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