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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, 1999
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Commission File Number 0-26816
IDX SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Vermont 03-0222230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Shelburne Road
South Burlington, VT 05403
(Address of principal executive offices)
Registrant's telephone number, including area code: (802-862-1022)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports).
Yes X No
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the registrant's common
stock as of August 11, 1999 was 27,773,439.
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[Exhibit index begins on Page 24]
<PAGE>
IDX SYSTEMS CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION ----
<S> <C> <C>
ITEM 1. Interim Financial Statements:
a) Condensed consolidated balance sheets as of June 30, 1999
and December 31, 1998 (unaudited).................................3
b) Condensed consolidated statements of operations for the three
and six months ended June 30, 1999 and 1998 (unaudited)...........4
c) Condensed consolidated statements of cash flows for the six
months ended June 30, 1999 and 1998 (unaudited)..................5
d) Notes to condensed consolidated financial statements (unaudited)..6
ITEM 2. Management's discussion and analysis of financial condition and
results of operations.............................................9
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings.................................................22
ITEM 2. Changes in securities.............................................22
ITEM 3. Defaults upon senior securities...................................22
ITEM 4. Submission of matters to a vote of security holders...............22
ITEM 5. Other information.................................................22
ITEM 6. Exhibits and reports on Form 8-K..................................22
SIGNATURES.................................................................23
EXHIBIT INDEX..............................................................24
</TABLE>
Page 2 of 24
<PAGE>
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,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Cash and marketable securities $ 70,619 $ 125,132
Accounts receivable, net 111,795 102,179
Income taxes receivable 4,703 -
Other current assets 11,684 5,403
Deferred tax asset 4,720 4,720
--------- ---------
Total current assets 203,521 237,434
Property and equipment, net 50,573 35,949
Capitalized software costs, net 525 665
Other assets 17,178 12,868
Deferred tax asset 2,307 2,307
--------- ---------
Total assets $ 274,104 $ 289,223
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses
and other liabilities $ 44,914 $ 38,484
Short term debt - 5,611
Income taxes - 5,429
Deferred revenue 18,313 18,239
--------- ---------
Total current liabilities 63,227 67,763
Long term debt - 2,261
Minority interest 9,235 8,988
Stockholders' equity 201,642 210,211
--------- --------
Total liabilities and stockholders'
equity $ 274,104 $ 289,223
========= =========
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
Page 3 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
REVENUES
Systems sales $37,727 $43,719 $ 60,579 $82,685
Maintenance and service fees 53,528 42,443 100,326 82,286
------- ------- ------- -------
Total revenues 91,255 86,162 160,905 164,971
OPERATING EXPENSES
Cost of sales 56,295 48,094 105,098 92,461
Selling, general and
administrative 21,212 16,189 41,199 31,163
Research and development 13,423 11,938 27,188 22,438
Nonrecurring charge 4,045 - 4,045 3,201
------- ------- ------- -------
Total operating expenses 94,975 76,221 177,530 149,263
Operating income (loss) (3,720) 9,941 (16,625) 15,708
Interest and other income, net 790 1,025 1,259 1,996
Loss on impairment of asset - - (1,642) -
------- ------- ------- -------
Income (loss) before income
taxes (2,930) 10,966 (17,008) 17,704
Income tax provision (benefit) (680) 5,400 ( 6,180) 10,340
------- ------- -------- -------
Net income (loss) $(2,250) $ 5,566 $(10,828) $ 7,364
======= ======= ======== =======
Basic earnings (loss) per
share $ (0.08) $ 0.20 $ (0.39) $ 0.27
======= ======= ======== =======
Basic weighted average shares
outstanding 27,682 27,294 27,668 27,225
======= ======= ======== =======
Diluted earnings (loss) per
share $ (0.08) $ 0.20 $ (0.39) $ 0.26
======= ======= ======= =======
Diluted weighted average shares
outstanding 27,682 28,181 27,668 28,094
======= ======= ======= =======
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
Page 4 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(10,828) $ 7,364
Adjustments to reconcile net income(loss) to net
cash provided by (used in ) operating activities:
Depreciation and amortization 7,094 6,076
Deferred tax benefit, net of acquisitions - (517)
Increase in allowance for doubtful accounts 109 88
Minority interest 247 21
Loss on investment 1,642 -
Write-off of acquired in-process
research & development costs - 3,201
Changes in operating assets and liabilities,
net of business acquisitions:
Accounts receivable (9,725) (11,069)
Other current assets (2,347) 3,424
Accounts payable and accrued expenses 6,331 (3,780)
Income taxes payable (10,132) 3,007
Deferred revenue 74 (3,906)
------- -------
Net cash (used in) provided by operating activities (17,535) 3,909
INVESTING ACTIVITIES
Purchase of property and equipment, net (19,180) (7,429)
Purchase of securities available-for-sale, net (129,372) (47,168)
Sale of securities available-for-sale 179,462 43,430
Business acquisitions (6,500) -
Other assets, net (5,683) (5,778)
------- -------
Net cash provided by (used in) investing activities 18,727 (16,945)
FINANCING ACTIVITIES
Proceeds from sale of common stock 2,460 7,767
Contributions to affiliates, net - 6,500
Proceeds from debt issuances 3,501 5,342
Principal repayments of debt (11,373) (7,738)
------- ------
Net cash (used in) provided by financing activities (5,412) 11,871
------- -------
Decrease in cash and cash equivalents (4,220) (1,165)
Cash and cash equivalents at beginning of period 11,558 14,741
------- -------
Cash and cash equivalents at end of period $ 7,338 $13,576
======= =======
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
Page 5 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
All financial information for previously reported periods included in the
accompanying interim unaudited condensed consolidated financial statements of
IDX Systems Corporation ("Company" or "IDX") has been restated to reflect the
combined operations of IDX and EDiX Corporation ("EDiX") as a result of the
merger, more fully described in Note 3, which has been accounted for as a
pooling of interests in the quarter ended June 30, 1999. No adjustments were
required to conform the financial reporting policies of IDX and EDiX for periods
presented.
The interim unaudited consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission and in accordance with generally accepted accounting principles.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed. In the opinion of
management, all necessary adjustments have been made to provide a fair
presentation. The operating results for the six months ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes included in the Company's latest annual
report on Form 10-K.
Note 2 - New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which the Company adopted as
of December 31, 1998. SOP 98-1 requires capitalization of certain costs incurred
in connection with developing or obtaining internal use software. In the prior
year, the Company expensed such costs as incurred. This accounting change had no
effect on net income (loss) for the three months ended June 30, 1999 and June
30, 1998 and for the six month periods ended June 30, 1999 and June 30, 1998.
Note 3 - Business Acquisitions
On February 23, 1998, the Company recorded charges of $3.2 million related to
the acquisition of contract management system technology from Trego Systems,
Inc. for cash of $4.0 million. The acquisition was accounted for under the
purchase method. The charges were expensed as in-process research and
development in connection with the Company's development of a healthcare
contract management system.
On April 23, 1999, the Company acquired EDiX Corporation ("EDiX"), a provider of
medical transcription outsourcing services to hospitals and large physician
group practices. The terms of the agreement provided for the shareholders and
optionholders of EDiX to receive approximately 1,000,000 shares of IDX common
stock. Based on the closing price of the IDX common stock on April 23, 1999, the
transaction is valued at approximately $16.7 million, plus the assumption of
EDiX debt of approximately $14.0 million. This transaction is not expected to
dilute earnings per share in 1999 compared to 1998. The EDiX organization will
operate as EDiX, a division of IDX Systems Corporation.
The acquisition has been accounted for as a pooling of interests for the quarter
ended June 30, 1999 and all historical information of the Company for all
periods presented has been restated to include EDiX's operating results. During
the second quarter ended June 30, 1999, the Company recorded charges of $4.0
million related to the acquisition of EDiX. The charges were comprised of
transaction costs of $2.4 million, write-offs and adjustments for long-lived
assets, principally computer equipment, of $1.4 million and other merger related
costs of $0.2 million, principally related to integration costs incurred during
the period and the termination of leases and other contractual obligations.
On April 1, 1999, the Company acquired an 80% interest in ChannelHealth, Inc.
for $6.5 million and may pay an additional $3.0 million, contingent upon certain
performance goals. The acquisition will be accounted for under the purchase
method.
Page 6 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
On June 23, 1999, the Company acquired all of the assets of DietSite.com, Inc.
for $1.5 million. DietSite.com is a website which includes disease-oriented
dietary information with extensive proprietary content on diets, vitamins,
herbals and nutritionals. ChannelHealth, Inc. and DietSite.com will be managed
and operated with the Company's other web technology initiatives as a separate
business unit or tracking division, within the Company.
Note 4 - Income taxes
The tax benefit in 1999 is lower than that expected based on the statutory rate
principally due to the non-deductible nature of certain transaction costs
related to business acquisitions. The 1998 tax provision is higher than that
expected based on the statutory rate principally due to losses of EDiX for which
no tax benefit has been recognized.
Note 5 - Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, "Reporting Comprehensive Income". SFAS 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this statement had no impact on the
Company's net income or stockholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities which prior to adoption
were reported separately in stockholders' equity, to be included in other
comprehensive income. Total comprehensive income (loss) for the quarter ended
June 30, 1999 amounted to ($2.3) million compared to $5.4 million in the same
period in 1998. Total comprehensive income (loss) for the six months ended June
30, 1999 amounted to ($10.9) million compared to $7.3 million in the same period
in 1998.
Note 6- Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company adopted SFAS No. 131 effective with the fiscal year ended December 31,
1998. SFAS No. 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about major customers, products and services, and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. Up to and including the first quarter
of 1999, the Company has viewed its operations and managed its business as
principally one segment, healthcare information solutions that include software,
hardware and related services. During the second quarter of 1999, the Company
acquired two companies which have separate and distinct financial information
and operating characteristics. When applicable, the information for the
reportable segments has been restated for the prior year in order to conform to
the 1999 presentation.
The Company's three business units have separate management teams and
infrastructures that offer different products and services, and as such, have
been classified as three reportable segments (information systems and services,
internet initiatives, and medical transcription services).
Information Systems and Services: This reportable segment consists of IDX
Systems Corporation's healthcare information solutions that include software,
hardware and related services. IDX solutions enable healthcare organizations to
redesign patient care and other workflow processes in order to improve
efficiency and quality. The principal markets for this segment include physician
groups, management service organizations, hospitals, and integrated delivery
networks primarily located in the United States.
IDX.com - Internet Initiatives: This reportable segment consists of an 80%
interest in ChannelHealth, an internet web-portal for physicians combined with a
marketing site for pharmaceutical products, including the website DietSite.com
which provides nutritional analysis and information, and various other web
enabled products. IDX.com strategy is to deliver comprehensive web
technology-based services. The principal markets for this segment include
pharmaceutical companies, healthcare product distributors, healthcare providers
including physicians, hospitals, and integrated delivery networks, and patients
primarily located in the United States.
Page 7 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
Medical Transcription Services: This reportable segment contains EDiX, a
provider of medical transcription outsourcing services. The principal markets
for this segment include hospitals and large physician group practices primarily
located in the United States.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements filed in
the 1998 form 10-K. The Company evaluates the performance of its operating
segments based on revenue and operating income. Intersegment sales are
immaterial. No one customer accounts for greater than 10% in revenue for any
reportable segment, with the exception of EDiX. During the quarter ended June
30, 1999 and June 30, 1998, EDiX's sales to one major customer amounted to 37%
and 36% of total revenue respectively. During the six months ended June 30, 1999
and June 30, 1998, EDiX's sales to the same customer amounted to 40% and 35% of
total revenue respectively.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in millions):
<TABLE>
<CAPTION>
IDX Healthcare
Information IDX.com -
Systems and Internet
Services Initiatives EDiX Total
--------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS
ENDED JUNE 30, 1999
Net operating revenues $ 77,514 $ 2,561 $ 11,180 $ 91,255
Operating income (loss) 3,054 (2,739) (4,035) (3,720)
Identifiable operating
assets 260,060 1,768 12,276 274,104
FOR THE SIX MONTHS ENDED
JUNE 30, 1999
Net operating revenues $ 137,695 $ 2,561 $ 20,649 $160,905
Operating loss (8,810) (2,739) (5,076) (16,625)
Identifiable operating
assets 260,060 1,768 12,276 274,104
FOR THE THREE MONTHS
ENDED JUNE 30, 1998
Net operating revenues $ 79,364 $ 6,798 $ 86,162
Operating income (loss) 12,247 (2,306) 9,941
Identifiable operating
assets 250,686 9,257 259,943
FOR THE SIX MONTHS ENDED
JUNE 30, 1998
Net operating revenues $ 152,101 $ 12,870 $164,971
Operating income (loss) 20,467 (4,759) 15,708
Identifiable operating
assets 250,686 9,257 259,943
</TABLE>
Substantially all of the Company's operations are in the United States. As a
result, the financial information disclosed herein represents all of the
material financial information related to the Company's principal operating
segments.
Page 8 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
Note 6 - Earnings Per Share Information
The Company utilizes SFAS No. 128 to compute earnings per share. Under SFAS No.
128, the dilutive effect of stock options is excluded. The following sets forth
the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
----- ----- ----- -----
Numerator:
Net income (loss) $(2,250) $ 5,566 $(10,828) $ 7,364
------- ------- --------- -------
Numerator for basic and diluted
earnings (loss) per share $(2,250) $ 5,566 $(10,828) $ 7,364
Denominator:
Denominator for basic earnings
(loss) per share--
weighted-average shares 27,682 27,294 27,668 27,225
Effect of employee stock options - 887 - 869
------ ------ ------- -------
Denominator for diluted earnings
(loss) per share 27,682 28,181 27,668 28,094
------ ------ ------- ------
Basic earnings (loss) per share $ (0.08) $ 0.20 $ (0.39 $ 0.27
======= ======= ======= =======
Diluted earnings (loss) per share $ (0.08) $ 0.20 $ (0.39) $ 0.26
======= ======= ======= =======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
including those discussed below that could cause actual results to differ
materially from historical results or those anticipated. Words such as
"believes," "may," "plans," "anticipates," "expects," "intends," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. In addition, the disclosures in
the section on page 14 under the caption "Factors Affecting Future Results"
consists principally of a discussion of risks which may affect future results
and are thus, in their entirety, forward-looking in nature. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
The Company reported a net loss of ($2.2) million, or ($0.08) per share, for the
second quarter of 1999 as compared to net income of $5.6 million or $0.20 per
share, for the second quarter of 1998. Excluding the effect of the nonrecurring
charge for the acquisition of EDiX Corporation of $4.0 million, the net income
for the quarter ended June 30, 1999 was $0.7 million or $0.02 per share. The
Company reported a net loss of ($10.8) million, or ($0.39) per share, for the
first six months of 1999 as compared to net income of $7.4 million or $0.26 per
diluted share, for the first six months of 1998.
Page 9 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
Excluding the effect of the nonrecurring charge for the acquisition of EDiX
Corporation of $4.0 million, the net loss for the six months ended June 30, 1999
was ($7.0) million or ($0.25) per share. Excluding nonrecurring expenses in the
prior year for costs associated with the acquisition of Trego Systems, Inc., the
Company reported net income of $9.3 million, or $0.33 per share, for the first
six months of 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES
The Company's total revenues increased to $91.3 million during the three months
ended June 30, 1999 from $86.2 million in the corresponding period in 1998, an
increase of $5.1 million or 5.9%. Revenues from systems sales decreased to $37.7
million during the three months ended June 30, 1999 (41.3% of total revenues)
compared to $43.7 million (50.7% of total revenues) in the corresponding period
in 1998, a decrease of $6.0 million or (13.7%). The decrease was primarily due
to a delay in current and potential customers' purchasing decisions combined
with a decrease in installations of certain of the Company's IDXtend and
LastWord systems. Revenues from maintenance and service fees increased to $53.5
million during the three months ended June 30, 1999 (58.7% of total revenues)
from $42.4 million (49.3% of total revenues) in the corresponding period in
1998, an increase of $11.1 million or 26.1%. The increase in revenues from
maintenance and service fees was due to additional maintenance revenues
resulting from the continued growth in the Company's installed client base and
increased transcription service fee revenue from EDiX.
During the quarter ended June 30, 1999, certain of the Company's large customers
delayed making purchasing decisions with respect to certain of the large
software systems comprised of multiple products, resulting in longer sales
cycles for such systems. Management believes such delays are due to a number of
factors, including customer organizational changes, governmental approvals,
product complexity, competition and customer preoccupation with internal Year
2000 issues. The Company is unable to determine whether such factors constitute
a trend and will continue into future periods.
COST OF SALES
The cost of sales and services increased to $56.3 million during the three
months ended June 30, 1999 from $48.1 million in the corresponding period in
1998, an increase of $8.2 million or 17.1%. The gross profit margin on systems
sales and services decreased to 38.3% during the three months ended June 30,
1999 from 44.2% in the corresponding period in 1998. The decrease in gross
profit was primarily due to fixed costs and overhead expenses in relation to
decreased revenue from installations of the Company's systems which typically
include a greater percentage of software than services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $21.2 million during
the three months ended June 30, 1999 from $16.2 million in the corresponding
period in 1998, an increase of $5.0 million or 31.0%. As a percentage of total
revenues, selling, general and administrative expenses increased to 23.2% during
the three months ended June 30, 1999 from 18.8% in 1998. The increase in total
selling, general and administrative expenses during the three months ended June
30, 1999 was primarily due to an increase in the Company's sales, marketing and
administrative staff infrastructure which management believes is necessary to
support the long-term growth of the Company.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $13.4 million during the three
months ended June 30, 1999 from $11.9 million in the corresponding period in
1998, an increase of $1.5 million or 12.4%. The increase is primarily due to the
hiring of additional staff and outside consultants to support the development of
additional products including IDXsite and web technology applications, and for
the costs of efforts to address Year 2000 issues. As a percentage of total
revenues,
Page 10 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
research and development expenses increased to 14.7% during the three months
ended June 30, 1999 from 13.9% for the three months ended June 30, 1998. The
increase as a percentage of sales for the three months ended June 30, 1999 as
compared to the prior year, is due to additional personnel and consulting
expenses.
INTEREST AND OTHER INCOME
Interest income decreased to approximately $1.3 million during the second
quarter of 1999 compared to $1.5 million for the comparable period in 1998.
Interest expense remained comparable at approximately $0.2 million during the
second quarters of 1999 and 1998.
INCOME TAXES
Income taxes for the quarter ended June 30, 1999 were benefited at 23.2 % which
is lower than the Company's historical statutory rate of 40.0 % due to certain
charges related to the acquisition of EDiX which are non-deductible for income
tax purposes. The provision for income taxes for the three months ended June 30,
1998 was provided for at approximately 49.2 %. The higher rate in the prior year
is due to the combined financial statement, including a net loss for EDiX for
which no tax benefit was recognized. In addition, a portion of the charges
incurred in the first quarter ended March 31, 1998 related to the acquisition of
Trego Systems, Inc. were nondeductible for income tax purposes. The Company
anticipates an effective tax rate of approximately 40.0 % for the remainder of
the year ending December 31, 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES
The Company's total revenues decreased to $160.9 million during the six months
ended June 30, 1999 compared to $165.0 million in the corresponding period in
1998, a decrease of $4.1 million or (2.5%). Revenues from systems sales
decreased to $60.6 million during the six months ended June 30, 1999 (37.6% of
total revenues) compared to $82.7 million (50.1% of total revenues) in the
corresponding period in 1998, a decrease of $22.1 million or (26.7%). The
decrease was primarily due to a delay in current and potential customers'
purchasing decisions combined with a decrease in installations of certain of the
Company's LastWord and IDXtend systems. Revenues from maintenance and service
fees increased to $100.3 million during the six months ended June 30, 1999
(62.4% of total revenues) from $82.3 million (49.9% of total revenues) in the
corresponding period in 1998, an increase of $18.0 million or 21.9%. The
increase in revenues from maintenance and service fees was due to additional
maintenance revenues resulting from the continued growth in the Company's
installed client base and increased transcription service fee revenue from EDiX.
During the six months ended June 30, 1999, certain of the Company's large
customers delayed making purchasing decisions with respect to certain of the
large software systems comprised of multiple products, resulting in longer sales
cycles for such systems. Management believes such delays are due to a number of
factors, including customer organizational changes, governmental approvals,
product complexity, competition and customer preoccupation with internal Year
2000 issues. The Company is unable to determine whether such factors constitute
a trend and will continue into future periods.
COST OF SALES
The cost of sales and services increased to $105.1 million during the six months
ended June 30, 1999 from $92.5 million in the corresponding period in 1998, an
increase of $12.6 million or 13.7%. The gross profit margin on systems sales and
services decreased to 34.7% during the six months ended June 30, 1999 from 44.0%
in the corresponding period in 1998.
Page 11 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
The decrease in gross profit was primarily due to fixed costs and overhead
expenses in relation to decreased revenue from installations of the Company's
LastWord and IDXtend systems which typically include a greater percentage of
software than of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $41.2 million during
the six months ended June 30, 1999 from $31.2 million in the corresponding
period in 1998, an increase of $10.0 million or 32.2%. As a percentage of total
revenues, selling, general and administrative expenses increased to 25.6% during
the six months ended June 30, 1999 from 18.9% in 1998. The increase in total
selling, general and administrative expenses during the six months ended June
30, 1999 was principally due to an increase in the Company's sales, marketing
and administrative staff infrastructure which management believes is necessary
to support the long-term growth of the Company.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $27.2 million during the six
months ended June 30, 1999 from $22.4 million in the corresponding period in
1998, an increase of $4.7 million or 21.2%. The increase is primarily due to the
hiring of additional staff and outside consultants to support the development of
additional products including IDXsite and web technology applications, and for
the costs of efforts to address Year 2000 issues. As a percentage of total
revenues, research and development expenses increased to 16.9% during the six
months ended June 30, 1999 from 13.6% for the six months ended June 30, 1998.
The increase as a percentage of sales for the six months ended June 30, 1999 as
compared to the prior year, is due to the additional personnel and consulting
expenses.
NONRECURRING CHARGE - MERGER AND RELATED COSTS
During the first six months ended June 30, 1999, the Company recorded charges of
$4.0 million related to the acquisition of EDiX. The charges were comprised of
transaction costs of $2.4 million, write-offs and adjustments for long-lived
assets, principally computer equipment, of $1.4 million and other merger related
costs of $0.2 million, principally related to integration costs incurred during
the period and the termination of leases and other contractual obligations.
NONRECURRING CHARGE - WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On February 23, 1998, the Company recorded nonrecurring charges of $3.2 million
related to the acquisition of contract management technology from Trego Systems,
Inc. for cash of $4.0 million. The acquisition was accounted for under the
purchase method. The charges were expensed as in-process research and
development in connection with the Company's development of a healthcare
contract management system.
INTEREST AND OTHER INCOME (EXPENSE)
Interest income decreased to approximately $2.7 million during the first six
months of 1999 compared to $3.0 million for the same period in 1998. Interest
expense increased to $0.9 million during the first two quarters of 1999 compared
to $0.4 million for the same period in the prior year. The increase in interest
expense is primarily due to EDiX Corporation.
LOSS ON IMPAIRMENT OF ASSET
Other expense included the write-off of an investment of $1.6 million in the
quarter ended March 31, 1999.
INCOME TAXES
Income taxes for the six months ended June 30, 1999 were benefited at 36.3%
which is lower than the Company's historical statutory rate of 40.0% primarily
due to certain charges related to the acquisition of EDiX which are
non-deductible for income tax purposes. The provision for income taxes for the
six months ended June 30, 1998 was provided at approximately 58.4%. The higher
rate in the prior year is due to the combined financial statement, including a
net loss for EDiX for which no tax benefit was recognized. In addition, a
portion of the charges incurred in the first quarter ended March 31, 1998
related to the acquisition of Trego Systems, Inc. were non-deductible for income
tax purposes. The Company anticipates an effective tax rate of approximately 40%
for the remainder of the year ending December 31, 1999.
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PART I. FINANCIAL INFORMATION
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1969, the Company has funded its operations, working
capital needs and capital expenditures primarily from operations. The proceeds
from its initial public offering in 1995 have been used for general
corporate purposes.
Cash flows from operations are principally comprised of net income (loss),
depreciation and amortization, and are primarily affected by the net effect of
the change in accounts receivable, accounts payable and accrued expenses. Due to
the nature of the Company's business, accounts receivable, deferred revenue and
accounts payable fluctuate considerably due to, among other things, the length
of the installation efforts which are dependent upon, among other things, the
size of the transaction, the changing business plans of the customer, the
effectiveness of customers' management and general economic conditions. In
general, accounts receivable from customers have been collected within 85 to 112
days.
Cash flows related to investing activities have principally been related to the
purchase of computer and office equipment, leasehold improvements, the
acquisition of complementary products, businesses, technology and the purchase
and sale of investment grade marketable securities. The Company expects these
activities to continue. During the six months ended June 30, 1999, the Company
acquired two buildings in South Burlington, Vermont for approximately $7.5
million with approximately 66,000 square feet that will be used for additional
office space. On April 23, 1999 the Company acquired EDiX Corporation ("EDiX").
The terms of the agreement provided for the shareholders and optionholders of
EDiX to receive approximately 1,000,000 shares of IDX common stock. Based on the
closing price of the IDX common stock on April 23, 1999, the transaction is
valued at approximately $16.7 million, plus the assumption of EDiX debt of
approximately $14.0 million that was paid off during the six months ended June
30, 1999. Additionally, the Company acquired an 80% interest in ChannelHealth,
Inc. on April 1, 1999 for $6.5 million and may pay an additional $3.0 million,
contingent upon certain performance goals. On June 23, 1999, the Company
acquired all of the assets of DietSite.com, Inc. for $1.5 million.
ChannelHealth, Inc. and DietSite.com will be managed and operated with the
Company's other web technology initiatives as a separate business unit or,
tracking division,within the Company. It is anticipated that this division will
lose approximately $10.0 million pretax during 1999. There can be no assurance
that the Company will be able to successfully complete other purchases or
acquisitions in the future.
Cash flows from financing activities historically relate to the sale of common
stock through the exercise of employee stock options and in connection with the
employee stock purchase plan. During 1998 other financing activities related to
the recapitalization of the real estate affiliate from debt to equity.
Cash, cash equivalents and marketable securities at June 30, 1999 were $70.6
million, a decrease from the December 31, 1998 balance of $125.1 million. This
decrease is primarily due to the investing activities referred to above combined
with a use of cash for operations due to the operating loss of $10.8 million for
the six months ended June 30, 1999. The Company has a revolving line of credit
with a bank allowing the Company to borrow up to $5.0 million bearing interest
at the prime rate. There were no borrowings as of June 30, 1999 or 1998.
The Company expects that its requirements for office facilities and other office
equipment will grow as staffing requirements dictate. The Company's operating
lease commitments consist primarily of office leasing for the Company's
operating facilities. The Company plans to continue increasing the number of its
professional staff during 1999 to meet anticipated sales volume and to support
research and development efforts. To the extent necessary to support increases
in staffing, the Company intends to obtain additional office space.
The Company believes that current operating funds will be sufficient to finance
its operating requirements at least through the next twelve months. To date,
inflation has not had a material impact on the Company's revenues or income.
The Company has announced plans to expand its facilities at Shelburne Road in
South Burlington, Vermont and is considering various options, including the
purchase of additional land and the construction of additional office space. To
date, the Company has made no lease or purchase commitments other than the two
building purchases mentioned above.
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PART I. FINANCIAL INFORMATION
YEAR 2000
INTRODUCTION
Software applications that use only two digits to identify a year in the date
field may fail or create errors in the year 2000 ("Year 2000 Issues"). The
Company has taken significant steps to address Year 2000 Issues.
The Company's internally used computer equipment, software and devices with
embedded technology--including both information systems and non-information
systems (together, "Internal Use Systems")--may fail to operate properly or as
expected due to Year 2000 Issues. This could result in a system failure or
miscalculations causing disruption of the Company's operations, including among
other things, a temporary inability to process transactions, send invoices,
conduct communications, or engage in similar normal business activities. In
addition, computer software products sold, marketed, and supported by the
Company ("Company Software Products") and the products of third parties that are
distributed by the Company or others or may be necessary for operation of
Company Software Products ("Third Party Products"), may fail to operate properly
or as expected due to Year 2000 Issues. Such failures could result in system
failures or miscalculations causing disruption of customers' operations,
including among other things, a temporary inability to process transactions,
send invoices, conduct communications, treat patients, or engage in similar
normal business activities. Further, products and services used by the Company's
customers, but not supplied by the Company, could fail to operate properly or as
expected due to Year 2000 Issues. Customers' efforts to plan for such events
could result in the deferral, delay or cancellation by customers of current
installations of and plans to purchase Company Software Products.
STATE OF READINESS
The Company has undertaken various initiatives intended to address Year 2000
Issues with respect to Internal Use Systems, Company Software Products, and
Third Party Products. The Company has established working groups whose primary
functions are to: (i) develop and implement the Company's definition of Year
2000 readiness; (ii) assess Internal Use Systems, Third Party Products and
Company Software Products for Year 2000 Issues; (iii) monitor development,
testing and remediation efforts with respect to Company Software Products; (iv)
monitor testing of Company Software Products and Third Party Products, (v)
review customer preparations to implement Year 2000 releases of Company Software
Products; (vi) monitor and coordinate the Company's deployment plans and results
with respect to Year 2000 releases of Company Software Products; (vii) monitor
and coordinate contingency plans with respect to Internal Use Systems, Company
Software Products and Third Party Products; and (viii) provide centralization,
accuracy and consistency of the Company's communications regarding Year 2000
Issues.
The Company has engaged independent experts to assist in its efforts with
respect to Year 2000 Issues. The Company has employed such experts to
independently evaluate and verify its methodologies and state of readiness. In
addition, the Company has employed experts to independently evaluate certain
critical Internal Use Systems.
Although the Company's efforts to address Year 2000 issues do not fall precisely
into sequential phases, generally these efforts are comprised of an assessment
phase, a development phase (only with respect to Company Software Products), a
deployment or remediation phase, a preliminary contingency planning phase, and a
final stage contingency planning phase.
Internal Use Systems. Based upon the Company's assessment efforts to date, the
Company believes that certain Internal Use Systems will require replacement or
modification, and to date the Company has replaced or modified some Internal Use
Systems. In addition, in the ordinary course of replacing and upgrading Internal
Use Systems, the Company attempts to obtain replacements that it believes will
not fail as a result of Year 2000 Issues. The Company has substantially
completed its assessment efforts with respect to Internal Use Systems and
expects that its remediation efforts will be completed by the fourth quarter of
1999. The Company is currently engaged in but has not completed contingency
planning to address personnel, resource and technical Year 2000 Issues relating
to foreseeable scenarios that may develop despite its current and planned
remediation efforts. The Company estimates that as of June 30, 1999 it had
completed approximately 88% of its efforts in connection with Year 2000 Issues
relating to its Internal Use Systems. The projects
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PART I. FINANCIAL INFORMATION
comprising the remaining 12% of such efforts are in process and are expected to
be substantially completed on or about the fourth quarter of 1999. The majority
of the remaining work is associated with finalizing the Company's contingency
plan, analyzing landlord's responses for facilities leased by IDX, completing
evaluation of the possible need for upgrades on non-IDX desktop applications and
plan validation.
The Company has mailed letters or otherwise communicated with many of its
significant vendors of Internal Use Systems and related service providers to
determine the extent to which Year 2000 Issues affect products and services of
such vendors and providers. As of June 30, 1999, the Company had received
responses from approximately 95% of such third parties, and 92% of these
companies have provided written assurances that they expect to successfully
address their significant Year 2000 Issues on a timely basis. The Company is
engaged in but has not completed efforts to communicate with other vendors and
service providers involved in its Internal Use Systems to request more responses
to its communications and to verify the responses received. Due to uncertainties
associated with vendors and service providers, the Company is unable to predict
whether Year 2000 Issues involved in its Internal Use Systems will have a
material adverse effect on the Company's business, results of operations, or
financial condition, despite the Company's current assessment to the contrary.
Third Party Products. The Company works closely with vendors of significant
Third Party Products and has communicated with them to determine the extent to
which their products and services are or will be Year 2000 compliant. In
addition, the Company is testing or plans to test Year 2000 releases of certain
Third Party Products. Based upon its current assessment, the Company believes it
has received adequate assurances that significant Third Party Product vendors
expect to successfully address their significant Year 2000 Issues on a timely
basis. Due to uncertainties associated with Third Party Product vendors, the
Company is unable to predict whether a material adverse effect on business,
results of operations, or financial condition may result from Year 2000 Issues
related to Third Party Products, despite the Company's current assessment to the
contrary.
Company Software Products. The Company began development of Year 2000 versions
of some Company Software Products in 1997 and continues to progress through
development cycles with respect to some Company Software Products. The Company
began deploying Year 2000 releases of Company Software Products in 1998 and
expects to complete deployment of such releases during the second half of 1999.
The Company continues to test and monitor performance of Year 2000 releases of
Company Software Products in customer environments. The Company expects to
deliver and deploy maintenance releases of Company Software Products in the
ordinary course of business to remediate any Year 2000 Issues as identified
during and after deployment of Year 2000 releases of Company Software Products.
Based on the Company's assessment, the Company believes continuing efforts will
be required to assist customers in deploying and testing Year 2000 releases of
Company Software Products in their unique environments. The Company expects an
increase in service and support effort levels as the year 2000 approaches and
into the early months of the year 2000.
The Company develops, markets and supports many different products, and the
amount of effort applied with respect to individual products varies from product
to product. The Company estimates that as of June 30, 1999 it had completed
approximately 91% of the development efforts relating to Year 2000 versions of
all of the Company Software Products, including 90% of such efforts related to
EDiX. The projects comprising the remaining 9% of these efforts are in process
and expected to be substantially completed in the third quarter of 1999. The
Company estimates that as of June 30, 1999, it had completed approximately 86%
of the deployment efforts relating to Year 2000 versions of all Company Software
Products, including 50% of deployment efforts related to EDiX's products. The
projects comprising the remaining 14% of these efforts are in process and are
expected to be substantially completed in the third quarter of 1999, but the
Company expects to continue efforts to remediate and maintain Year 2000 versions
of Company Software Products in customer environments and to support customers'
efforts relating to Year 2000 Issues through the early part of 2000.
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PART I. FINANCIAL INFORMATION
The Company is currently engaged in but has not completed contingency planning
to address company-wide personnel, resource, technical and communication issues
relating to its service and remediation efforts. The Company expects that its
development, remediation, testing, deployment and contingency planning efforts
with respect to Company Software Products will continue up to and beyond
December 31, 1999, but expects the level of development and deployment will
decrease in the second half of 1999.
Contingency Plans and Risks. The Company has begun, but not yet completed, a
comprehensive analysis of the company-wide operational, business and financial
problems (including possible loss of revenue), if any, that would be reasonably
likely to result from the impact of unresolved Year 2000 Issues, including
possible: (i) failure by the Company and vendors of Third Party Products to
complete efforts to avoid or minimize Year 2000 Issues on a timely basis,
including failure of Internal Use Systems, Company Software Products and Third
Party Products to be Year 2000 ready; (ii) failure of Customers to be ready to
or cooperate in the deployment of Year 2000 ready versions of Company Software
Products and Third Party Products on a timely basis; and (iii) delay, deferral
or cancellation by customers of current installations and prospective purchase
decisions with respect to Company Software Products. The Company has not yet
completed its contingency plans relating to Year 2000 scenarios it deems
sufficiently probable to merit contingency planning, but it has substantially
completed its preliminary phase of contingency planning and expects to
substantially complete its contingency planning by the third quarter of 1999.
Such contingency final stage planning will encompass "worst case" scenarios that
assume the failure of significant communications and computing infrastructures
of the Company, its customers and suppliers, together with failures of
governmental and utility infrastructures, including those related to
transportation and energy.
COSTS
The Company estimates that the cost of its efforts to successfully address Year
2000 Issues will be approximately $17.8 million, of which approximately $5.2
million relates to Internal Use Systems, $0.6 million relates to EDiX, and $12.0
million relates to Company Software Products. Because the Company develops,
markets, and supports many different products, the amount of effort applied with
respect to individual products varies from product to product. All expenditures
to fund Year 2000 Issue efforts have been and will continue to be recognized
as operating expenses for fiscal years 1997 through early 2000, except for $0.8
million, which is expected to be incurred and capitalized in 1999. As of June
30, 1999, the Company had incurred approximately $12.7 million related to its
Year 2000 Issue assessment, remediation, testing, and contingency planning
efforts identification, which is approximately 71% of the total projected costs
of such efforts. Of the amount of costs incurred as of June 30, 1999,
approximately $3.3 million relates to Internal Use Systems, which is
approximately 57% of the total of estimated costs for such efforts, and $9.4
million relates to Company Software Products, which is approximately 78% of the
total of estimated costs for such efforts.
Unless all material Year 2000 Issues are timely and properly identified,
assessed, and remediated, and unless adequate contingency plans are properly
formulated, Year 2000 Issues may materially adversely impact the Company's
business, financial condition and results of operations, or adversely affect the
Company's relationships with customers, suppliers or others. The Company
believes that Year 2000 Issues could cause failures in important elements of the
computing and communications infrastructures of the Company, its customers and
suppliers and also Company Software Products and Third Party Products. Further,
the Company expects that it and its customers and suppliers may experience
failures of such systems the causes of which will be difficult to determine,
requiring the application of resources for diagnostic purposes. If the Company
has not developed adequate contingency plans and means to address such
contingencies, Year 2000 Issues could materially adversely impact the Company's
business, financial condition and results of operations, or adversely affect the
Company's relationships with customers, suppliers or others.
The costs, timing and scheduling of deployment and installation of Year 2000
versions of Company Software Products and Third Party Products, as well as the
ability of the Company to assist customers in the installation of Company
Software Products, will depend in part on the readiness, ability and cooperation
of customers and their suppliers. Due to uncertainties associated with
customers' readiness, cooperation and sources of products and services, there
can be no assurance that Year 2000 Issues will not materially adversely affect
the Company's business, results of operations, or financial condition, or
adversely affect the Company's relationships with customers, vendors or others.
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PART I. FINANCIAL INFORMATION
Some customers and prospects of the Company operate in complex computing
environments that include products and services not supplied by the Company. The
costs, timing and scheduling by customers of work related to Year 2000 Issues
involving such products and services may cause some customers and prospects to
defer current projects or prospective purchase decisions regarding Company
Software Products. If Year 2000 Issues cause customers and prospects to defer
current projects or prospective purchase decisions, the Company's financial,
business and operational goals may be deferred or may not be realized at all,
with the result that the Company's business, results of operations, or financial
condition could be materially adversely affected. Due to uncertainties
associated with customers and prospects, there can be no assurance that Year
2000 Issues will not materially adversely affect the Company's business, results
of operations, or financial condition or adversely affect the Company's
relationships with customers, vendors or others.
The costs of the Company's Year 2000 identification, assessment, remediation,
testing, deployment and contingency planning efforts, and the dates on which the
Company believes it will complete such efforts, are based upon management's
current best estimates, which were derived using numerous assumptions regarding
future events, including the continued availability of certain resources,
third-party remediation plans, and other factors. There can be no assurance that
these estimates will prove to be accurate, and actual results could differ
materially from those currently anticipated. Specific factors that could cause
such material differences include, but are not limited to, the availability of
and cost of personnel trained in Year 2000 Issues, the ability to correctly and
effectively identify, assess, remediate, and test all relevant computer codes,
equipment, and embedded technology, and similar uncertainties, the ability of
the Company to timely install and deploy Year 2000 releases of Company Software
Products, a failure of the Company to provide, obtain or make available adequate
resources to assist customers in installing Year 2000 releases of Company
Software Products and Third Party Products. As a result of any of such factors
alone or in combination, the Company may experience an increase in warranty and
other claims. In addition, since there is no uniform definition of "compliance
with Year 2000," and since the Company sells a myriad of different combinations
of products and services under varying contractual terms, the Company is not
able to assess or estimate the possible impact of such possible claims. No
assurance can be given that the aggregate cost of defending and resolving such
claims, if any, will not materially adversely affect the Company's results of
operations. Although some of the Company's agreements with manufacturers and
others from whom it purchases products for resale contain provisions requiring
such parties to indemnify the Company under some circumstances, there can be no
assurance that such indemnification arrangements will cover all of the Company's
liabilities and costs related to claims by third parties related to Year 2000
Issues.
FACTORS AFFECTING FUTURE RESULTS
IDX Stock Prices May Continue to be Volatile. IDX has experienced, and expects
to continue to experience fluctuations in its stock price due to a variety of
factors including:
. delay in customers purchasing decisions due to a variety of factors
such as consolidation, management changes and year 2000 problems;
. market prices of competitors such as McKesson HBOC, Inc.;
. announcements of technological innovations, including Internet
delivery of information and use of relational database technology;
. new product introductions by IDX or its competitors;
. market conditions particularly in the computer software and hardware
industries; and
. healthcare reform measures, such as those contemplated by the
Balanced Budget Act of 1997.
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PART I. FINANCIAL INFORMATION
These fluctuations could have a significant impact on future market prices of
IDX's common stock. On March 5, 1999 IDX announced that it expected a loss of
($0.22) - ($0.28) per share in the quarter ending March 31, 1999. Following this
announcement, the IDX share price declined. On April 30, 1999, the last reported
sale price of IDX common stock on the Nasdaq National Market was $16.25 per
share and on June 30, 1999, such price was $22.5625. On December 31, 1998, the
last reported sale price of IDX common stock on the Nasdaq National Market was
$44.00. These prices represent declines of 63% and 49%, respectively, in the
value of IDX stock since December 31, 1998.
Variation in Financial Trends in Net Income and Cash from Operations May
Continue. Year over year net income and cash from operations have fluctuated
since 1995. IDX's net income was $20.6 million in 1995. Net income fell to $16.7
million in 1996 and $8.0 million in 1997. Net income increased to $30.2 million
in 1998. Cash from operations was $21.7 million in 1995, $10.4 million in 1996,
$9.8 million in 1997, and $23.4 million in 1998. On March 5, 1999 IDX announced
that based on currently available information, the after tax loss for the first
quarter ending March 31, 1999 was expected to be ($5.0) to ($7.0) million. If
these negative trends were to continue, IDX may have difficulty in financing
future growth and funding its operating initiatives including future
acquisitions.
IDX Expects its Quarterly Operating Results to Fluctuate and its Customer Sales
and Installation Requirements to Change.
IDX expects its quarterly results of
operations to continue to fluctuate. Because a significant percentage of IDX's
expenses are relatively fixed, the following factors could cause these
fluctuations:
. delay in customers purchasing decisions due to a variety of factors
such as consolidation, management changes and year 2000 problems;
. the volume and timing of systems sales and installations;
. recognizing revenue at various points during the installation
process;
. the sales and implementation cycles of IDX's customers; and
. general reductions in spending by IDX's customers and healthcare
reform measures.
In addition, the timing of new product and service introductions and product
upgrade releases and general economic conditions can impact IDX's quarterly
operating results.
In light of the above, IDX believes that its results of operations for any
particular quarter or fiscal year are not necessarily meaningful or reliable
indicators of future performance. Future period-to-period fluctuations may have
a material adverse effect on IDX's results of operations, financial condition or
business.
IDX May Experience Challenges and Incur Substantial Costs in Integrating the
Operations of EDiX.
EDiX may present IDX operational challenges, and IDX expects to incur
significant pre-tax charges in association with the merger. If IDX fails to
successfully integrate the operations or management of the two companies, it
could have a material adverse effect on the combined entity's results of
operations, financial condition or business.
IDX May Not be Successful in Implementing its Acquisition Strategy. IDX intends
to continue to grow in part through either acquisitions of complementary
products, technologies and businesses or alliances with complementary
businesses. IDX may not be successful in these acquisitions or alliances, or in
integrating any such acquired or aligned products, technologies or businesses
into its current business and operations. Factors which may affect IDX's ability
to expand successfully include:
. the successful identification and acquisition of products,
technologies or businesses;
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PART I. FINANCIAL INFORMATION
. effective integration and operation of the acquired or aligned
products, technologies or businesses despite technical
difficulties, geographic limitations and personnel issues; and
. overcoming significant competition for acquisition and alliance
opportunities from companies that have significantly
greater financial and management resources, such as McKesson HBOC,
Inc. and Shared Medical Systems Corporation.
The failure to successfully integrate any significant products, technologies or
businesses could have a material adverse effect on IDX's results of operations,
financial condition or business.
IDX's Success Depends on New Product Development and Its Ability to Respond to
Rapidly Changing Technology. To be successful, IDX must enhance its existing
products, respond effectively to technology changes and help its clients adopt
new technologies. In addition, IDX must sell additional products to its existing
client base and introduce new products and technologies to meet the evolving
needs of its clients in the healthcare information systems market. IDX may have
difficulty in accomplishing this because of factors including:
. evolving industry standards, for example, Health Level Seven;
. new technological developments, for example, the web technology.
IDX is currently devoting significant resources toward the development of
enhancements to its existing products, particularly in the announced area of
web-based functionality and the migration of existing products to new hardware
and software platforms including relational database technology and
object-oriented programming. However, IDX may not successfully complete these
product developments or the adaptation in a timely fashion, and IDX's current or
future products may not satisfy the needs of the healthcare information systems
market. Any of these developments may adversely affect IDX's competitive
position or render its products or technologies noncompetitive or obsolete.
IDX May Be Adversely Affected by Year 2000 Problems. In the year 2000 software
applications that use only two digits to identify a year in the date field may
fail or create errors. IDX uses computer equipment, software and devices with
embedded technology, including both information systems and non-information
systems, that may not be year 2000 compliant despite IDX's continuing efforts to
assess, remediate, and test such equipment, software and devices. This could
result in a system failure or miscalculations causing disruption of IDX's
operations, including among other things, a temporary inability to:
. process transactions;
. send invoices;
. conduct communications; or
. engage in similar normal business activities.
In addition, IDX sells computer software products and distributes the products
of third parties that may not be year 2000 compliant despite IDX's continuing
efforts to assess and test these products. This could result in system failures
or miscalculations causing disruption of customers' operations, including, in
addition to the types of disruptions described above, a temporary disruption in
their ability to treat patients. Further, products and services used by IDX's
customers, but not supplied by IDX, may not be year 2000 compliant. Customers
may defer current installations of and plans to purchase IDX products until they
have completed their own year 2000 assessment. Any of these problems could have
a material adverse effect on IDX's results of operations, financial condition or
business.
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PART I. FINANCIAL INFORMATION
IDX does not believe that the year 2000 issues will pose significant operational
problems for IDX. However, if year 2000 issues are not properly identified,
assessed and resolved, it could have a material adverse effect on the results of
operations, financial condition or business of IDX. In addition if actual year
2000 remediation costs are higher than IDX estimated costs, it could materially
adversely affect IDX's results of operations, financial condition or business.
The nature of IDX's business and its relationships with its customers make it
difficult to assess the magnitude of IDX's potential exposure as a result of
year 2000 issues. IDX is engaged in the business of developing, marketing and
supporting computer software. IDX's software is often used by its customers in
conjunction with other vendors' products and services. The ability of IDX to
assist its customers in the development and installation of year 2000 compliant
versions of IDX software products will depend in part on the readiness, ability
and cooperation of its customers and their suppliers. In addition, the
purchasing patterns of IDX customers and potential customers may be affected by
year 2000 issues. The cost, timing and scheduling by customers of work related
to year 2000 issues involving IDX's products and services may cause some
customers to defer or forego projects or purchase decisions. IDX sells a number
of different combinations of products and services under varying contractual
terms. There is no widely accepted definition of year 2000 compliance. Certain
of IDX's customers may assert breach of warranty or other claims against IDX
relating to year 2000 compliance. Any of these factors may adversely affect the
results of operations.
Product Sales Within the Healthcare Industry May Decline Causing IDX to Suffer
Financially. IDX currently derives substantially all of its revenues from sales
of financial, administrative and clinical healthcare information systems and
related services within the healthcare industry. As a result, any factor
adversely affecting this industry and these sales could have a material adverse
effect on IDX. In addition, even though IDX's annual sales have increased,
future revenues associated with existing products may decline as a result of
factors like price competition. IDX may not be able to continue its success in
marketing its current, new or enhanced products. Moreover, IDX may be unable to
maintain its current pricing for existing products.
IDX May Be Faced With Product Liability Claims Exceeding Its Insurance Coverage.
Any failure by IDX's products that provide applications relating to patient
medical histories and treatment plans could expose IDX to product liability
claims. These potential claims may exceed IDX's current insurance coverage. A
successful claim brought against IDX in excess of its insurance coverage could
have a material adverse effect on IDX's results of operations. Even unsuccessful
claims could be costly to defend and divert management time and resources. In
addition, IDX cannot assure you that it will continue to have appropriate
insurance available to it in the future at commercially reasonable rates.
IDX's Success is Significantly Dependent on Key Personnel. The success of IDX is
dependent to a significant degree on its key management, sales, marketing, and
technical personnel. To be successful IDX must attract, motivate and retain
highly skilled managerial, sales, marketing, consulting and technical personnel,
including programmers, consultants, and systems architects skilled in the
technical environments in which IDX's products operate. Competition for such
personnel in the software and information services industries is intense. The
loss of key personnel, or the inability to hire or retain qualified personnel,
could have a material adverse effect on IDX's results of operations. IDX does
not maintain "key man" life insurance policies on its executives.
Not all IDX personnel have executed noncompetition agreements.
IDX May Be Adversely Affected By Changes in the Healthcare Industry and by
Government Healthcare Reform Proposals. IDX's products are designed to function
within the structure of the healthcare financing and reimbursement system
currently being used in the United States. During the past several years, the
healthcare industry has been subject to increasing levels of governmental
regulation of, among other things, reimbursement rates and capital expenditures.
From time to time, Congress has considered and adopted proposals to reform the
healthcare system. These proposals may increase government involvement in
healthcare, lower reimbursement rates and otherwise change the operating
environment for IDX's clients. Legislation such as the Balanced Budget Act of
1997 will lower reimbursement rates and may result in reduced spending by
certain healthcare organizations. Healthcare organizations may react to these
proposals and the uncertainty surrounding these proposals by curtailing or
deferring investments, including those for IDX's products and services. IDX
cannot predict with any certainty what impact these proposals or healthcare
reforms, such as the Balanced Budget Act of 1997 might have on its results of
operations, financial condition or business.
Page 20 of 24
<PAGE>
PART I. FINANCIAL INFORMATION
Governmental Regulation May Impose New Burdens and Costs on IDX's Operations.
The United States Food and Drug Administration has promulgated a draft policy
for the regulation of computer software products as medical devices under the
1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To
the extent that computer software is a medical device under the policy, IDX, as
a manufacturer of such products, could be required, depending on the product,
to:
. register and list its products with the FDA;
. notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing such products; or
. obtain FDA approval by demonstrating safety and effectiveness
before marketing a product.
Depending on the intended use of a device, the FDA could require IDX to obtain
extensive data from clinical studies to demonstrate safety or effectiveness, or
substantial equivalence. If the FDA requires this data, IDX would be required to
obtain approval of an investigational device exemption before undertaking
clinical trials. Clinical trials can take extended periods of time to complete.
IDX cannot provide assurances that the FDA will approve or clear a device after
the completion of such trials. In addition, these products would be subject to
the FDC Act's general controls, including those relating to good manufacturing
practices and adverse experience reporting. Although it is not possible to
anticipate the final form of the FDA's policy with regard to computer software,
IDX expects that the FDA is likely to become increasingly active in regulating
computer software intended for use in healthcare settings regardless of whether
the draft is finalized or changed. The FDA can impose extensive requirements
governing pre-and post-market conditions like service investigation, approval,
labeling and manufacturing. In addition, the FDA can impose extensive
requirements governing development controls and quality assurance processes.
In order to ensure continued compliance with changing government standards and
regulations, IDX monitors regulations affecting its business including those
mandated by the Health Insurance Portability and Accountability Act of 1996.
IDX May Have Conflicts of Interests With Some of its Executives Which May
Adversely Affect IDX. Richard E. Tarrant, Chief Executive Officer and Director,
and Robert H. Hoehl, Chairman of the Board of Directors, indirectly own, through
various entities, real estate which IDX leases in connection with its
operations. During 1998, IDX paid an aggregate of approximately $4.2 million in
connection with these leases. In November 1998, IDX announced tentative plans to
expand one of its facilities located on land owned by these executives, however
the Company has not yet made any commitments to finalize those plans.
In connection with these arrangements, the economic interests of these
executives and directors and IDX may diverge. In response, IDX has created the
Committee on Independent Director Transactions to review and approve
transactions of this nature. IDX believes that these arrangements were entered
into on an arm's length basis on terms that were no less favorable to IDX than
could have been obtained from unaffiliated third parties.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results.
Page 21 of 24
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On June 11, 1999, a lawsuit was served on the Company. Eleven other
companies engaged in various aspects of the healthcare information
systems business have also been sued in the same lawsuit. The lawsuit
was brought in the United States District Court for the Northern
District of Texas Fort Worth Division and is entitled Allcare Health
Management System, Inc. v. Cerner Corporation, et al., and claims
damages for patent infringement. The Company is investigating the
claims made in the lawsuit and will respond accordingly. Based upon a
preliminary investigation to date, the Company believes the lawsuit is
without merit and intends to vigorously defend against it.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company believes that no
such currently pending routine litigation to which it is party will
have a material adverse effect on its financial condition or results of
operations.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this Form 10-Q are listed on the Exhibit Index
immediately preceding such exhibits, which Exhibit Index is incorporated herein
by reference.
Page 22 of 24
<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, 1999 By: /S/ JOHN A. KANE
-------------------------------
John A. Kane,
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
Page 23 of 24
<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 25
</TABLE>
Page 24 of 24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</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-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 7,338 13,576
<SECURITIES> 63,281 105,469
<RECEIVABLES> 114,519 82,231
<ALLOWANCES> (2,724) (1,842)
<INVENTORY> 0 0
<CURRENT-ASSETS> 203,521 210,251
<PP&E> 94,093 65,530
<DEPRECIATION> 43,520 31,371
<TOTAL-ASSETS> 274,104 259,943
<CURRENT-LIABILITIES> 63,227 56,202
<BONDS> 0 0
0 0
0 0
<COMMON> 357 273
<OTHER-SE> 201,285 192,619
<TOTAL-LIABILITY-AND-EQUITY> 274,104 259,943
<SALES> 160,905 164,971
<TOTAL-REVENUES> 160,905 164,971
<CGS> 105,098 92,461
<TOTAL-COSTS> 72,432 56,802
<OTHER-EXPENSES> 4,045 3,201
<LOSS-PROVISION> 246 301
<INTEREST-EXPENSE> 858 434
<INCOME-PRETAX> (17,008) 17,704
<INCOME-TAX> (6,180) 10,340
<INCOME-CONTINUING> (10,828) 7,364
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,828) 7,364
<EPS-BASIC> (0.39) 0.27
<EPS-DILUTED> (0.39) 0.26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001001185
<NAME> IDX SYSTEMS CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 7,338 13,576
<SECURITIES> 63,281 105,469
<RECEIVABLES> 114,519 82,231
<ALLOWANCES> (2,724) (1,842)
<INVENTORY> 0 0
<CURRENT-ASSETS> 203,521 210,251
<PP&E> 94,093 65,530
<DEPRECIATION> 43,520 31,371
<TOTAL-ASSETS> 274,104 259,943
<CURRENT-LIABILITIES> 63,227 56,202
<BONDS> 0 0
0 0
0 0
<COMMON> 357 273
<OTHER-SE> 201,285 192,619
<TOTAL-LIABILITY-AND-EQUITY> 274,104 259,943
<SALES> 91,255 86,162
<TOTAL-REVENUES> 91,255 86,162
<CGS> 56,295 48,094
<TOTAL-COSTS> 38,680 28,127
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 116 139
<INTEREST-EXPENSE> 221 240
<INCOME-PRETAX> (2,930) 10,966
<INCOME-TAX> (680) 5,400
<INCOME-CONTINUING> (2,250) 5,566
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,250) 5,566
<EPS-BASIC> (0.08) 0.20
<EPS-DILUTED> (0.08) 0.20
</TABLE>
