cycles and installation
efforts. The timing of revenues from systems sales is difficult to forecast
because the Company's sales cycle can vary depending upon factors such as the
size of the transaction, the changing business plans of the customer, the
effectiveness of customer's management, and general economic conditions. In
addition, because revenue is recognized at various points during the
installation process, the timing of revenue recognition varies considerably
based on a number of factors, including availability of personnel, availability
of the customer's resources and complexity of the needs of the customer's
organization. The Company's initial contact with a potential customer depends in
significant part on the customer's decision to replace, expand, or substantially
modify its existing information systems, or modify or add business processes or
lines of business. How and when to implement, replace, expand or substantially
modify an information system, or modify or add business processes or lines of
business, are major decisions for health care organizations. Accordingly, the
sales cycle for the Company's systems 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 sales and installation
can cause significant variations in operating results from quarter to quarter.
The Company's future operating results may fluctuate as a result of these and
other factors, such as customer purchasing patterns, and the timing of new
product and service introductions and product upgrade releases.
The Company'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 vacation schedules of its clients. 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.
The stock market has, from time to time, experienced extreme price and volume
fluctuations, particularly in the high technology and health care information
technology sectors, which have often been unrelated to the operating performance
of particular companies. The Company experiences fluctuations in its stock price
related to these general market swings as well as announcements of technological
innovations, new product introductions by the Company or its competitors, market
conditions in the computer software or hardware industries and healthcare reform
measures. These fluctuations could have a significant impact on the future
market price of the Company's Common Stock.
Page 13 of 22
<PAGE>
PART I. FINANCIAL INFORMATION
As a developer of information systems, the Company must anticipate and adapt to
evolving industry standards and new technological developments. The market for
the Company's products is characterized by continued and rapid technological
advances in both hardware and software development, requiring ongoing
expenditures for research and development and the timely introduction of new
products and enhancements to existing products. The establishment of standards
is largely a function of user acceptance. Therefore, such standards are subject
to change. The Company's future success will depend in part upon its ability to
enhance its existing products, to respond effectively to technology changes, to
migrate its clients to new technologies, to sell additional products to its
existing client base and to introduce new products and technologies to meet the
evolving needs of its clients in the 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.
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.
Certain of the Company's products provide applications that relate to patient
medical histories and treatment plans. Any failure by the Company's products to
provide accurate, secure and timely information could result in product
liability claims against the Company by its clients or their affiliates or
patients. The Company maintains insurance that it believes is adequate to
protect against claims associated with the use of its products, but there can be
no assurance that its insurance coverage would adequately cover any claim
asserted against the Company. A successful claim brought against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company's results of operations, financial condition or business. Even
unsuccessful claims could result in the expenditure of funds in litigation, as
well as 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
Page 14 of 22
<PAGE>
PART I. FINANCIAL INFORMATION
skilled in the computer languages in which the Company's products operate.
Competition for such personnel in the software and information services
industries is intense. The loss of key personnel, or the inability to hire or
retain qualified personnel, could have a material adverse effect on the
Company's results of operations, financial condition or business. although the
Company has been successful to date in attracting and retaining skilled
personnel, there can be no assurance that the Company will continue to be
successful in attracting and retaining the personnel it requires to successfully
develop new and enhanced products and to continue to grow and operate
profitably.
The 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.
The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy
for the regulation of certain computer software products as medical devices
under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic
Act (the "FDC Act") and has recently indicated it may modify such draft policy
or create a new policy. To the extent that computer software is a medical device
under the policy, the manufacturers of such products could be required,
depending on the product, to (i) register and list their products with the FDA,
(ii) notify the FDA and demonstrate substantial equivalence to other products on
the market before marketing such products, or (iii) obtain FDA approval by
demonstrating safety and effectiveness before marketing a product. In addition,
such products would be subject to FDC Acts 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 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
Page 15 of 22
<PAGE>
PART I. FINANCIAL INFORMATION
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.
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 16 of 22
<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
The Company held its Annual Meeting of Shareholders on May 19, 1997. Of the
21,017,420 shares of common stock outstanding and entitled to vote at this
meeting, 18,100,982 shares were represented at the meeting, in person or by
proxy. The following matters were voted upon at the Annual Meeting:
1. Steven M. Lash and Henry M. Tufo, M.D. were elected to serve for a term
of three years as Class II Directors. The remaining terms of Richard E.
Tarrant, Paul L. Egerman, Stuart H. Altman, Ph.D. and Robert H. Hoehl
continued after the meeting. The result of the vote with respect to each
nominee for office was as follows:
Votes "Against" Broker
Nominee Votes "For" or "Withheld" Abstained Non-Votes
- ------- ----------- ------------- --------- ---------
Steven M. Lash 18,054,993 0 45,674 315
Henry M.Tufo, M.D. 18,052,925 0 47,742 315
2. Holders of 17,286,619 shares of Common Stock of the Company voted to
approve amendments to the Company's 1995 Director Stock Option Plan
("Plan"). Holder of 808,269 shares voted against such approval and 5,779
shares abstained from voting, with 315 broker non-votes.
3. Holders of 18,098,095 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 1,448 shares voted against
ratifying such selection and 1,124 shares abstained from voting, with 315
broker non-votes.
Page 17 of 22
<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, & 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) On April 3, 1997, the Company filed a report on Form 8-K, reporting
an Agreement and Plan of Merger dated as of March 25, 1997 (the "Merger
Agreement") with Penguin Acquisition Corporation, a Washington corporation and
wholly-owned subsidiary of the Company ("Sub") and PHAMIS, Inc., a Washington
corporation ("PHAMIS") whereby the Sub would be merged with and into PHAMIS,
with PHAMIS being the surviving corporation and becoming a wholly-owned
subsidiary of the Company. No financial statements were filed with such report.
Page 18 of 22
<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, 1997 By:/s/ JOHN A. KANE
----------------------------
John A. Kane,
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
Page 19 of 22
<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 21
for three months ended June 30, 1997.
12 Statement regarding computation of per share earnings 22
for six months ended June 30, 1997.
</TABLE>
Page 20 of 22
<PAGE>
EXHIBIT 11
IDX SYSTEMS CORPORATION
SCHEDULES OF 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,
1997 1996 1997 1996
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding 21,043 20,683 21,043 20,683
Net dilutive effect of
stockoptions-based
on the treasury stock
method using the
average price for
primary and ending
price, if higher, for
fully diluted 596 737 489 737
---------------------------- ---------------------------
Total shares 21,639 21,420 21,532 21,420
============================ ===========================
Net income $5,017 $3,856 $5,017 $3,856
===== ===== ===== =====
Net income per share $ 0.23 $ 0.18 $ 0.23 $ 0.18
====== ====== ====== ======
</TABLE>
Page 21 of 22
<PAGE>
EXHIBIT 12
IDX SYSTEMS CORPORATION
SCHEDULES OF 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,
1997 1996 1997 1996
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding 21,023 20,546 21,023 20,546
Net dilutive effect of
stockoptions-based
on the treasury stock
method using the
average price for
primary and ending
price, if higher, for
fully diluted 566 805 513 805
----------------------------- ---------------------------
Total shares 21,589 21,351 21,536 21,351
============================ ===========================
Net income $8,417 $7,209 $8,417 $7,209
===== ===== ===== =====
Net income per share $ 0.39 $ 0.34 $ 0.39 $ 0.34
====== ====== ====== ======
</TABLE>
Page 22 of 22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME
TAXES QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0001001185
<NAME> IDX Systems Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 12,039 15,617
<SECURITIES> 84,463 69,899
<RECEIVABLES> 46,930 35,477
<ALLOWANCES> (889) (579)
<INVENTORY> 0 0
<CURRENT-ASSETS> 149,222 123,468
<PP&E> 41,574 33,970
<DEPRECIATION> 20,852 16,877
<TOTAL-ASSETS> 172,443 141,358
<CURRENT-LIABILITIES> 30,199 20,124
<BONDS> 2,500 2,700
0 0
0 0
<COMMON> 212 209
<OTHER-SE> 137,623 116,810
<TOTAL-LIABILITY-AND-EQUITY> 172,443 141,358
<SALES> 17,373 15,675
<TOTAL-REVENUES> 92,606 76,427
<CGS> 13,290 12,757
<TOTAL-COSTS> 80,745 66,267
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 205 51
<INTEREST-EXPENSE> 57 67
<INCOME-PRETAX> 14,028 12,009
<INCOME-TAX> 5,611 4,800
<INCOME-CONTINUING> 8,417 7,209
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,417 7,209
<EPS-PRIMARY> .39 .34
<EPS-DILUTED> .39 .34
</TABLE>
