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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 SEPTEMBER 30, 2000
-------------------------------
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
November 10, 2000 was 28,224,184.
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<PAGE>
IDX SYSTEMS CORPORATION
FORM 10-Q
For the Period Ended September 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets . . . . . . . . . . . .. . 3
Condensed Consolidated Statements of Operations . . . . . . .. . 4
Condensed Consolidated Statements of Cash Flows . . . . . . .. . 5
Notes to Condensed Consolidated Financial Statements . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 27
Item 2. Changes In Securities . . . . . . . . . . . . . . . . 27
Item 3. Defaults Upon Senior Securities . . . . . . . . .. 27
Item 4. Submission of Matters to a Vote of Security Holders . . 27
Item 5. Other Information . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits And Reports On Form 8-K . . . . . . . .. . . .. 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 29
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Page 2 of 30
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
September 30, December 31,
2000 1999
----------------- ----------------
ASSETS
Cash, cash equivalents and marketable
securities $ 69,769 $ 68,359
Accounts receivable, net 97,118 110,759
Other current assets 8,932 5,153
Income taxes receivable 12,192 199
Deferred income taxes 15,824 7,691
-------- --------
Total current assets 203,835 192,161
Property and equipment, net 68,542 58,265
Other assets 9,450 17,521
Deferred income taxes 3,426 3,200
-------- --------
Total assets $285,253 $271,147
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses
and other liabilities $ 49,612 $ 37,970
Deferred revenue 18,674 17,459
-------- --------
Total current liabilities 68,286 55,429
Minority interest 9,040 9,204
Stockholders' equity 207,927 206,514
-------- --------
Total liabilities and stockholders'
equity $285,253 $271,147
======== ========
See Notes to the Condensed Consolidated Financial Statements
Page 3 of 30
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Systems sales $ 28,940 $ 34,365 $ 71,680 $ 94,944
Maintenance and service fees 58,638 57,853 172,216 158,179
-------- -------- -------- --------
TOTAL REVENUES 87,578 92,218 243,896 253,123
OPERATING EXPENSES
Cost of sales 60,682 56,442 176,502 161,540
Selling, general and
administrative 23,325 21,616 63,112 62,815
Research and development 12,074 12,733 37,414 39,921
Merger and related costs - - - 4,045
Restructuring charges - - 21,029 -
Loss of impairment of
goodwill - - 5,810 -
--------- -------- --------- --------
TOTAL OPERATING EXPENSES 96,081 90,791 303,867 268,321
--------- -------- --------- --------
OPERATING INCOME (LOSS) (8,503) 1,427 (59,971) (15,198)
Other income, net (798) (537) (2,928) (1,796)
Loss on investment impairment - - - 1,642
---------- --------- ---------- ----------
Income (loss) before income
taxes (7,705) 1,964 (57,043) (15,044)
Income tax provision (benefit) (2,928) 786 (19,744) (5,394)
---------- --------- ---------- ---------
NET INCOME (LOSS) $ (4,777) $ 1,178 $ (37,299) $ (9,650)
========== ========= ========== ==========
BASIC EARNINGS (LOSS) PER
SHARE $ (0.17) $ 0.04 $ (1.33) $ (0.35)
========== ========= ========== ==========
Basic weighted average shares
outstanding 28,154 27,767 28,047 27,701
========== ========= ========== ==========
DILUTED EARNINGS (LOSS) PER
SHARE $ (0.17) $ 0.04 $ (1.33) $ (0.35)
========== ========= ========== ==========
Diluted weighted average shares
outstanding 28,154 28,271 28,047 27,701
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
Page 4 of 30
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (37,299) $ (9,650)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 11,153 8,915
Amortization 474 2,307
Deferred income tax benefit (8,359) -
Increase in allowance for doubtful accounts 1,541 585
Loss on impairment of goodwill 5,810 -
Minority interest 736 112
Loss on investment impairment - 1,642
Restructuring charge 21,029 -
Changes in operating assets and liabilities:
Accounts receivable 8,596 (9,780)
Prepaid expenses and other assets (3,590) 1,179
Accounts payable and accrued expenses (6,044) 5,839
Federal and state income taxes (11,994) (10,149)
Deferred revenue 1,215 (438)
--------- ----------
Net cash used in operating activities (16,732) (9,438)
INVESTING ACTIVITIES
Purchase of property and equipment, net (21,481) (28,177)
Purchase of securities available-for-sale (14,962) (178,246)
Sale of securities available-for-sale 21,203 246,753
Business acquisitions - (6,500)
Other assets 1,861 (3,077)
--------- ----------
Net cash (used in) provided by investing
activities (13,379) 30,753
FINANCING ACTIVITIES
Proceeds from sale of common stock 6,486 4,063
Procdeds from sale of preferred stock 32,089 -
Proceeds from debt issuances - 3,501
Principal repayments of debt - (11,373)
Distributions to affiliates, net (900) -
--------- ----------
Net cash provided by (used in) financing
activities 37,675 (3,809)
--------- ----------
Increase in cash and cash equivalents 7,564 17,506
Cash and cash equivalents at beginning of period 18,487 11,558
--------- ----------
Cash and cash equivalents at end of period 26,051 29,064
Marketable securities 43,718 44,832
--------- ----------
Total cash, cash equivalents and marketable
securities $ 69,769 $ 73,896
========= ==========
</TABLE>
See Notes to the Condensed Consolidated Financial Statements
Page 5 of 30
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The interim unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and in accordance with accounting principles generally
accepted in the United States. 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
(consisting of normal recurring accruals and adjustments) have been made to
provide a fair presentation. The operating results for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes included in the Company's
latest annual report on Form 10-K filed with the Securities and Exchange
Commission.
Note 2 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), as amended
by SFAS No. 137 and SFAS No. 138, which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 as amended, is effective for the Company beginning
after January 1, 2001. The adoption of SFAS No. 133, as amended, is not expected
to have a material impact on the Company's financial condition or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements." SAB
formalizes positions the staff has expressed in speeches and comment letters.
SAB 101 is effective in 2000 but may be adopted in the quarter ending December
31, 2000 as a cumulative effect adjustment for a change in accounting principle.
In the event a cumulative effect adjustment is required, previously issued
interim financial statements are required to be restated. The Company is
presently analyzing the impact, if any, that the adherence to the SAB will have
on its financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25". The Company adopted
Interpretation 44 on July 1, 2000. Interpretation 44 requires, among other
things, that stock option grants that have been modified be accounted for as
variable. As a result of adopting Interpretation 44, the Company will be
required to adopt variable accounting for stock options that have been modified
and if the market price of the Company's stock increases it will recognize
additional compensation expense that it otherwise would not have incurred. The
Company has not modified any stock option grants in the past year and does not
anticipate any compensation expense for stock options issued to date.
Note 3 - Restructuring Charge
On June 21, 2000 the Company announced the implementation of a workforce
restructuring program. The Company halted development and discontinued sales
efforts on certain product lines that have failed to achieve business targets or
have been deemed non-strategic to the business going forward. As a result of the
Page 6 of 30
<PAGE>
restructuring, the Company implemented a work-force reduction of approximately
five percent. The program resulted in a charge to earnings of approximately
$21.0 million in the second quarter, in connection with costs associated with
product discontinuations of approximately $16.0 million and severance
arrangements of approximately $5.0 million. Workforce related accruals,
consisting principally of severance costs, were established based on specific
identification of employees to be terminated, along with their job
classification or functions, and their location. Substantially all
workforce-related actions were completed during the third quarter of 2000 with
the exception of product related "sunset" support teams, which under certain
circumstances, may result in the actual payment of termination costs to extend
beyond September 30, 2000. As of September 30, 2000 the Company has a balance of
$13.7 million related to accrued restructuring costs. Cash expenditures related
to these accruals are estimated to be paid as follows: $3.0 million over the
remainder of 2000 and $8.0 million thereafter. The remaining balance of
approximately $2.7 million represents a provision for the estimated write-off of
accounts receivable that will not affect cash. These write-offs are expected to
be finalized by March 31, 2001.
Note 4 - Business Acquisitions, Dispositions and Related Matters
On July 13, 2000, the Company announced an agreement to sell certain operations
of Channelhealth Incorporated to Allscripts, Inc., a leading provider of
point-of-care e-prescribing and productivity solutions for physicians.
ChannelHealth provides a set of Internet-based clinical and productivity
solutions for physicians that brings the power of the Internet to the practice
of medicine. IDX will retain the Patient and e-Commerce Channels, which were
previously part of Channelhealth Incoporated, enabling IDX to integrate an
Internet solution that leverages its core competencies in physician practice
management systems. In addition to the sale, the Company has agreed to enter
into a 10-year strategic alliance whereby Allscripts will become the exclusive
provider of point-of-care clinical applications sold by IDX to physician
practices.
Under the terms of the deal, which is subject to regulatory and Allscripts'
shareholder approval, Allscripts will acquire Channelhealth Incorporated in
exchange for 8.6 million shares, or 21.3% of Allscripts stock on a pro forma
fully diluted basis, of which IDX will receive approximately 90%.
On April 23, 1999, the Company completed a merger with EDiX Corporation, a
provider of medical transcription services, which became a wholly owned
subsidiary of the Company. The transaction was accounted for as a
pooling-of-interests and accordingly, the accompanying condensed financial
statements include the accounts of EDiX for all periods presented. In connection
with the merger, the Company incurred approximately $4.0 million of merger and
related costs consisting principally of transaction costs of $2.4 million,
write-offs and adjustments of long-lived assets, principally noncompatible
computer equipment of $1.4 million and other merger related costs of $0.2
million, principally related to integration costs and the termination of leases
and other contractual obligations.
On April 1, 1999, the Company acquired an 80% interest in ChannelHealth, Inc., a
Massachusetts corporation, for $6.5 million. The acquisition was accounted for
under the purchase method and resulted in $6.5 million of goodwill being
recorded on the Company's financial statements. As described above certain of
Channelhealth Incorporated operations will be sold to Allscripts.
In the first quarter of 2000, the Company determined that an asset impairment
existed related to goodwill acquired in the purchase of ChannelHealth, Inc., a
Massachusetts corporation. In January 2000, the Company made the decision to
seek a primary provider of content and transactions for Channelhealth
Page 7 of 30
<PAGE>
Incorporated, and decided to no longer utilize certain assets acquired with the
purchase of ChannelHealth, Inc. The Company recognizes impairment losses on
long-lived assets when indicators of impairment are present and future
undiscounted cash flows are insufficient to support the assets' recovery. The
amount of the impairment loss is recognized based on an analysis of discounted
cash flows estimated to be derived from the impaired asset. This asset
impairment has been recognized during the first quarter of 2000 and is reflected
as a pre-tax loss on impairment of goodwill of approximately $5.8 million.
On June 23, 1999, the Company acquired all of the assets of DietSite.com, Inc.
for $1.5 million. DietSite.com is a website that includes disease-oriented
dietary information with extensive proprietary content on diets, vitamins,
herbals and nutritionals.
Note 5 - Income Taxes
The 2000 tax benefit is lower than the statutory rate principally due to the
non-deductible nature of the loss on impairment of goodwill related to
ChannelHealth, Inc. The 1999 tax benefit is lower than the statutory rate due
principally to the inclusion in the condensed financial statements of the net
loss of EDiX Corporation, for which no tax benefit was recognized.
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 viewed its operations and managed its business as one
segment, healthcare information solutions that include software, hardware and
related services. During the second quarter of 1999, the Company acquired two
companies that 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 2000
presentation.
The Company's three operating segments have separate management teams and
infrastructures that offer different products and services. Accordingly, these
operating segments have been classified as three reportable segments
(information systems and services, Internet services and content, and medical
transcription services).
Information Systems and Services: This segment contains 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.
Page 8 of 30
<PAGE>
Internet Services and Content: Channelhealth Incorporated, a majority owned
subsidiary, offers three Internet channels that integrate IDX's core practice
management systems with extensive Internet-based services and clinically valid
content. Channelhealth Incorporated services are available to physicians through
group practices, hospitals, integrated delivery networks and managed care
organizations. As discussed in Note 4, on July 13, 2000, the Company announced
an agreement to sell the majority of the operations of Channelhealth
Incorporated to Allscripts, Inc. Effective on the date of the close of this
pending transaction, the Internet Services and Content segment will no longer be
presented separately.
Medical Dictation and Transcription Services: This segment contains EDiX, a
provider of medical transcription outsourcing services. EDiX's principal markets
include hospitals and large physician group practices primarily located in the
United States.
The Company evaluates the performance of its operating segments based on revenue
and operating income. Intersegment revenues are immaterial. No one customer
accounts for greater than 10% of revenue for any reportable segment for the
three and nine month periods ended September 30, 2000, with the exception of
EDiX. EDiX's revenues from one major customer amounted to 10.5% and 12.9% of
EDiX's total revenue during the three months ended September 30, 2000 and
September 30, 1999, respectively. EDiX's revenues from one major customer
amounted to 10.3% and 10.4% of EDiX's total revenue during the nine months ended
September 30, 2000 and September 30, 1999, respectively.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in thousands):
<TABLE>
<CAPTION>
MEDICAL
DICTATION
INFORMATION INTERNET AND
SYSTEMS AND SERVICES AND TRANSCRIPTION
SERVICES CONTENT SERVICES TOTAL
-------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2000
Net operating revenues $ 67,857 $ 1,591 $ 18,130 $ 87,578
Operating income (loss) (3,175) (6,138) 810 (8,503)
Identifiable operating assets 237,646 24,991 22,616 285,253
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000
Net operating revenues $187,151 $ 4,342 $ 52,403 $243,896
Operating income (loss) (39,280) (23,230) 2,539 (59,971)
Identifiable operating assets 237,646 24,991 22,616 285,253
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
Net operating revenues $ 80,021 $ 0 $ 12,197 $ 92,218
Operating income (loss) 3,275 (1,959) 111 1,427
Identifiable operating assets 254,774 8,042 12,798 275,614
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
Net operating revenues $220,277 $ 0 $ 32,846 $253,123
Operating loss (7,333) (2,901) (4,964) (15,198)
Identifiable operating assets 254,774 8,042 12,798 275,614
</TABLE>
Corporate headquarters assets are included in the Information Systems and
Services segment. Substantially all of the Company's operations are in the
United States. The financial information disclosed herein represents all of the
material financial information related to the Company's principal operating
segments.
Page 9 of 30
<PAGE>
Note 7 - Earnings Per Share Information
The following sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (4,777) $ 1,178 $(37,299) $ (9,650)
--------- -------- --------- ---------
Numerator for basic and diluted
income (loss) per share $ (4,777) $ 1,178 $(37,299) $ (9,650)
--------- -------- --------- ---------
Denominator:
Weighted-average shares 28,154 27,767 28,047 27,701
Effect of employee stock options - 504 - -
-------- -------- --------- ---------
Denominator for diluted income
(loss) per share 28,154 28,271 28,047 27,701
-------- -------- --------- ---------
Basic and diluted income (loss)
per share $ (0.17) $ 0.04 $ (1.33) $ (0.35)
========= ======== ========= =========
</TABLE>
Page 10 of 30
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company reported a net loss of $4.8 million, or $0.17 per diluted share, for
the third quarter of 2000 as compared to net income of $1.2 million or $0.04 per
diluted share, for the third quarter of 1999. The Company reported a net loss of
$37.3 million, or $1.33 per share, for the first nine months of 2000 as compared
to a net loss of $9.6 million or $0.35 per diluted share, for the first nine
months of 1999. Excluding the effect of charges related to a workforce
restructuring program announced on June 21, 2000 and the loss on impairment of
goodwill associated with ChannelHealth, Inc., the net loss for the nine months
ended September 30, 2000 was $18.6 million or $0.66 per share. Excluding the
effect of the charge for the merger and related costs associated with the
acquisition of EDiX Corporation of $4.0 million and the loss on investment
impairment of $1.6 million, the net loss for the nine months ended September 30,
1999 was $5.6 million or $0.20 per share.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1999
REVENUES
The Company's total revenues decreased to $87.6 million during the three months
ended September 30, 2000 from $92.2 million in the corresponding period in 1999,
a decrease of $4.6 million or (5.0%). Revenues from systems sales decreased to
$28.9 million during the three months ended September 30, 2000 (33.0% of total
revenues) compared to $34.4 million (37.3% of total revenues) in the
corresponding period in 1999, a decrease of $5.4 million or (15.8%). This
decrease was primarily due to a decrease in new sales and installations of
certain IDX systems. Revenues from maintenance and service fees increased to
$58.6 million during the three months ended September 30, 2000 (67.0% of total
revenues) from $57.9 million (62.7% of total revenues) in the corresponding
period in 1999, an increase of $0.8 million or 1.4%. The increase in revenues
from maintenance and service fees is primarily due to increased medical
transcription service fee revenue from EDiX offset by a decrease in consulting
services provided by IDX's core business.
During 1999 and continuing into 2000, certain of the Company's customers delayed
making purchasing decisions with respect to certain of the Company's 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, government approvals, pressures to
reduce expenses, product complexity, competition, and customer preoccupation
with internal Year 2000 issues. In June 2000, the Company announced that
weakness in system sales experienced in the fourth quarter of 1999 and the first
half of 2000 was expected to continue through the remainder of 2000. While the
Company believes these factors are temporary, it expects them to continue to
cause reductions or delays in spending for new systems and services.
Accordingly, the Company expects that it will experience deferrals and delays in
sales of software and related services, professional services, and hardware
during the remainder of 2000.
Page 11 of 30
<PAGE>
COST OF SALES AND SERVICES
The cost of sales and services increased to $60.7 million during the three
months ended September 30, 2000 from $56.4 million in the corresponding period
in 1999, an increase of $4.2 million or 7.5%. The increase in cost of sales and
services as compared to the prior year resulted from growth in client services
expenses, primarily related to medical transcription costs combined with an
increase in cost of hardware offset by a decrease in outside contract services.
The gross profit margin on systems sales and services decreased to 30.7% in the
third quarter of 2000 from 38.8% for the same period in 1999. The decrease in
gross profit margin as a percentage of sales was due to the net effect of a
decrease in software license revenues which provides a higher gross profit
margin, and an increase in maintenance and service revenue which provides a
lower gross profit margin. IDX's core business, information systems and
services, gross profit margin as a percentage of sales declined to 35.8% during
the third quarter of 2000 from 42.1% for the same period in 1999 due to the
effect of the revenue mix described above. The gross profit margin for the
Company's medical dictation and transcription business segment (EDiX) increased
as a percentage of sales to 18.7% in 2000 from 16.8% in 1999 due to an increase
in utilization of a new transcription processing system, which provides a higher
margin, as compared to the prior year, combined with other efficiencies in
editing and telecommunications. Channelhealth Incorporated experienced a
negative gross margin of 50.5% during the third quarter of 2000 primarily due to
high fixed costs relative to sales volume due to the early stage of this
business' development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $23.3 million during
the three months ended September 30, 2000 from $21.6 million during the
corresponding period in 1999, an increase of $1.7 million or 7.9%. As a
percentage of total revenues, selling, general and administrative expenses
increased to 26.6% during the three months ended September 30, 2000 from 23.4%
for the same period in 1999. IDX's core business selling, general and
administrative expenses decreased $1.7 million primarily due to the transfer of
certain expenses to the Channelhealth Incorporated subsidiary. EDiX's selling,
general and administrative expenses increased $559,000 or 33.7% during the third
quarter of 2000 as compared to the same period in the prior year primarily due
to increased costs to support sales growth. Channelhealth Incorporated's
selling, general and administrative expenses were $3.8 million during the third
quarter of 2000 which includes sales and marketing expenses and administrative
start up expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $12.1 million during the three
months ended September 30, 2000 from $12.7 million in the corresponding period
in 1999, a decrease of $659,000 or 5.2%. The decrease is primarily due to a
reduction in costs to address Year 2000 issues combined with the cost savings
related to a workforce restructuring program announced in June 2000. As a
percentage of total revenues, research and development expenses remained
consistent at 13.8% of revenue for the third quarters of 2000 and 1999. IDX's
core business research and development expenses decreased $1.3 million due to
the transfer of approximately $1.0 million of research and development costs to
the internet services and content business segment (Channelhealth Incorporated),
as well as the effect of the workforce restructuring program. Research and
development costs in the medical dictation and transcription business segment
(EDiX) increased from $276,000 in 1999 to $353,000 in 2000.
RESTRUCTURING CHARGE
On June 21, 2000 the Company announced the implementation of a workforce
restructuring program. The Company halted development and discontinued sales
efforts on certain product lines that have failed to achieve business targets or
Page 12 of 30
<PAGE>
have been deemed non-strategic to the business going forward. As a result of the
restructuring program, the Company implemented a workforce reduction of
approximately five percent. Though the Company reduced certain expenses as a
result of the workforce restructuring program, the Company continues to evaluate
and invest resources in the development of various products and new initiatives
that management believes will provide returns. As a result of these ongoing
investments in products and initiatives, some of the projected savings from the
restructuring program have been reinvested in new initiatives and product
enhancements. The restructuring program resulted in a charge to earnings of
approximately $21.0 million in the second quarter, primarily in connection with
costs associated with product discontinuations of approximately $16.0 million
and severance arrangements of approximately $5.0 million. Cash expenditures of
$6.5 million and non-cash expenses of approximately $800,000 related to these
accruals were processed during the second and third quarters of 2000. As of
September 30, 2000 the Company has a balance of $13.7 million related to accrued
restructuring costs. Cash expenditures related to these accruals are estimated
to be substantially made as follows: $3.0 million over the remainder of 2000 and
$8.0 million thereafter. The remaining balance of approximately $2.7 million
represents a provision for the estimated write-off of accounts receivable that
will not affect cash. These write-offs are expected to be finalized by March 31,
2001.
OTHER (INCOME) EXPENSE, NET
Interest income was approximately $1.0 million during the third quarter of 2000
as compared to $800,000 for the same period in 1999. The increase in interest
income is due to a higher average invested balance combined with an increase in
interest rates due to the taxable nature of the investment holdings in 2000.
INCOME TAXES
Income taxes for the quarter ended September 30, 2000 were benefited at 38.0%.
Income taxes for the quarter ended September 30, 1999 were provided for at
40.0%. Excluding the impact of the loss on impairment of goodwill that is
non-deductible for income tax purposes, the Company anticipates an effective tax
rate of approximately 38.0% for the remainder of the year ending December 31,
2000. Of the net deferred tax assets of approximately $19.3 million, $12.2
million is expected to be realized by carrying back losses to prior years and
the balance of $7.1 million is expected to be realized by reducing future
taxable income.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
The Company's total revenues decreased to $243.9 million during the nine months
ended September 30, 2000 compared to $253.1 million in the corresponding period
in 1999, a decrease of $9.2 million or 3.6%. Revenues from systems sales
decreased to $71.7 million during the nine months ended September 30, 2000
(29.4% of total revenues) compared to $94.9 million (37.5% of total revenues) in
the corresponding period in 1999, a decrease of $23.3 million or 24.5%. This
decrease was primarily due to a decrease in new sales and installations of
certain IDX systems. Revenues from maintenance and service fees increased to
$172.2 million during the nine months ended September 30, 2000 (70.6% of total
revenues) from $158.2 million (62.5% of total revenues) in the corresponding
period in 1999, an increase of $14.0 million or 8.9%. The increase in revenues
from maintenance and service fees was primarily due to increased transcription
service fee revenue from EDiX.
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During 1999 and continuing into 2000, certain of the Company's customers delayed
making purchasing decisions with respect to certain of the Company's 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, government approvals, pressures to
reduce expenses, product complexity, competition, and customer preoccupation
with internal Year 2000 issues. In June 2000, the Company announced that
weakness in system sales experienced in the fourth quarter of 1999 and the first
half of 2000 was expected to continue through the remainder of 2000. The Company
expects that the factors described above may continue to cause reductions or
delays in spending for new systems and services. Accordingly, the Company
expects that it will experience deferrals and delays in sales of software and
related services, professional services, and hardware during the remainder of
2000.
COST OF SALES
The cost of sales and services increased to $176.5 million during the nine
months ended September 30, 2000 from $161.5 million in the corresponding period
in 1999, an increase of $15.0 million or 9.3%. The gross profit margin on
systems sales and services decreased to 27.6% during the nine months ended
September 30, 2000 from 36.2% in the corresponding period in 1999. The decrease
in gross profit margin was primarily due to high fixed costs and overhead
expenses in relation to decreased revenue from installations of the Company's
software systems which typically include a greater percentage of higher margin
software than of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $63.1 million during
the nine months ended September 30, 2000 from $62.8 million in the corresponding
period in 1999, an increase of $297,000 or 0.5%. As a percentage of total
revenues, selling, general and administrative expenses increased to 25.9% during
the nine months ended September 30, 2000 from 24.8% in 1999. The increase in
total selling, general and administrative expenses during the nine months ended
September 30, 2000 was primarily due to increased salary and benefit costs.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $37.4 million during the nine
months ended September 30, 2000 from $39.9 million in the corresponding period
in 1999, a decrease of $2.5 million or (6.3%). The decrease is primarily due to
costs of efforts to address Year 2000 issues as compared to the prior year
combined with reduced costs as a result of a workforce restructuring program
pursuant to the discontinuation of three product lines. As a percentage of total
revenues, research and development expenses decreased to 15.3% during the nine
months ended September 30, 2000 from 15.8% for the nine months ended September
30, 1999. The decrease as a percentage of sales for the nine months ended
September 30, 2000 as compared to the prior year, is primarily due to a decrease
in outside consulting expenses.
RESTRUCTURING CHARGE
On June 21, 2000 the Company announced the implementation of a workforce
restructuring program. The Company halted development and discontinued sales
efforts on certain product lines that have failed to achieve business targets or
have been deemed non-strategic to the business going forward. As a result of the
restructuring program the Company implemented a workforce reduction of
approximately five percent. Though the Company reduced certain expenses as a
result of the workforce restructuring program, the Company continues to evaluate
and invest resources in the development of various products and new initiatives
that management believes will provide returns. As a result of these ongoing
investments in products and initiatives, some of the projected savings from the
restructuring program have been reinvested in new initiatives and product
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enhancements. The restructuring program resulted in a charge to earnings of
approximately $21.0 million in the second quarter, primarily in connection with
costs associated with product discontinuations of approximately $16.0 million
and severance arrangements of approximately $5.0 million. Cash expenditures of
$6.5 million and non-cash expenses of approximately $800,000 related to these
accruals were processed during the second and third quarters of 2000. As of
September 30, 2000 the Company has a balance of $13.7 million related to accrued
restructuring costs. Cash expenditures related to these accruals are estimated
to be substantially made as follows: $3.0 million over the remainder of 2000 and
$8.0 million thereafter. The remaining balance of approximately $2.7 million
represents a provision for the estimated write-off of accounts receivable that
will not affect cash. These write-offs are expected to be finalized by March 31,
2001.
CHARGE FOR MERGER AND RELATED COSTS
During June 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
noncompatible 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.
CHARGE FOR LOSS ON IMPAIRMENT OF GOODWILL
During the first quarter of 2000, the Company determined that an asset
impairment existed related to goodwill acquired in the 1999 purchase of a
Massachusetts corporation ChannelHealth, Inc. In January 2000, the Company made
the decision to seek a primary provider of content and transactions for
Channelhealth Incorporated, and decided to no longer utilize certain assets
acquired with the purchase of ChannelHealth, Inc. This goodwill impairment was
recognized during the first quarter of 2000 and is reflected as a pre-tax loss
on impairment of goodwill of approximately $5.8 million.
OTHER (INCOME) EXPENSE, NET
Interest income increased to approximately $3.7 million during the first nine
months of 2000 compared to $3.4 million for the same period in 1999 primarily
due to the taxable nature of the investment holdings in 2000. No interest
expense was incurred during the first nine months of 2000 compared to $0.9
million for the same period in the prior year. Interest expense in the prior
year was primarily attributable to EDiX Corporation.
LOSS ON INVESTMENT IMPAIRMENT
Other expense included the write-off of an investment of $1.6 million during the
9 months ended September 30, 1999 due to the investee's inability to raise
additional equity and a decision to dissolve the business.
INCOME TAXES
Income taxes for the nine months ended September 30, 2000 were benefited at
34.6%. The tax benefit in 2000 is lower than that expected based on the
statutory rate principally due to the non-deductible nature of the loss on
goodwill impairment related to ChannelHealth in January of 2000. Income taxes
for the nine months ended September 30, 1999 were benefited at 35.9%. The 1999
tax benefit is lower than the expected statutory rate due to the non-deductible
nature of certain merger related costs and the inclusion in the financial
statements of the net loss of EDiX Corporation, for which no tax benefit was
recognized. Excluding the impact of the loss on goodwill impairment that is
non-deductible for income tax purposes, the Company anticipates an effective tax
rate of approximately 38.0% for the remainder of the year ending December 31,
2000. Of the net deferred tax assets of approximately $19.3 million, $12.2
million is expected to be realized by carrying back losses to prior years and
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the balance of $7.1 million is expected to be realized by reducing future
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows related to operations are principally comprised of net loss 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. During the three months
ended September 30, 2000 accounts receivable from customers were collected on
average within 102 days compared to the 1999 annual average of 119 days. The
1999 annual average represented an increase of 13 days from the prior year in
terms of average days to collect receivables from customers. The 1999 annual
average was higher than current and historical collection periods due in part to
unbilled receivables related to contracts accounted for using long term contract
accounting combined with a lengthening of customer payment patterns. In
connection with its workforce restructuring program the Company estimates cash
expenditures to be made as follows: $3.0 million during the remainder of 2000,
and $8.0 million thereafter.
Cash flows related to investing activities have historically 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, loans to 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 flows from financing activities historically relate to purchases of common
stock through the exercise of employee stock options and in connection with the
employee stock purchase plan. During 1999, all outstanding debt of EDiX
Corporation was paid. Cash, cash equivalents and short-term investments at
September 30, 2000 were $69.8 million, an increase of $1.4 million from December
31, 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 that
will expire on January 14, 2001. There were no borrowings as of September 30,
2000.
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. In April 2000, the Company entered into a new operating
lease for office space in Seattle, Washington commencing in 2003 for a period of
12 years. The Company plans to continue increasing the number of its
professional staff during 2001 and future periods to meet anticipated sales
volume and to support research and development efforts. To the extent necessary
to support increases in staffing, the Company may obtain additional office
space.
The Company is currently leasing the Company's headquarters in South Burlington,
Vermont from BDP Realty, a related entity which is included in the Company's
consolidated financial statements. The Company started construction on an
expansion of its corporate headquarters facility in South Burlington, Vermont,
in November 1999, and is considering various options for financing including a
construction loan, sale lease-back arrangement or funding from operations. The
Company anticipates that it will spend approximately $16 million on construction
to expand its Corporate Headquarters facility. From time to time, based on the
Company's requirements, the Company may consider other purchases of additional
land or the construction of additional office space.
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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.
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of its internal use systems (both information technology related and
non-information technology related) and its products (including third party
products included in its products) and also completed and implemented
contingency planning. As a result of those efforts, the Company experienced no
significant disruptions in its products (including third party products included
in its products), internal use information technology systems, and internal use
non-information technology systems, and the Company believes all of those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
During the first nine months of 2000, the Company expensed all of its remaining
project costs in the amount of approximately $1.2 million, which related
primarily to contingency plans and remediation efforts for internal systems. The
Company will continue to monitor its products (including third party products
included in its products), mission critical computer applications, and those of
its suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE
This Management Discussion and Analysis of Financial Condition and Results of
Operations contains "forward-looking statements" as defined in Section 21E of
the Securities and Exchange Commission Act of 1934. For this purpose, any
statements contained in this Quarterly Report that are not statements of
historical fact may be deemed to be forward-looking statements. Words such as
"believes," "anticipates," "plans," "expects," "will" and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the results of IDX Systems Corporation to
differ materially from those indicated by these forward-looking statements
including among others, the factors set forth below. If any risk or uncertainty
identified in the following factors actually occurs, IDX's business, financial
condition and operating results would likely suffer. In that event, the market
price of IDX's common stock could decline and you could lose all or part of the
money you paid to buy IDX's common stock.
The following important factors affect IDX's business and operations generally
or affect more than one segment of our business and operations:
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:
o delay in customers purchasing decisions due to a variety of
factors such as consolidation, management changes and
regulatory developments;
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o market prices of competitors;
o announcements of technological innovations, including Internet
delivery of information and use of application service
provider technology;
o new product introductions by IDX or its competitors;
o market conditions particularly in the computer software and
Internet industries; and
o healthcare reform measures and healthcare regulation.
These fluctuations have had a significant impact on the market price of our
common stock, and may have a significant impact on the future market price of
our common stock.
These fluctuations may affect operating results as follows:
o ability to transact stock acquisitions; and
o ability to retain and incent key employees.
ADVERSE FINANCIAL TRENDS INCLUDING DECLINING NET INCOME AND CASH FROM OPERATIONS
HAVE AND MAY CONTINUE. Year over year net income and cash from operations have
generally declined since 1998. In 1999, and the first nine months of 2000 IDX
generated a net loss of approximately $7.9 million and $37.3 million,
respectively. If these negative trends continue, IDX may have difficulty
financing future growth and funding 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 may continue to fluctuate. Because a significant percentage of IDX's
expenses are relatively fixed, the following factors could cause these
fluctuations:
o delay in customers purchasing decisions due to a variety of
factors such as consolidation and management changes;
o the volume and timing of systems sales and installations;
o recognizing revenue at various points during the installation
process;
o the timing of new product and service introductions and
product upgrade releases; and
o the sales and implementation cycles of IDX's customers.
In light of the above, IDX believes that its results of operations for any
particular quarter or fiscal year are not necessarily reliable indicators of
future performance.
IDX'S PROPOSED TRANSACTION WITH ALLSCRIPTS, INC. MAY BE DELAYED, MAY NOT HAPPEN,
OR MAY BE UNSUCCESSFUL. IDX has agreed to sell the Physician Channel Business of
its subsidiary, Channelhealth Incorporated, to Allscripts, Inc., a leading
provider of point-of-care solutions for physicians, while retaining the
E-commerce Channel and Patient Channel Business. The closing of these
transactions is conditioned on shareholder and regulatory approval, which may be
delayed or denied. There can be no assurance that the proposed transactions with
Allscripts and ChannelHealth will be approved or will ever happen. As a
condition to the sale, IDX and Allscripts have agreed to implement a 10-year
strategic alliance agreement, whereby Allscripts will become the exclusive
provider of certain point-of-care clinical applications sold by IDX to physician
shareholder approval, which may not happen. Even if the required approvals are
given and the transaction is closed, IDX and Allscripts may not be successful in
implementing or realizing benefits from their strategic alliance.
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IDX MAY NOT BE SUCCESSFUL IN IMPLEMENTING ITS RESTRUCTURING PROGRAM. IDX intends
to achieve efficiencies through the discontinuance of development and sales
activities of certain product lines and a workforce reduction. IDX may not fully
realize these efficiencies. Factors that may affect IDX's ability to realize
efficiencies include:
o the successful negotiation of satisfactory compensation
arrangements with customers of the discontinued product
lines;
o the ability to manage work with fewer employees; and
o the ability to fill vacated positions with qualified
employees in a highly competitive labor market.
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 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:
o the continuing evolution of industry standards,
for example, transaction standard pursuant to the Health
Insurance Portability and Accountability Act of 1996 (HIPAA);
and
o the creation of new technological developments, for example,
Internet and application service provider technology.
IDX is currently devoting significant resources toward the development of
enhancements to its existing products, particularly in the area of
Internet-based functionality and the migration of existing products to new
hardware and software platforms, including relational database technology,
object-oriented programming and application service provider technology.
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'S BUSINESS WILL BE HARMED, AND THE VALUE OF ALLSCRIPTS STOCK TO BE RECEIVED
FOR THE SALE OF CHANNELHEALTH TO ALLSCRIPTS MAY BE DIMINISHED, IF IDX AND
CHANNELHEALTH CANNOT MAINTAIN THEIR STRATEGIC ALLIANCE AGREEMENTS WITH
HEALTHEON/WEBMD. On June 8, 2000, ChannelHealth and IDX entered into agreements
with Healtheon/WebMD Corp. pursuant to which Healtheon/WebMD agreed to provide
electronic transaction services and content to ChannelHealth and IDX. Pursuant
to the agreement, Healtheon/WebMD's content is to be integrated into
ChannelHealth's Physician Channel and Patient Channel Internet services.
Healtheon/WebMD further committed to a multi-million dollar campaign promoting
IDX and ChannelHealth products and services that incorporate Healtheon/WebMD
content and transactions. Healtheon/WebMD has recently informed IDX that it
believes ChannelHealth and IDX will be unable to perform their obligations to
Healtheon/WebMD if the proposed strategic alliance between Allscripts and IDX is
consummated. Healtheon/WebMD also stated that it would seek to terminate its
agreement with ChannelHealth and propose a "restructured" relationship with IDX.
Such proposal has not been received by IDX. IDX believes that ChannelHealth's
and IDX's performance will not be impaired by the strategic alliance with
Allscripts and that Healtheon/WebMD does not have a basis for unilateral
termination of the ChannelHealth agreement or restructuring the IDX agreement.
In the event the Healtheon/WebMD agreement with ChannelHealth is terminated,
ChannelHealth's expected revenues for 2001 may be significantly lower than
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currently anticipated, their business may be harmed, and Allscripts' stock price
may fall.
POLITICAL, ECONOMIC AND REGULATORY CHANGES AND CONSOLIDATION IN THE HEALTHCARE
INDUSTRY MAY CAUSE 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, the success of IDX is dependent in part on the
political and economic conditions in the healthcare industry.
Virtually all of IDX's customers and the other entities with which IDX has a
business relationship operate in the healthcare industry and, as a result, are
subject to governmental regulation, including Medicare and Medicaid regulation.
Accordingly, IDX's customers and the other entities with which IDX has a
business relationship are affected by changes in such regulations and
limitations in governmental spending for Medicare and Medicaid programs. Recent
actions by Congress have limited governmental spending for the Medicare and
Medicaid programs, limited payments to hospitals and other providers under such
programs, and increased emphasis on competition and other programs that
potentially could have an adverse effect on IDX's customers and the other
entities with which IDX has a business relationship. In addition, Federal and
state legislatures have considered proposals to reform the U.S. healthcare
system at both the federal and state level. If enacted, these proposals could
increase government involvement in healthcare, lower reimbursement rates and
otherwise change the business environment of IDX's customers and the other
entities with which IDX has a business relationship. IDX's customers and the
other entities with which IDX has a business relationship could react to these
proposals and the uncertainty surrounding these proposals by curtailing or
deferring investments, including those for IDX's products and services.
In addition, many healthcare providers have consolidated to create integrated
healthcare delivery systems with greater market power. These providers may try
to use their market power to negotiate price reductions for IDX's products and
services. If IDX were forced to reduce its prices, its operating margins would
decrease. As the healthcare industry consolidates, competition for customers
will become more intense and the importance of acquiring each customer will
become greater.
THERE IS INTENSE COMPETITION IN THE MARKET FOR HEALTHCARE INFORMATION SYSTEMS
AND IF IDX FAILS TO COMPETE SUCCESSFULLY, IDX WILL SUFFER FINANCIALLY. The
market for healthcare information systems is intensely competitive, rapidly
evolving and subject to rapid technological change. IDX believes that the
principal competitive factors in this market include the breadth and quality of
system and product offerings, the features and capabilities of the systems, the
price of system and product offerings, the ongoing support for the systems, and
the potential for enhancements and future compatible products.
Some of IDX's competitors have greater financial, technical, product
development, marketing and other resources than IDX, and some of its competitors
offer products that it does not offer. The Company's principal existing
competitors include Cerner Corporation, Eclipsys Corporation, McKesson HBOC,
Inc., Shared Medical Systems Corporation, MedQuist, Medic and Epic Systems each
of which offers a suite of products that compete with many of IDX's products.
There are other competitors that offer a more limited number of competing
products. Many of IDX's competitors have also announced or introduced Internet
strategies that will compete with IDX's Internet applications and services. IDX
may be unable to compete successfully against these organizations. In addition,
IDX expects that major software information systems companies, large information
technology consulting service providers and system integrators, Internet-based
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start-up companies and others specializing in the healthcare industry may offer
competitive products or services.
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.
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, 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. IDX does not
maintain "key man" life insurance policies on any of its executives. Not all IDX
personnel have executed noncompetition agreements.
GOVERNMENT REGULATION MAY IMPOSE BURDENS AND COSTS ON IDX'S OPERATIONS.
Virtually all of IDX's customers and the other entities with which IDX has a
business relationship operate in the healthcare industry and, as a result, are
subject to governmental regulation. Because IDX's products and services are
designed to function within the structure of the healthcare financing and
reimbursement systems currently in place in the United States, and because IDX
is pursuing a strategy of developing and marketing products and services that
support its customers' regulatory and compliance efforts, IDX may become subject
to the reach of, and liability under, these regulations.
The Federal Anti-Kickback Law, among other things, prohibits the direct or
indirect payment or receipt of any remuneration for Medicare, Medicaid and
certain other Federal or state healthcare program patient referrals, or
arranging for or recommending referrals or other business paid for in whole or
in part by the federal health care programs. Violations of the Federal
Anti-Kickback Law may result in civil and criminal sanction and liability,
including the temporary or permanent exclusion of the violator from government
health programs, treble damages and imprisonment for up to five years for each
violation. If the activities of a customer of IDX or other entity with which IDX
has a business relationship were found to constitute a violation of the Federal
Anti-Kickback Law and IDX, as a result of the provision of products or services
to such customer or entity, was found to have knowingly participated in such
activities, IDX could be subject to sanction or liability under such laws,
including the exclusion of IDX from government health programs. As a result of
exclusion from government health programs, IDX customers would not be permitted
to make any payments to IDX.
The Federal Civil False Claims Act and the Medicare/Medicaid Civil Money
Penalties regulations prohibit, among other things, the filing of claims for
services that were not provided as claimed, which were for services that were
not medically necessary, or which were otherwise false or fraudulent. Violations
of these laws may result in civil damages, including treble and civil penalties.
In addition the Medicare/Medicaid and other Federal statutes provide for
criminal penalties for such false claims, including fines and imprisonment. If,
as a result of the provision by IDX of products or services to its customers or
other entities with which IDX has a business relationship, IDX provides
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assistance with the provision of inaccurate financial reports to the government
under these regulations, or IDX is found to have knowingly recorded or reported
data relating to inappropriate payments made to a healthcare provider, IDX could
be subject to liability under these laws.
HIPAA contains provisions regarding standardization, privacy, security, and
administrative simplification in healthcare. As a result of regulations now
proposed under HIPAA, IDX will make investments to support customer operations
in areas, such as:
o electronic data transactions;
o computer system security; and
o patient privacy.
Although it is not possible to anticipate the final form of regulations under
HIPAA, IDX has made and expects to continue to make investments in product
enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require IDX to make investments in new products
or charge higher prices. It may be expensive to implement security or other
measures designed to comply with any new legislation or regulation.
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:
o register and list its products with the FDA;
o notify the FDA and demonstrate substantial equivalence to
other products on the market before marketing such
products; or
o 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 Federal Food, Drug and Cosmetic 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.
SYSTEM ERRORS IN IDX'S HEALTHCARE INFORMATION SYSTEMS COULD CAUSE UNFORESEEN
LIABILITIES. IDX's healthcare information systems are very complex. As with
complex systems offered by others, IDX's healthcare information systems may
contain errors, especially when first introduced. IDX's healthcare information
systems are intended to provide information to healthcare providers for use in
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the diagnosis and treatment of patients. Therefore, users of IDX's products may
have a greater sensitivity to system errors than the market for software
products generally. Failure of an IDX customer's system to perform in accordance
with its documentation could constitute a breach of warranty and require IDX to
incur additional expense in order to make the system comply with the
documentation. If such failure is not timely remedied, it could constitute a
material breach under a contract allowing the client to cancel the contract and
subject IDX to liability.
CLAIMS BY OTHER COMPANIES THAT IDX'S PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD HINDER OR BLOCK IDX'S ABILITY TO SELL ITS PRODUCTS, SUBJECT IDX TO
SIGNIFICANT MONETARY LIABILITY AND DIVERT THE TIME AND ATTENTION OF ITS
MANAGEMENT. If any of IDX's products violate third party proprietary rights, IDX
may be required to reengineer its products or seek to obtain licenses from third
parties to continue offering its products without substantial reengineering. Any
efforts to reengineer IDX's products or obtain licenses from third parties may
not be successful, in which case IDX may be forced to stop selling the
infringing product or remove the infringing functionality or feature. IDX may
also become subject to damage awards as a result of infringing the proprietary
rights of others, which could cause IDX to incur additional losses and have an
adverse impact on its financial position. IDX does not conduct comprehensive
patent searches to determine whether the technologies used in its products
infringe patents held by others. In addition, product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed,
with regard to similar technologies.
IDX'S COMPETITIVE POSITION WOULD BE ADVERSELY AFFECTED IF IT WERE UNABLE TO
PROTECT ITS PROPRIETARY TECHNOLOGY. IDX's success and competitiveness are
dependent to a significant degree on the protection of its proprietary
technology. IDX relies primarily on a combination of copyrights, trade secret
laws and restrictions on disclosure to protect its proprietary technology.
Despite these precautions, others may be able to copy or reverse engineer
aspects of IDX's products, to obtain and use information that IDX regards as
proprietary or to independently develop similar technology. Litigation may be
necessary in the future to enforce or defend IDX's proprietary technology or to
determine the validity and scope of the proprietary rights of others. This
litigation, whether successful or unsuccessful, could result in substantial
costs and diversion of management and technical resources.
IDX MAY HAVE CONFLICTS OF INTERESTS WITH SOME OF ITS EXECUTIVES. Richard E.
Tarrant, President, 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 the first
nine months of 2000, IDX paid an aggregate of approximately $1.3 million in
connection with these leases. IDX currently leases its headquarters facilities
in South Burlington, Vermont from a real estate entity owned by Richard E.
Tarrant and Robert H. Hoehl. IDX has commenced a $16 million construction
project to expand its office facilities at that location. In connection with
these arrangements, the economic interests of these executives and directors and
IDX may diverge.
The following important factors affect our Internet services and content
business segment or "ChannelHealth" business:
CHANNELHEALTH'S LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT TO VALUE AND
EVALUATE ITS BUSINESS AND FUTURE PROSPECTS. ChannelHealth commenced operations
October 1999 and only recently commercially released its first internet-based
product. An evaluation of the risks and uncertainties of ChannelHealth's
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business will be difficult because of ChannelHealth's limited operating history.
In addition, ChannelHealth's limited operating history means that it has less
insight into how technological and market trends may affect its business as
evidenced by the loss on goodwill impairment of $5.8 million in the first year
of 2000 due to a change in its content strategy. The revenue and income
potential of ChannelHealth's business and market are unproven, and its business
model is emerging and unproven. ChannelHealth's business and prospects must be
considered in light of the risks and difficulties typically encountered by
businesses in their early stages of development, particularly those in new and
rapidly evolving markets such as the Internet healthcare information industry.
CHANNELHEALTH HAS INCURRED SUBSTANTIAL LOSSES TO DATE AND MAY NOT BE ABLE TO
ACHIEVE OR MAINTAIN PROFITABILITY. ChannelHealth has incurred losses since it
began operations. ChannelHealth incurred a net loss of $16.2 million in the
first nine months of 2000 and a net loss of $5.5 million for the year ended
December 31, 1999, and its accumulated deficit through September 30, 2000 was
$21.7 million. ChannelHealth cannot be certain if or when it will become
profitable. ChannelHealth's failure to become profitable within the timeframe
expected by IDX investors or at all may adversely affect the market price of IDX
Common Stock. ChannelHealth expects to continue to increase its expenses in an
effort to develop its business and, as a result, will need to generate
significant revenue to achieve profitability. Even if ChannelHealth does achieve
profitability, there can be no assurance that ChannelHealth can sustain or
increase profitability on a quarterly or annual basis in the future.
CURRENTLY, CHANNELHEALTH'S BUSINESS DEPENDS ON INTEGRATING INTERNET-RELATED
TECHNOLOGY INTO ITS CUSTOMERS' BUSINESSES, AND, AS A RESULT, ITS BUSINESS WILL
SUFFER IF USE OF THE INTERNET AS A MEANS FOR COMMERCE DECLINES. If commerce on
the Internet does not continue to grow or grows slower than expected, the need
for ChannelHealth's Internet healthcare information products and services could
decline, resulting in fewer projects and reduced revenues. Consumers and
businesses may reject the Internet as a viable commercial medium for a number of
reasons, including:
o actual or perceived lack of security of information;
o lack of access and ease of use;
o congestion of Internet traffic or other usage delays;
o inconsistent quality of service;
o increase in access costs to the Internet;
o evolving government regulation;
o uncertainty regarding intellectual property ownership;
o costs associated with the obsolescence of existing
infrastructure; and
o economic viability of the Internet commerce model.
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.
The adoption of Internet solutions by healthcare participants will require the
acceptance of a new way of conducting business and exchanging information. The
healthcare industry, in particular, relies on legacy systems that may be unable
to benefit from ChannelHealth's Internet healthcare information services. To
maximize the benefits of ChannelHealth's services, healthcare participants must
be willing to allow sensitive information to be stored in ChannelHealth's
databases. ChannelHealth can process transactions for healthcare participants
that maintain information on their own proprietary databases. However, the
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benefits of ChannelHealth's connectivity and sophisticated services are limited
under these circumstances. Customers using legacy and client-server systems may
refuse to adopt new systems when they have made extensive investment in
hardware, software and training for older systems.
GOVERNMENT REGULATION COULD ADVERSELY AFFECT CHANNELHEALTH'S BUSINESS.
ChannelHealth's business will be subject to government regulation. Existing as
well as new laws and regulations could adversely affect its business. Laws and
regulations may be adopted with respect to the Internet or other on-line
services covering issues such as:
o user privacy;
o system security;
o pricing;
o content;
o copyrights;
o distribution; and
o characteristics and quality of products and services.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Demand for
ChannelHealth's applications and services may be adversely affected by
additional regulation of the Internet.
IF CHANNELHEALTH SYSTEMS EXPERIENCE SECURITY BREACHES OR ARE OTHERWISE PERCEIVED
TO BE INSECURE, CHANNELHEALTH'S REPUTATION AND BUSINESS WILL SUFFER. A material
security breach could damage ChannelHealth's reputation, cause users to lose
confidence in ChannelHealth's systems or result in liability. ChannelHealth will
retain confidential customer and patient information in its processing centers.
ChannelHealth may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by
breaches. Any well-publicized compromise of Internet security could deter people
from using the Internet or from conducting transactions that involve
transmitting confidential information, including confidential healthcare
information. Therefore, it is critical that these facilities and infrastructure
remain secure and are perceived by the marketplace to be secure. Despite the
implementation of security measures, this infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors, attacks by third
parties or similar disruptive problems. Any damage to ChannelHealth's reputation
or loss of user confidence as a result of a security breach could reduce the
willingness of patients and physicians to use ChannelHealth's products and
services and as a result, adversely affect ChannelHealth's business.
CHANNELHEALTH DEPENDS UPON A SINGLE TRANSACTION SERVICE PROVIDER TO PROVIDE MOST
OF CHANNELHEALTH'S TRANSACTION SERVICES AND IF THAT PROVIDER IS UNABLE OR
UNWILLING TO PROVIDE SUCH SERVICES, CHANNELHEALTH MAY NOT BE ABLE TO PROVIDE
SERVICE TO ITS CUSTOMERS. ChannelHealth currently relies on ProxyMed for most of
its electronic transaction services. ChannelHealth's reliance on a single
provider of these services exposes ChannelHealth, and IDX as a reseller of
ChannelHealth's products and services, to a number of risks, including the loss
of customer goodwill and possible liability, if ProxyMed fails to provide
transaction services. If ProxyMed is unable or unwilling to provide such
services to ChannelHealth on a timely basis, ChannelHealth may be forced to
engage additional or replacement providers, which could result in additional
expenses and delays and disruptions in ChannelHealth's service.
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PERFORMANCE PROBLEMS WITH THE SYSTEMS OF CHANNELHEALTH'S TRANSACTION, SERVICE
AND CONTENT PROVIDERS COULD HARM CHANNELHEALTH'S BUSINESS. ChannelHealth will
depend on service and content providers to provide transactions and information
on a timely basis. ChannelHealth's Web sites could experience disruptions or
interruptions in service due to the failure or delay in the transmission or
receipt of this information. In addition, ChannelHealth's customers will depend
on Internet service providers, online service providers and other Web site
operators for access to our Web sites. All of these providers have experienced
significant outages in the past and could experience outages, delays and other
difficulties in the future due to system failures unrelated to ChannelHealth's
systems. Any significant interruptions in ChannelHealth's services or increases
in response time could result in a loss of potential or existing customers,
strategic partners, advertisers or sponsors and, if sustained or repeated, would
likely reduce the attractiveness of ChannelHealth's services.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The legal procedings involving the Company, its subsidiary
Channelhealth Incorporated and ProxyMed, Inc. have been settled and
terminated.
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
Shareholder Proposals for 2000 Annual Meeting
As set forth in the Company's Proxy Statement for its 2000 Annual
Meeting of Stockholders, shareholders, proposals submitted pursuant to
Rule 14a-8 under the Exchange Act for inclusion in the Company's proxy
materials for its 2001 Annual Meeting of Stockholders must be received
by the Secretary of the Company at the principal offices of the Company
no later than March 7, 2001.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5
and 14a-8 under the Exchange Act, written notice of stockholder
proposals submitted outside the processes of Rule 14a-8 for
consideration at the 2001 Annual Meeting of Stockholders must be
received by the Company on or before March 7, 2001 in order to be
considered timely for purpose 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 stockholder proposal
with respect to which the Company does not receive timely notice.
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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) On July 20, 2000, the Company filed a report on Form 8-K, reporting the
Agreement and Plan of Merger dated July 13, 2000, by and among Allscripts
Holding, Inc., Allscripts, Inc., Bursar Acquisition, Inc., Bursar
Acquisition No. 2., Inc., IDX Systems Corporation and Channelhealth
Incorporated.
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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
/S/ JOHN A. KANE
Date: November 14, 2000 By:____________________________
John A. Kane,
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
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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 31
</TABLE>
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