SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Year Ended December 31, 1998 Commission File No. 0-26816
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IDX Systems Corporation
(Exact Name of Registrant as Specified in its Charter)
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Vermont 03-0222230
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
1400 Shelburne Road, P.O. Box 1070, South Burlington, Vermont 05403
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (802) 862-1022
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) 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), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant was $184,044,861 based on the last reported sale price of the
Common Stock on the Nasdaq consolidated transaction reporting system on March
19, 1999.
Number of shares outstanding of the registrant's class of Common Stock as
of March 19, 1999: 26,675,957.
Documents incorporated by reference:
Proxy Statement for the 1999 Annual Meeting of Stockholders--Part II and
Part III
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PART I
Item 1. Business
Overview
IDX is a leading provider of healthcare information solutions in the United
States. IDX offers healthcare information solutions that include software,
hardware, and related services required by physician groups, management services
organizations (MSOs), hospitals, and integrated delivery networks (IDNs). IDX
solutions enable healthcare organizations to redesign patient care and other
workflow processes in order to improve efficiency and quality.
IDX solutions are packaged as the IDXtendR(TM) @ the Site Series, where the
Site corresponds to settings across the care continuum: IDXtendRTM @ the Group
Practice, IDXtendR(TM) @ the MSO, IDXtendR(TM) @ the Hospital, and IDXtendRTM @
IDN. The IDXtendR product line employs relational, scaleable, client/server
architecture and provides both ambulatory and hospital capabilities. In February
1999, IDX announced the general release of a new product line--IDXsite(TM), a
web-based practice management system that includes integrated financial,
administrative, and managed care applications for mid-size physician
organizations. IDXsite and the Clinical Management System module of IDXtendR
together provide a comprehensive solution for the mid-size physician group
market segment. IDXsite is built on a multi-tier web-based platform engineered
using Microsoft (R) Enterprise Suite, including Microsoft SQL server and
Windows(R) NT.
As of February 28, 1999 IDX's systems were used by, or were under contract
to be used by, more than 110,000 physicians and were installed at over 1,650
client sites, including approximately 250 large physician group practices, those
generally with more than 75 physicians, more than 530 physician practices which
have 75 or fewer physicians, over 270 hospitals and 205 IDNs.
IDX was incorporated in Vermont on June 2, 1969. IDX's executive offices
are located at 1400 Shelburne Road, South Burlington, Vermont 05403 and its
telephone number is (802) 862-1022.
Industry Background
Healthcare costs in the United States have risen dramatically over the past
two decades relative to the overall rate of inflation. Broad pressures to reduce
costs without sacrificing the quality of care have caused significant changes in
the healthcare industry. While reimbursement for healthcare has historically
been based on a fee-for-service model of payment, managed care organizations and
other payers are increasingly utilizing alternative reimbursement models,
including fixed fee and capitation, that shift the financial risk of delivering
healthcare from payers to both physicians and institutional providers. Pressures
to control costs have also contributed to the movement of care from more
expensive inpatient settings, such as hospitals, to ambulatory settings. Today,
ambulatory care providers, particularly physician groups, deliver the majority
of healthcare services, bear an increasing share of the financial risk, and
control a substantial portion of total healthcare resources.
Over the past decade, individual physicians, physician groups and other
ambulatory care providers joined and affiliated with other physicians, managed
care organizations, hospitals and other enterprises to form larger healthcare
organizations known as IDNs. These organizations have been formed to manage the
continuum of healthcare services for population groups across both inpatient and
ambulatory settings to improve quality and reduced costs for patients and
members. IDNs enter into contracts with payers that cover a wide spectrum of
terms--from a managed care contract that defines the terms under which care is
administered and fixes the amount of payment for each covered person to
contracts that resembles the more traditional indemnity or fee-for-service
model.
Regardless of the payment or insurance model, care providers are challenged
to improve the quality of care and reduce the associated cost at the same time.
To meet this challenge, care delivery organizations must organize their
businesses to efficiently manage patient care and other workflow processes that
can extend across multiple care locations and business entities. Management
believes a key operational principle for healthcare organizations will be to
control and influence the complete treatment during an episode (or entire
lifetime) of care, regardless of the organization's legal structure or sources
of payment for care. The Company expects that healthcare organizations,
including group practices, clinics, hospitals, and IDNs, will focus closely on
the role that physicians play in determining the cost and quality of care.
Whether the physician is a part of a tightly integrated IDN, a solo or small
practice in a rural area, or a virtual IDN, coordinating care will be a
significant factor in controlling costs and providing high-quality care. IDX
believes that using
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web technology on the physician desktop will play a significant role in helping
physicians, who control the majority of healthcare resources, to coordinate care
across the continuum. The Company's use of web technology will simplify
integrated access by physicians and other users to medical knowledge bases and
trading partners, as well as traditional software applications for automating
care. The ability to deliver web technology products and access to third party
applications and services is the result of the Company's recent adoption of the
IDX Target Architecture(TM), which provides a standard for new IDX products and
migrating existing IDX products to web technology over time. Management expects
the use of the IDX Target Architecture will provide benefits to healthcare
organizations, including a lower total cost of ownership, simplified system
management, and a standard user interface across applications and locations.
IDX expects care delivery organizations to use technology as a means to
attract and retain physicians to their organizations and that such organizations
will use technology to differentiate themselves. Management believes that the
most attractive technology solutions for physicians will involve systems that
connect them to financial, clinical, and administrative information and manage
patient flow processes for physicians at their desktops. While IDNs and
physician groups continue to look to integrated application systems to provide
enterprise-wide solutions, the process of selecting and implementing such
solutions is time-consuming and expensive. Large healthcare organizations
require technology solutions that not only deliver high-performance computing in
environments with thousands of concurrent computer users, but also deliver a
lower total cost of ownership, improved organizational workflow, improved
information access, and a portal to web-based information and services. The
possibility of connecting disparate systems through low-cost web-technology has
to potential to accelerate implementation of enterprise-wide solutions, thereby
changing the information system strategies of many large IDNs. Management
believes this potential represents an opportunity for IDX.
The healthcare information systems market is highly fragmented, with over
1,300 vendors. It is estimated that the market, worth an estimated $17.1 billion
in 1998, could grow to as much as $21.1 billion by the year 2000. Healthcare
organizations are transitioning to new platforms and newer technologies in a
migration over time toward the implementation of enterprise-wide, patient-
centered computing systems leading to the computerized medical record. These
organizations cannot afford significant downtime or re-education, or the risk of
choosing a system which has not proven its ability to handle high-volume
transaction processing with continuous dependability. IDX believes that
successful vendors in this market will have a large existing client base and
offer the high-quality, integrated and web-enabled products, and value-added
services needed to expand and support clients throughout this evolution process.
Strategy
IDX seeks to maximize value for its clients by delivering information
systems that are designed to improve the quality and reduce the cost of
healthcare delivery. The IDX strategy is to build on its success as a leading
ambulatory systems vendor and to build on the strength of the LastWord acute
care clinical system to provide comprehensive information systems solutions for
IDNs and other healthcare organizations. The IDX solution anticipates
evolutionary change in the organizational structure of IDNs and provides the
connectivity and information sharing functions that support evolutionary change.
IDX believes that, in the near term, connectivity and information sharing
requirements of the evolving IDN will be best met through the use of web
technology and integration to IDX core systems. The IDX strategy will allow
physician groups to share data with an IDN while at the same time maintaining an
appropriate level of autonomy. This approach recognizes the practical
operational needs of hospitals, MSOs, and group practices, while simultaneously
providing the critical physician link to the network. IDX's ability to deliver
on this strategy depends on its successful products for these market segments
and its strategy to move these products to web technology, and to build new
products on a thin-client, web-based architecture.
The combined strengths of IDX's products and the strategy for moving IDX
products to web technology, positions IDX to provide comprehensive functionality
and desktop integration across administrative, financial, clinical, and
analytical applications. The IDX strategy--which includes automating patient
care and other workflow processes, web access to patient data, clinical content,
and e-commerce capabilities, and enterprise clinicals--provides benefits to all
care delivery organizations looking to attract and maintain strong physician
relationships. The Company's understanding of the significant role of the
physician and the changing nature of delivery settings is the cornerstone of the
IDX strategy.
Key elements of IDX's strategy are to:
Increase Penetration of IDNs through Large Physician Group and Hospital
Customer Relationships. IDX believes that the interests of its existing client
organizations, including approximately 250 large group practices composed of
more than 101,191 physicians and over 270 hospitals, as of December 31, 1998,
will be a significant factor in the
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management of IDNs and the formation of IDNs in the future. IDX expects that its
relationships with these clients combined with the depth and breadth of its
product offerings will provide significant opportunities to sell its products
and services to IDNs and their affiliated organizations.
Capitalize on Web Technology to Enhance Current Products and Expand e-
commerce offerings. IDX recognizes the need for healthcare organizations to
extend information systems to physicians, trading partners, and ultimately,
healthcare consumers. IDX recognizes the vast potential of the Web and web-
based technologies to cost-effectively support the growing information needs of
healthcare providers and is developing a technical strategy to use web
technology to provide value to its customers. IDX believes that, in an
information intensive environment like healthcare, where timely access to
information is critical, web technology provides the needed connection for
information about patients, while facilitating communication between providers,
patients, and trading partners. The IDX web strategy encompasses four
components:
. Continue to web-enable the Company's products
. Build new products on the Company's web-based Target Architecture(TM)
. Extend customers' connectivity opportunities using the Internet
. Deliver value-added services for clinical content and electronic
commerce
Target Physician Users with Web-based Desktop Solutions. IDX systems are
currently performing practice management functions for 110,000 physicians. IDX
believes significant opportunities exist to deliver a configurable physician
desktop by selling the IDX Web Framework and associated products and services to
IDX customers. IDX plans to leverage its presence in the physician market to
secure a dominant presence on the physician desktop by organizing workflow and
content for physicians and other users. Management believes that in the future
physicians (who control approximately 80 percent of all healthcare expenditures)
will become empowered to improve the quality of healthcare with direct access to
patient information, trading partners, and the businesses they depend on--labs,
pharmacies, office suppliers, and payers. IDX believes its position as a leading
provider of information solutions to physicians, its proven ability to meet the
needs of practices of all sizes, and its Web strategy will create a significant
opportunity to provide a widely-accepted and effective physician desktop
solution.
Cross-Sell Products and Services into Existing Client Base. IDX believes
significant opportunities exist to cross-sell current products and professional
services as well as products under development to its existing client base which
at December 31, 1998 consisted of over 780 physician practices and over 270
hospitals. IDX is marketing its LastWord system to IDNs associated with its
ambulatory customers, and is marketing the IDX ambulatory solution to physician
groups associated with the LastWord customer base. In addition to selling
products that enhance currently installed ambulatory applications, IDX actively
markets applications that complement currently installed IDX systems. Among
those applications are the IDXtendR(TM) Clinical Management System--an
ambulatory computerized patient record; Analyzer--an OLAP (online analytical
processing) decision support tool; Electronic Data Interchange--for interactive
eligibility and credit card processing; IDXrad--radiology information system;
Enterprise Index (formerly known as the Enterprise Patient Management System)--
an enterprise master patient index system; the IDX Web Framework--a web-browser-
based user interface with standard navigation tools to merge disparate
applications; and OutReach(TM)--a web-based companion application for remote
access to IDX systems.
Expand Professional and Technical Service Offerings. IDX seeks to leverage
its healthcare information systems expertise by providing professional and
technical services such as information systems planning, contract programming,
and project management to assist healthcare organizations by focusing on best
practices using the Company's products. A specialized consulting organization
within IDX, The Huntington Group, provides information technology and services
solutions to healthcare organizations, including process redesign,
organizational change management, outsourcing, and systems integration services
to IDX customers.
Establish Partnerships to Supplement IDX Offerings. IDX seeks to enhance
its product offerings through strategic alliances with vendors developing
complementary products and services, including emerging web-based clinical
content and e-commerce services. The complementary products and services
currently offered include integrated credit card transaction processing, point-
of-service access to eligibility, referral, and enrollment data, critical care
management, and integrated patient communication systems. In addition to
increasing the range of products and services available to IDX customers, these
alliances provide recurring revenue opportunities for IDX.
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IDX Products
Products
IDX's software product solutions enable healthcare organizations to
redesign patient care and other work flow processes by providing computer-based
tools to capture, access and manage information within healthcare organizations
and throughout IDNs. In January 1997, IDX introduced the IDXtendR(TM) product
line. IDXtendR is packaged as the "IDXtendR @ the Site Series" consisting of
nine configurations of IDX products packaged to meet the specific process
requirements of healthcare organizations, including group practices, MSOs,
hospitals, and IDNs. IDXtendR provides relational reporting and analysis
capabilities as well as OutReach for web-browser access to patient data residing
in an IDX database.
In February 1999, IDX announced the general release of IDXsite(TM), a web-
based practice management system that includes integrated financial,
administrative, and managed care applications for mid-size physician
organizations. IDXsite and the IDXtendR Clinical Management System provide a
comprehensive solution for this market segment. IDXsite is built on a multi-tier
Web platform engineered using Microsoft (R) Enterprise Suite, including
Microsoft SQL server and Windows(R) NT.
Below is a description of IDX's products as of February 28, 1999.
IDX solutions are configured as the IDXtendR @ the Site SeriesTM , which is
comprised of IDXtendR @ the Group Practice (Series 2000); IDXtendR @ the
MSO(Series 3000); IDXtendR @ the Hospital (Series 5000); and IDXtendR @ the IDN
(Series 6000). The @ the Site Series includes core applications, optional
applications, and complementary products and services. To meet the needs of
technically advanced, mid-size physician groups, IDX also offers IDXsite, a web-
based practice management system with integrated financial, administrative, and
managed care capabilities.
Key healthcare processes automated by the IDX product lines include:
- patient information access for scheduling and patient registration
- financial management for billing and managed care
- clinical information applications, including inpatient computerized
patient record system, ambulatory clinical information, radiology
information, and image management
- enterprise connectivity for enterprise-wide scheduling, master
patient index, and electronic data interchange decision support for
reporting tools to support effective decision-making across the care
continuum
Specific application and associated functions are described below:
IDXtendR
Scheduling:
- schedules patients, providers, and resources in small, mid-size, and
large physician group settings
- manages schedules and coordinates appointments in the acute care
environment and is integrated with orders for procedure scheduling
Registration:
- stores patient demographics and insurance information
- creates a single master database of patient information across
multiple care settings
- includes patient registration, charge entry, fee schedule, patient
list, user registration, security and text messaging functions.
Visit Management:
- admission and discharge capabilities for outpatient centers,
physician practices, and clinics
- admission, discharge, and transfer capabilities for hospital
inpatients and outpatients
- reports information related to patient registration, visit, bed
management, and insurance management
- tracks patient interaction to build the comprehensive electronic
medical record
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Charting
- provides abstracting and encoding using ICD-9, CPT-4 and DRG codes.
- streamlines chart completion activities for medical records personnel
- streamlines all activities related to tracking physical medical
records throughout a multi-site organization
- automates activities related to releasing patient record information
to external requesters including tracking, billing and collection.
Billing and Accounts Receivable:
- integrates billing and receivables management with comprehensive
analysis and reporting for large group practices and MSOs
- manages patient billing, collection and insurance management from
initial registration through resolution of payment
- streamlines hospital patient accounting activities and expedites
reimbursement
Managed Care Application
- maintains member registration, demographic, and financial data and
automatically applies benefits as defined in the member's plan
- provides a comprehensive referrals system with authorization
tracking, concurrent review, pre-certification, length of stay
assignment, and provider selection
- provides case identification, care plan tracking, cost simulation,
form letters, and linking of service records
- adjudicates and processes claims and statistical encounters
- provides billing for employer groups and self-pay members and manages
receivables
- provides flexible risk management (fund accounting), tracking, and
reporting
- provides issue tracking, responsibility assignment, workflow
management with automatic ticklers, and letter production
Transaction Editing System (TES):
- captures, evaluates, and facilitates editing of charge and claim data
- allows transactions to be edited for completeness and re-tested
before they are entered into BAR and MCA applications
Contract Reference:
- manages capitated contracts across the enterprise
Intercept Contract Management
- contract administration, encoding, modeling and cost allocation
- contract reimbursement determination tool
Clinical Tools
- manages the care process by providing a patient record, access to a
structured medical knowledge database that supports protocols, and
outcomes management
- comprehensive set of tools to aid clinician productivity and
streamline workflow, including problem list, prescription pad, chart
summary view, provider in-box and alerts, health maintenance alerts,
patient list management, panel query and rounds report.
- provides clinical results in easy to read flowsheet format.
- provides automated support for nursing activities such as
assessments, charting, and patient classification.
Orders and Results Reporting
- provides comprehensive order management capabilities for inpatient
and ambulatory settings.
- provides comprehensive results reporting for lab, ancillary,
radiology, medications, and diagnosis results.
Pharmacy
- comprehensive inpatient pharmacy department support
- comprehensive outpatient pharmacy department support
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Emergency Department
- provides patient flow management and tracking support for the
emergency department that is fully integrated with the inpatient
system, making all care activities performed in the ED available as
part of the patient's long-term record .
Enterprise and Departmental Radiology
- automates a radiology department's clinical, demographic,
administrative, billing, scheduling, and film information
- provides multiple-site, access to patient data, exam information,
results, and corresponding digital images, thereby reducing instances
of film loss and delays in reporting to physician
- makes images and diagnostic reports available throughout the
enterprise via imaging solutions including a modality manager
investigational device
- provides bi-directional link between IDXrad and diagnostic imaging
equipment, allowing transfer of information between the modality and
IDXrad (investigational device)
Enterprise Index (formerly called Enterprise Patient Management System):
- a master person index used to track patient and member registration
information and visit histories across multiple locations in a
delivery network
Enterprise Wide Scheduling (EWS):
- provides enterprise-wide patient, provider, and resource scheduling
IDX Web Framework:
- provides web-browser user interface for integrating applications in a
single desktop presentation
OutReach:
- provides remote access through the Internet or Intranet to IDX
applications
Electronic Data Interchange (EDI):
- automates the computer-to-computer exchange of data such as claims
submittals and remittances, health plan eligibility information, and
integrated credit card processing
Analyzer:
- provides relational reporting and analysis of IDXtendR data using
Microsoft SQL Server and on-line analytical processing (OLAP) for
multi-dimensional analysis in a graphical user environment
Enterprise View:
- provides a data repository for enterprise-wide information analysis
using a relational database
IDXsite(TM)
IDXsite is a web-based practice management system with integrated financial,
administrative, and managed care applications for physician organizations.
Integrated with the IDXtendR(TM) Clinical Management System (CMS), IDXsite
provides a comprehensive information system solution to mid-size physician group
practices. IDXsite is Y2K compliant and can be implemented rapidly for customers
needing a solution for the Year 2000. IDXsite is built on a multi-tier Web
platform engineered using Microsoft(R) Enterprise suite, including Microsoft SQL
server and Windows(R) NT. The web-based thin client architecture of IDXsite
provides an open desktop for access to third party applications and enables
centralized system management, reduced desktop costs, and incremental system
investments as the number of users grow. The standard Internet protocols used
for system access in IDXsite reduces the cost and complexity of networking a
decentralized organization that must support multiple group practices,
locations, and remote users.
Key functional areas of the IDXsite(TM) practice management solution include:
. Patient and resource scheduling
. Patient/member registration
. Eligibility verification
. Referral management
. Point of service billing
. Reimbursement management
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. Automated collections
. Prepaid plan management
. Claims adjudication
. Reporting and analysis
Business Partner Solutions
Envoy:
- provides point-of-service access to claims and receipts, interactive
eligibility, enrollment, and referral services.
- eliminates formatting challenges typically associated with electronic
data interchange (EDI)
HDX:
- provides seamless access to eligibility information at the point of
service
- integrated with EDI to enable requesting, receiving, and updating
eligibility information
Imperial Technology Solutions:
- provides credit card transaction processing services from the IDX
desktop integrated with EDI for automatic approval and payment
posting into the patient's account
Picis:
- PICIS Chart+ - critical care system used with the LastWord system
SmartTalk:
- provides an integrated patient communication solution based on
Interactive Voice Response (IVR) technology
- utilizes a sophisticated voice messaging engine to provide
personalized appointment reminders and confirmation, schedule change
notification, wellness and recall message delivery, around the clock
test result delivery, and patient surveys
- integrated with the Patient Scheduling (SCHED) application
Services
IDX maintains a client services organization to install its products and to
support and provide professional, technical and other services to its client
base. IDX possesses the healthcare information systems expertise desired by the
growing number of larger and more sophisticated healthcare enterprises as they
reengineer healthcare delivery processes and deploy information systems to
support these processes. The services organization is experienced at installing
and supporting systems in very large organizations with thousands of computer
users across multiple departments.
Installation Services. IDX's installation representatives work with clients
to tailor and optimize IDX products to meet specific business needs. Services
include project management, train-the-trainer programs, best practices
comparison to other IDX clients and systems conversion and implementation
assistance.
Maintenance Services. IDX provides ongoing software support to all of its
large clients and substantially all of its other clients under contracts that
are typically for a term of one year. These contracts generally are renewable
automatically unless terminated at the option of either the client or IDX.
Software maintenance services consist of providing the client with certain new
software releases, as available, and general support, including error
corrections and telephone consultation. For all products, maintenance services
are available either on a 24-hour-a-day basis or during normal business hours.
Professional and Technical Services. IDX offers professional and technical
services to assist clients in building an information infrastructure to operate
in a complex and changing healthcare environment. The work performed by IDX
includes information systems planning, process redesign, project management,
contract programming, network design, education and training. These value-added
services, combined with IDX's systems expertise, enable IDX to support its
clients' efforts to develop consistent enterprise-wide systems and processes.
Through these services, IDX believes it strengthens its relationship with
clients, builds a knowledge base of best practices in the use of IDX's systems
and gains information regarding future client needs. IDX has expanded the
services provided by this group with the formation of The Huntington Group, a
professional services organization devoted to providing information technology
solutions to those organizations that use IDX's information systems products.
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The following sets forth a description of the services provided by the IDX
consulting organization:
IDX Professional Services
The Huntington Group
- process redesign, organizational change management, outsourcing, and
systems integration
Technical Consulting Services
- performance and investment analysis and hardware upgrades, network
review, systems operational analysis, and various utilities and tools
Application Consulting Services
- project management, upgrades, temporary services, and operational
analysis
Network Consulting Services
- network analysis, design, and implementation, temporary networking
services, client-server design and installation, and support services
Radiology Consulting Services
- system analysis and process redesign for radiology groups
Technology Strategy and Hardware Platforms
IDX designs its software to operate on a variety of technical platforms,
including computer equipment from Compaq, Hewlett Packard Company ("HP"), Data
General, and International Business Machines Corporation ("IBM"). The IDX
technology strategy is based on a technology for performance philosophy
employing advanced technology and connectivity solutions to solve business
problems. The IDX strategy includes a single desktop presentation, integrated
business functions, workflow across all participants, and decision support
tools. To fulfill this strategy, IDX has established its IDX Target Architecture
that employs the web and other new technologies. New products will be built to
this standard and existing IDX applications will migrate to the Target
Architecture over time. The four fundamental components of the Target
Architecture include:
- The IDX Web Framework
- Objects and Components
- Customizable user interface and workflow tools
- Platform independence
The IDX Web Framework is a set of software tools, user interface standards,
and style conventions that provides the ability to integrate many different
applications into a single desktop presentation. The IDX Web Framework is built
on thin client web technology that enables an organization to deliver an
integrated IDX desktop from a web server. The Web Framework facilitates
integration across applications in a cost-effective, secure environment.
Component-based software is a software design methodology that uses
concepts and actions by describing their attributes in a programming language.
Once a concept or action has been described, that description and its
accompanying software code can be reused broadly as the building blocks for
different applications. This software design approach leads to faster
development processes and allows IDX to "plug" components together in tailored
configurations providing greater congruence with client needs and expectations.
The approach facilitates cross product and multi-vendor interoperability and
connectivity.
Customizable user interface and workflow tools provide the flexibility to
adapt the IDX system to meet unique business needs. Using advanced software
construction techniques, it is expected that IDX solutions will be designed in
the future in a way that they can be updated more quickly to allow customers to
customize the system to meet their unique needs.
The platform independence foundation allows IDX and our customers to use
the best technologies available. This strategy provides options that balance the
scalability, price, and functionality issues that are involved with platform
decisions.
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The addition of web-enabling IDX applications reduces the risks of changing
technologies and ensures that IDX customers have tools needed to operate in
complex clinical and business office settings. IDX strives to utilize technology
for performance by applying the new technologies, such as the web, as they prove
themselves able to perform well in large-scale, transaction-driven environments.
The technology for performance philosophy seeks to protect customer investments
in current systems with a technology framework designed to allow them to expand
and take advantage of new features and new technologies as they become
available. The architecture of IDX products is expected to enable clients to
incrementally migrate from one technology to another. With a focus on reliable,
scaleable hardware and software solutions, IDX applications are expected to
migrate to platform independence, beginning with a migration to SQL and Windows
NT. IDX believes that its approach to technology, particularly the emphasis on
web-based, thin client architecture, will provide IDX customers with flexibility
and utility, while reducing costs and deployment risks.
As a service to its clients, IDX sells third-party computers, terminals,
printers, storage devices and other peripheral devices. IDX also provides value-
added services to configure client systems. Hardware is purchased from Compaq,
IBM, Data General, and HP under renewable one-year reseller agreements. IDX does
not maintain an inventory of hardware, but relies on suppliers' inventories to
meet client delivery requirements. IDX believes that its relationships with
vendors are good.
Sales and Marketing
IDX sells its products exclusively through its direct sales force. The
majority of IDX's sales calls are in response to requests for proposals. IDX
generates these requests and other sales primarily through referrals from
clients and consultants. IDX also seeks to enhance market recognition through
participation in industry seminars and tradeshows, its website, direct mail
campaigns, telemarketing and advertisements in trade journals. IDX products
typically have a three to 18 month sales cycle for new client sales.
No single client accounted for more than 5% of IDX's annual revenues in
fiscal 1996, 1997, or 1998.
At December 31, 1998, the Company had total backlog of $266.2 million,
including $129.0 million attributable to systems sales and $137.2 million
attributable to services. Systems sales backlog consists of fees due under
signed contracts that have not yet been recognized as revenues. Service backlog
represents contracted software maintenance services, installation fees, and
remote computing services fees for a period of 12 months. At December 31, 1997,
the Company had total backlog of $203.1 million including $101.5 million
attributable to systems sales and $101.7 million attributable to services for
multiple years of services. Service backlog represents contracted software
maintenance services, installation fees, and remote computing services fees for
a period exceeding 12 months. Of the total 1998 backlog of $266.2 million, the
Company expects that $72.5 million will not be fulfilled in the current fiscal
year.
Product Development
To ensure that its products continue to meet the evolving needs of the
healthcare industry, IDX allocates a significant portion of annual revenues to
research and development. IDX's research and development expenses for the fiscal
years 1996, 1997 and 1998 were $29.8 million, $36.3 million, and $46.6 million
respectively.
IDX's product development activities include enhancement of existing
products and the development of new products, as well as the implementation of
new technologies. IDX is devoting significant resources to integrating the
LastWord and IDX products, developing a relational practice management solution,
and expanding its web-based architecture. IDX is also currently migrating its
products to the web-based thin-client architecture. IDX's development process is
focused on building components for its integrated product rather than on stand-
alone products. These components can be integrated and configured to address
specific client needs.
IDX utilizes client focus groups, user groups and industry experts,
including physicians, nurses, healthcare administrators and consultants, for
advice in developing and enhancing its products.
Competition
The market for healthcare information systems is highly competitive. IDX
believes that the principal competitive factors in this market are the ability
to effectively market, install, support and integrate systems, the resources to
support ongoing research and development, financial stability and price. IDX
believes it competes favorably with respect to these factors. Competitors vary
in size, and in the scope and breadth of the products and services offered. IDX
experiences
Page 10
competition from companies with strengths in various segments of the healthcare
information systems market, such as physician group practice systems, hospital
information systems, clinical information systems, ancillary departmental
systems and systems integration. In addition, other entities not currently
offering products and services similar to those offered by IDX, including claims
processing organizations, hospitals, third-party administrators, insurers,
healthcare organizations and others, may enter certain markets in which IDX
competes.
While IDX believes no vendor dominates the market for healthcare
information systems, certain of IDX's competitors have greater financial,
development, technical, marketing and sales resources than IDX and have a
greater penetration into segments of the market in which IDX competes. In
addition, as the markets for IDX's products and services develop, additional
competitors may enter those markets and competition may intensify.
Proprietary Rights and Licenses
IDX depends upon a combination of trade secret, copyright and trademark
laws, license agreements, nondisclosure and other contractual provisions and
technical measures to protect its proprietary rights in its products. IDX
distributes its products under software license agreements that grant clients a
nonexclusive, nontransferable license to use IDX's products and contain terms
and conditions prohibiting the unauthorized reproduction or transfer of IDX's
products. In addition, IDX attempts to protect its trade secrets and other
proprietary information through agreements with employees and consultants. All
current employees of IDX have signed a nondisclosure agreement, and all current
employees involved in product development have signed an assignment of
inventions agreement. There can be no assurance that the legal protections
afforded to IDX or the precautions taken by IDX will be adequate to prevent
misappropriation of IDX's technology. In addition, these protections do not
prevent independent third-party development of functionally equivalent or
superior technologies, products or services. Any infringement or
misappropriation of IDX's proprietary software would disadvantage IDX in its
efforts to retain and attract new clients in a highly competitive market and
could cause IDX to lose revenues or incur substantial litigation expense. IDX
believes that, due to the rapid pace of innovation within the software industry,
factors such as the technological and creative skills of its personnel and
ongoing reliable product maintenance and support are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections afforded to its technology.
Although IDX believes that its products, trademarks and other proprietary
rights do not infringe upon the proprietary rights of third parties, there can
be no assurance that third parties will not assert infringement claims against
IDX in the future and that such claims will not have a material adverse effect
on IDX's results of operations, financial condition or business.
Government Regulation
The development and commercialization of the Company's products will be
subject to regulation in the United States by numerous regulatory authorities
including the Federal Food and Drug Administration (FDA) and Federal Trade
Commission (FTC) and by comparable regulatory authorities in foreign countries.
These regulatory authorities and other federal, state, and local entities will
regulate, among other things, the preclinical and clinical testing, safety,
effectiveness, approval, clearance, manufacturing, labeling, packaging, storage,
recordkeeping, adverse event reporting, export, and promotion and advertising of
the Company's products.
Unless a product is exempted from premarket submission and clearance, FDA
approval or clearance of the Company's products that meet the definition of a
medical device under the Federal Food Drug and Cosmetic Act (FDC Act), is
required before the products may be marketed in the United States. FDA has a
draft policy for the regulation of computer software products that meet the
definition of a medical device, and has indicated that it may modify its draft
policy or create a new policy. Although it is not possible to anticipate the
final content of FDA's policy with regard to computer software, IDX expects
that, whether or not the draft is finalized or changed, FDA will become
increasingly active in regulating computer software intended for use in
healthcare settings. FDA can impose extensive requirements governing premarket
and postmarket activities, including product design development and
manufacturing quality assurance controls, clinical investigations, marketing
clearance or approval, and labeling and promotion. There can be no assurance
that the company will be able to comply with any requirements or guidelines that
the FDA may issue.
FDA already actively regulates computer software used to capture,
communicate, and store images and information used in medical diagnosis and
treatment; depending on the intended use and technological characteristics of
the product, it may require clearance under section 510(k) of the FDC Act before
it may be marketed. In order to obtain clearance for marketing, a manufacturer
must demonstrate substantial equivalence to similar legally marketed products by
Page 11
submitting a premarket notification (510(k)) to the agency. FDA may require
additional data to support a substantial equivalence determination, and there is
no assurance FDA will find a device substantially equivalent. If FDA finds that
a device is not substantially equivalent, the manufacturer may ask the FDA to
make a risk-based classification to place the device in Class I or Class II.
However, if a timely request for risk-based classification is not made, or if
FDA determines that a Class III designation is appropriate, an approved
premarket approval application (PMA) will be required before the device may be
marketed.
The PMA approval process is lengthy, expensive, and typically requires,
among other things, extensive data from preclinical testing and a well-
controlled clinical trial or trials that demonstrates a reasonable assurance of
safety and effectiveness. Clinical trials can take extended periods of time to
complete. In addition, if FDA requires an approved Investigational Device
Exemption (IDE) before clinical trials may commence, there is no guarantee that
the agency will approve the IDE, and an IDE approval process could result in
significant delay. There is no assurance that review will result in timely or
any PMA approval, and there may be significant conditions on approval, including
limitations on labeling and advertising claims and the imposition of post-market
testing, tracking, or surveillance requirements.
Whether or not a product is required to be approved or cleared before
marketing, continuing compliance with strict FDA requirements concerning good
manufacturing practices, enforced by periodic inspections, and medical device
reporting (MDR) regulations, among other requirements, will be required. The MDR
regulations require that reports be submitted to FDA to report device-related
deaths, serious injuries, and malfunctions the recurrence of which would likely
cause serious injury or death. MDRs can result in agency action such as
inspection, recalls, and patient/physician notifications, and are often the
basis for agency enforcement actions. Because MDRs are publicly available, they
can also become the basis for private tort suits, including class actions.
If a manufacturer makes a change to a device cleared for marketing under
section 510(k) that is a major change in intended use, or is a change to design,
material, composition, energy source, or manufacture that could significantly
affect the safety and effectiveness of the marketed device, a new 510(k) will be
required before the modified device may be marketed. Changes to approved PMA
devices that affect safety and effectiveness require supplemental PMA approvals
before the modified PMA device may be marketed, except for manufacturing changes
that affect safety or effectiveness, which may be deemed approved after a 30-day
notice unless the FDA requests a supplement. There is no guarantee that such
additional clearances or approvals will be granted.
In addition, the nature of marketing claims that the Company will be
permitted to make in the labeling and advertising of its products will be
limited to those specified in an FDA clearance or approval, and claims exceeding
those that are cleared or approved will constitute violation of the Act.
Violations of the Act or regulatory requirements at any time during the product
development process, approval or clearance process, or after clearance or
approval may result agency enforcement actions, including voluntary or mandatory
recall, suspension or withdrawal of marketing clearance or approval, seizure of
products, fines, injunctions and/or civil or criminal penalties.
The Company's advertising of its products will also be subject to
regulation by the Federal Trade Commission (FTC) under the FTC Act. The FTC Act
prohibits unfair methods of competition and unfair or deceptive acts in or
affecting commerce. Violations of the FTC Act, such as failure to have
substantiation for product claims, would subject the Company to a variety of
enforcement actions, including compulsory process, cease and desist orders, and
injunctions. FTC enforcement can result in orders requiring, among other things,
limits on advertising, corrective advertising, consumer redress, and recision of
contracts. Violations of FTC enforcement orders can result in substantial fines
or other penalties.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
contains provisions regarding health data security and standardization for
financial and administrative transactions, including standards to enable
electronic exchange of information in health claims and health plan
administration. Many of the standards mandated by HIPAA and the regulations
thereunder become effective in the year 2000 and will be applicable to the
customer operations involving the use of the Company's products. It will be
necessary for the Company to ensure that its products support HIPAA compliance
by its customers insofar as its products are intended to be used in customer
operations governed by HIPAA and the regulations thereunder.
Employees
At December 31, 1998, IDX employed 2,116 full-time employees, including 256
employees in sales, 1,163 in the client services group, and 503 employees
engaged primarily in program development, new technology adaption and quality
Page 12
assurance. No employees are covered by any collective bargaining agreements. IDX
believes that its employee relations are good.
Item 2. Properties
The Company's principal corporate offices are located at 1400 Shelburne
Road, South Burlington, Vermont 05403. The Company maintains sales, research and
support facilities in South Burlington, Vermont, Boston, Massachusetts, and
Seattle, Washington. The Company maintains regional sales and support offices in
the greater metropolitan areas of Arlington, Virginia, Chicago, Illinois,
Dallas, Texas, San Francisco, California, Deerfield Beach, Florida and Atlanta,
Georgia. The Company leases all of its facilities which, in the aggregate,
constitute approximately 548,704 rentable square feet of office space. The
Company's leases expire between March 31, 1999 and April 12, 2014, with the
exception of the Lease at 1500 Shelburne Road, South Burlington, Vermont, which
is on a month-to-month basis. The Company believes that its facilities are
adequate for its current needs and that suitable additional space will be
available as required. 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. On February 4, 1999 the Company acquired a building in
South Burlington, Vermont, which will provide an additional 15,000 square feet
of space. In addition, the Company has entered into a contract to acquire a
building in South Burlington with 51,210 additional square feet of office space.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 13
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth: (i) the name and age of each current executive
officer of the Company, (ii) the position(s) currently held by each named
person, and (iii) the principal occupations held by each person named for at
least the past five years.
Executive Officer Age Position
- ---------------------------------------- --- ----------------------------------------------------------
Richard E. Tarrant 56 Chief Executive Officer and Director
James H. Crook, Jr. 42 President and Chief Operating Officer
Henry M. Tufo, M.D. 59 Executive Vice President and Director
Robert W. Baker, Jr., Esq. 50 Vice President, General Counsel and Secretary
Jeffrey M. Blanchard 42 Vice President Client Services
Robert F. Galin 54 Vice President Sales
John A. Kane 46 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
Pamela J. Pure 38 Vice President Marketing
Jeffrey V. Sutherland, Ph.D. 57 Senior Vice President, Engineering and Product Development
Mr. Tarrant co-founded the Company in 1969 and served as the President from
June 1969 to February 1999. He has served as Chief Executive Officer of the
Company and as a Director since 1969. Mr. Tarrant served as a member of the
Board of Trustees for the University Health Center (Vermont), an academic
medical center, from July 1988 to December 1994 and as Chairman of the
University Health Center (Vermont) from 1992 to 1994.
Mr. Crook, who joined the Company in April 1981, served as Vice President
of the Company from June 1984 to February 1999. He served as a Director of the
Company from July 1984 to June 1995. He has served as President and Chief
Operating Officer since February 1999.
Dr. Tufo has been Executive Vice President of the Company since September
1995. Dr. Tufo has served as a Director of the Company since November 1995. Dr.
Tufo served as Chief Operating Officer of the Company from September 1996 to
February 1999. Dr. Tufo served as Vice President and Chief Medical Officer of
the Company from August 1995 to September 1995. Dr. Tufo served as a consultant
to the Company from February 1995 to August 1995. Dr. Tufo was the President and
Chief Executive Officer of University Health Center (Vermont) from July 1989 to
December 1994. Dr. Tufo is Professor of Medicine at the University of Vermont
College of Medicine.
Mr. Baker joined the Company as General Counsel and Secretary in July 1989.
He has served as Vice President since April 1996.
Mr. Blanchard, who joined the Company in August 1987, has served as Vice
President, Client Services since March 1995. Prior to that time, Mr. Blanchard
served the Company in various capacities, including most recently as Director,
Customer Support from November 1992 to March 1995.
Mr. Galin has served as Vice President, Sales since August 1992. He served
as Director of Sales from April 1982 to August 1992.
Mr. Kane has served as the Vice President, Finance and Administration,
Chief Financial Officer and Treasurer since joining the Company in October 1984.
Mr. Kane is a C.P.A.
Page 14
Ms. Pure has served as Vice President, Marketing since November 1995. Ms.
Pure served as Director of Best Practices from March 1995 to November 1995.
Prior to joining the Company, Ms. Pure was employed by Shared Medical Systems
Corporation, a medical software company, from May 1983 until March 1995, most
recently as Manager of Product Marketing and Communications.
Dr. Sutherland has served as Senior Vice President, Engineering and Product
Development since joining the Company in September 1996. Prior to joining the
Company, he was Vice President, Engineering of Individual Inc., an Internet
content provider company, from May to September 1996; Vice President, Object
Technology of Vmark Software, a software development tools company, from June
1995 to May 1996; Vice President, Object Technology for Easel Corporation, a
software development tools company, from July 1993 to June 1995; and President
and founder of Object Databases (now known as Matisse Software) from October
1989 to June 1993.
Each officer serves at the discretion of the Company's Board of Directors.
There are no family relationship among the named officers.
Page 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Price of and Dividends on Common Stock and Related Matters. The
Common Stock of IDX is traded on the Nasdaq National Market under the symbol
"IDXC." The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stock as reported by the Nasdaq
National Market.
Quarter/Year High Low
- --------------------- -------- --------
1997
------------------
First Quarter 1997... $ 36.50 $26.875
Second Quarter 1997.. $ 37.50 $ 23.00
Third Quarter 1997... $ 40.00 $ 31.50
Fourth Quarter 1997.. $ 38.00 $28.375
1998
-----------------
First Quarter 1998... $ 47.50 $ 33.25
Second Quarter 1998.. $49.562 $39.500
Third Quarter 1998... $55.750 $41.750
Fourth Quarter 1998.. $52.250 $36.375
On March 19, 1999, the Company had approximately 266 stockholders of
record. (This number does not include stockholders for whom shares are held in a
"nominee" or "street" name.) On March 19, 1999, the closing price of the
Company's Common Stock on the Nasdaq National Market was $14.1875.
The Company anticipates that all future earnings will be retained for
development of its business and will not be distributed to stockholders as
dividends. Restrictions or limitations on the payment of dividends may be
imposed in the future under the terms of credit agreements or under other
contractual provisions. In the absence of such restrictions or limitations, the
payment of any dividends will be at the discretion of the Company's Board of
Directors.
(b) Recent Sales of Unregistered Securities. On May 18, 1998, the Company
issued 241 shares of Common Stock to each of the four outside directors of the
Company in consideration of one year's past service as a director of the
Company. The shares of Common Stock issued in these transactions were offered
and sold in reliance upon the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), relating to sales
by an issuer not involving any public offering. All such securities are deemed
restricted securities for purposes of the Securities Act. There were no
underwriters involved in such transactions.
Page 16
Item 6. Selected Financial Data
Financial Highlights
Summary of Consolidated Financial Data
Year Ended December 31,
----------------------------------------------------
1994 1995 1996 1997 1998
----------------------------------------------------
(in thousands, except per share data)
Statements of Income Data:
Revenues.............................. $143,807 $175,285 $206,879 $251,417 $321,676
Operating Income...................... 9,348 19,038 22,626 10,614 47,144
Net Income............................ 7,229 20,673 16,660 7,962 30,228
Net Income Per Share.................. $0.64 $0.30 $1.11
Pro Forma Net Income.................. 4,854 13,915
Pro Forma Net Income Per Share........ $ 0.24 $ 0.63
Balance Sheet Data:
Cash and Investments.................. $ 30,786 $104,154 $113,392 $115,887 $124,517
Working Capital....................... 33,662 110,966 131,900 140,906 178,749
Total Assets.......................... 96,013 169,517 202,322 237,318 284,324
Long-term Debt, less current portion.. 7,070 3,059 2,651 2,508 --
Total Stockholders' Equity............ $ 60,899 $130,512 $158,550 $176,604 $220,506
The consolidated financial data set forth above has been restated to
include the results of operations and accounts of PHAMIS for all periods prior
to its acquisition by IDX on July 10, 1997. The acquisition, as more fully
described in Note 2 to the Consolidated Financial Statements, has been accounted
for as a pooling of interests.
Per share amounts represent diluted net income per share. The 1994 and 1995
pro forma net income per share and the 1996 net income per share amounts have
been restated to comply with Statement of Financial Accounting Standards No.
128, Earnings per Share, as more full described in Note 1 to the Consolidated
Financial Statements.
Item 7. 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. The Company
has various sentences within this Annual Report which contain such forward-
looking statements. In addition, 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 on page 24 under the
caption "Factors Affecting Future Results," which are not italicized or
capitalized for improved readability, consist 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.
Revenues of $321.7 million in 1998 grew 27.9% over 1997 revenues of $251.4
million. Systems sales grew 32.8% in 1998, and maintenance and service fees
grew 22.4%.
Operating income increased from $10.6 million in 1997 to $47.1 million in
1998, an increase of $36.5 million or 344.2%. Excluding expenses related to the
write-off of acquired research and development and merger and related costs,
operating income grew from $32.9 million in 1997 to $50.3 million in 1998, an
increase of $17.4 million or 52.9%. Net income increased from $8.0 million in
1997 to $30.2 million in 1998, an increase of $22.3 million or 279.7%. Excluding
the write-off of acquired research and development, and merger and related
costs, net income grew from $23.1 million in 1997 to $33.4 million in 1998, an
increase of $10.2 million or 44.3%.
Page 17
Recently, certain of the Company's large customers delayed making
purchasing decisions with respect to certain of the Company's 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 and is therefore uncertain whether
such factors constitute a trend or will continue in future periods.
On September 11, 1998, the Company entered into a merger agreement
with EDiX Corporation ("EDiX"), a provider of medical transcription services
with annual revenues of approximately $29 million. The acquisition, which is
subject to regulatory and EDiX shareholder approval and satisfaction of other
closing conditions, will be accounted for as a pooling of interests and is
scheduled to close in the second quarter of 1999. The merger agreement provides
for the issuance by the Company of shares of its Common Stock, subject to
certain exchange ratios, based on an acquisition value of $19,302,000. The
merger agreement provides, however, that in no event will the Company be
required to issue more than an aggregate of 1,000,000 shares of its Common
Stock.
Year Ended December 31, 1998 and 1997
Revenues. The Company's total revenues increased to $321.7 million in 1998
from $251.4 million in 1997, an increase of $70.3 million or 27.9%. Revenues
from systems sales increased to $178.6 million in 1998 (55.5% of total revenues)
from $134.5 million in 1997 (53.5% of total revenues), an increase of $44.1
million or 32.8%. The increase was primarily due to an increase in installations
of certain of the Company's systems. Revenues from maintenance and service fees
increased to $143.1 million in 1998 (44.5% of total revenues) from $116.9
million in 1997 (46.5% of total revenues), an increase of $26.2 million or
22.4%. Approximately $12.8 million of the increase was due to additional
maintenance revenue resulting from the continued growth in the Company's
installed client base. Professional and technical services revenues increased to
$28.8 million in 1998 (8.9% of total revenues) from $20.4 million in 1997 (8.1%
of total revenues), an increase of $8.4 million, or 41.2%, as a result of the
Company's increased marketing efforts in that area.
Cost of Sales. The cost of sales and services increased to $163.1 million
in 1998 from $130.4 million in 1997, an increase of $32.6 million or 25.0%. The
gross profit margin on systems sales and services increased to 49.3% in 1998
from 48.1% in 1997. The increase in cost of sales and services was partly the
result of growth in client services expenses, including maintenance,
installation, and consulting staff. Cost of sales also increased due to growth
in hardware sales. The increase in gross profit margin was due primarily to the
increase of additional license revenues in the installations of certain of the
Company's products from its IDXtend, Radiology, GPMS/IDXsite and LastWord
systems, as well as growth in service revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $61.7 million in 1998 from $51.7 million in
1997, an increase of $10.0 million or 19.3%. As a percentage of total revenues,
selling, general and administrative expenses decreased to 19.2% in 1998 from
20.6% in 1997. The additional expenses incurred in 1998 were primarily due to an
increase in the Company's sales and marketing staff.
Research and Development. Research and development expenses increased to
$46.6 million in 1998 from $36.3 million in 1997, an increase of $10.3 million
or 28.2%. The increase was due to the hiring of additional staff 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
slightly to 14.5% in 1998 from 14.4% in 1997. As described in Note 1 to the
consolidated financial statements, software development costs incurred
subsequent to the establishment of technological feasibility until general
release of the related products are capitalized. Prior to the merger with
PHAMIS, technological feasibility was determined differently by IDX and PHAMIS.
Subsequent to the merger, the Company's determination of technological
feasibility for all product development is based on the completion of a working
model which has been approved for beta site testing. Historically costs incurred
during beta site testing have not been material. Although the Company presently
expects costs to complete beta site testing in the future to be insignificant,
as the Company develops products to operate using other technologies as well as
more comprehensive clinical systems, the time and effort required to complete
beta site testing may be significantly more extensive. Consequently, capitalized
software development costs may become material in future reporting periods.
Merger and Related Costs. During the third quarter of 1997, the Company
recorded charges of $20.0 million related to the merger with PHAMIS. The charges
were comprised of transaction costs of $5.1 million, write-offs and adjustments
of $7.4 million of long-lived assets, principally capitalized software
development costs and equipment, attributable to the elimination of overlapping
and obsolete products and operations, employee termination and related costs
Page 18
of $2.7 million, and other merger related costs of $4.8 million, principally
related to integration costs incurred during the year and the termination of
leases and other contractual obligations. At December 31, 1997, accounts payable
and accrued expenses included accrued costs of $3.1 million related to the
termination of employees, leases and other contractual obligations,
substantially all of which were paid during 1997.
Write-off of Acquired In-Process Research and Development. 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 February 26, 1997, the Company recorded charges of $2.3 million related
to the acquisition of certain data model technology from Medaphis Healthcare
Information Technology Company for cash of $2.5 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 data model.
Income Taxes
Income taxes for the year ended December 31, 1998 were provided at 42%
which is more than the Company's historical statutory rate of 40%. This higher
rate is due to a portion of the charges incurred in the first quarter ended
March 31, 1998 related to the acquisition of Trego Systems, Inc. which are non-
deductible for income tax purposes.
Year Ended December 31, 1997 and 1996.
Revenues. The Company's total revenues increased to $251.4 million in 1997
from $206.9 million in 1996, an increase of $44.5 million or 21.5%. Revenues
from systems sales increased to $134.5 million in 1997 (53.5% of total revenues)
from $110.5 million in 1996 (53.4% of total revenues), an increase of $24.0
million or 21.7%. The increase was primarily due to an increase in installations
of the Company's IDXtend and LastWord systems. Revenues from maintenance and
service fees increased to $116.9 million in 1997 (46.5% of total revenues) from
$96.4 million in 1996 (46.6% of total revenues), an increase of $20.5 million or
21.3%. Approximately $11.1 million of the increase was due to additional
maintenance revenue resulting from the continued growth in the Company's
installed client base. Professional and technical services revenues increased to
$20.4 million in 1997 (8.1% of total revenues) from $12.6 million in 1996 (6.1%
of total revenues), an increase of $7.8 million or 61.9%, as a result of the
Company's increased marketing efforts in that area.
Cost of Sales. The cost of sales and services increased to $130.4 million
in 1997 from $108.3 million in 1996, an increase of $22.1 million or 20.4%. The
gross profit margin on systems sales and services increased to 48.1% in 1997
from 47.7% in 1996. The increase in gross profit margin was due primarily to the
increase of additional license revenues in the installations of certain of the
Company's products from its IDXtend and LastWord systems.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $51.7 million in 1997 from $45.9 million in
1996, an increase of $5.8 million or 12.6%. As a percentage of total revenues,
selling, general and administrative expenses decreased to 20.6% in 1997 from
22.2% in 1996. The additional expenses incurred in 1997 were primarily due to an
increase in the Company's sales and marketing staff.
Research and Development. Research and development expenses increased to
$36.3 million in 1997 from $29.8 million in 1996, an increase of $6.5 million or
21.8%. As a percentage of total revenues, research and development expenses
remained constant at 14.4% in 1997 and 1996. The increase was due to the hiring
of additional staff to support the development of additional products for the
Company.
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 were (i) distributed to stockholders of the
Company in connection with the Company's prior status as an S corporation under
the Internal Revenue Code of 1986, as amended, and (ii) used for general
corporate purposes, including working capital purposes and strategic
transactions, including acquisitions of businesses, products and technologies.
Page 19
Cash flows from operations are principally comprised of net income and
depreciation and are primarily affected by the net effect of the change in
accounts receivable, accounts payable and accrued expenses. Due to the nature of
the Company's business, accounts receivable, deferred revenue and accounts
payable fluctuate considerably due to, among other things, the length of the
sales cycle and installation efforts which are dependent upon the size of the
transaction, the changing business plans of the customer, the effectiveness of
customers' management and general economic conditions. In 1998 accounts
receivable from customers have been collected on average within 113 days. This
represents an increase of 16 days in terms of average days to collect
receivables from customers. The increase is attributable to Company's
implementation of a new billing system and unbilled receivables related to
contracts accounted for using long term contract accounting.
Cash flows related to investing activities have principally been related to
the purchase of computer and office equipment, leasehold improvements, and the
purchase and sale of investment grade marketable securities. The Company expects
these activities to continue. Investing activities may also include purchases of
interests in, 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 1998 other financing activities
related to the recapitalization of the real estate affiliate from debt to
equity.
Cash, cash equivalents and marketable securities at December 31, 1998 were
$124.5 million, an increase of $8.6 million from December 31, 1997. The majority
of the increase was due to the cash provided by operating activities and
proceeds related to the exercise of stock options. 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 December 31,
1998 or 1997.
The Company expects that its requirements for office facilities and other
office equipment will grow as staffing requirements dictate. The Company's
operating lease commitments consist primarily of office leasing for the
Company's operating facilities. The Company plans to continue increasing the
number of its professional staff during 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 December 1999. 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. On
February 4, 1999 the Company acquired a building in South Burlington, Vermont,
which will provide an additional 15,000 square feet of space. In addition, the
Company has entered into a contract to acquire a building in South Burlington
with 51,210 additional square feet of office space.
New Accounting Standards
In October, 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition",
revising certain aspects of SOP No. 91-1, which the Company adopted on January
1, 1998. SOP No. 97-2 did not materially affect the Company's revenue
recognition policies with respect to software license fees which are based upon
objective evidence that is specific to the vendor and relate principally to its
proprietary systems software which generally requires no significant production,
modification or customization. License revenue, accordingly, is recognized upon
delivery subject to specified milestones and dates.
The Company periodically enters into certain long-term contracts to which
SOP No. 81-1 "Accounting for Performance of Construction-Type and
Certain Production- Type Contracts" is applied. For these agreements, revenue is
recognized under a percentage of completion basis as appropriate measures of
completion for each contract are achieved.
Page 20
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" which the Company adopted on January 1,
1998. The adoption of this new accounting standard did not have a material
impact on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings per Share, which the Company adopted on December 31, 1997.
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is not
materially different from the previously reported fully diluted earnings per
share.
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. The Company views its operations and
manages its business as principally one segment, healthcare information
solutions that include software, hardware and related services. Substantially
all of the Company's operations are in the United States.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The SOP, which the
Company adopted as of December 31, 1998, requires the capitalization of certain
costs incurred in connection with developing or obtaining internal use software.
Prior to the adoption of SOP No. 98-1, the Company expensed all internal use
software related costs as incurred. The effect of adopting the SOP was to
increase net income for the year ended December 31, 1998 by $0.5 million or
$0.02 per diluted share.
Backlog
At December 31, 1998, the Company had total backlog of $266.2 million,
including $129.0 million attributable to systems sales and $137.2 million
attributable to services. Systems sales backlog consists of fees due under
signed contracts which have not yet been recognized as revenues. Service backlog
represents contracted software maintenance services, installation fees, and
remote computing services fees for a period of 12 months. At December 31, 1997,
the Company had total backlog of $203.1 million including $101.5 million
attributable to systems sales and $101.7 million attributable to services for
multiple years of services. Service backlog represents contracted software
maintenance services, installation fees, and remote computing services fees for
a period of 12 months or greater at December 31, 1997. Of the total 1998 backlog
of $266.2 million, the Company expects that $72.5 million will not be fulfilled
in the current fiscal year.
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
Page 21
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 and 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 December 31,
1998 it had completed approximately 41% of its efforts in connection with Year
2000 Issues relating to its Internal Use Systems. The projects comprising the
remaining 59% of such efforts are in process and are expected to be
substantially completed on or about the fourth quarter of 1999.
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 March 23, 1999, the Company had received
responses from approximately 64% of such third parties, and 80% 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.
Page 22
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 December 31, 1998 it had completed
approximately 84% of the development efforts relating to Year 2000 versions of
all of the Company Software Products. The projects comprising the remaining 16%
of these efforts are in process and expected to be substantially completed in
the third quarter of 1999. The Company estimates that as of December 31, 1998,
it had completed approximately 44% of the deployment efforts relating to Year
2000 versions of all Company Software Products. The projects comprising the
remaining 56% 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.
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 infrastructures affecting transportation.
Costs
The Company estimates that the cost of its efforts to successfully address
Year 2000 Issues will be approximately $19 million, of which approximately $6.2
million relates to Internal Use Systems and $12.8 million relates to Company
Software Products. Because 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. All expenditures to fund Year 2000
Issue efforts have been and will continue to be funded from operating
expenditures for fiscal years 1997 through early 2000, except for $.8 million,
which is expected to be incurred and capitalized in 1999. As of December 31,
1998, the Company had incurred approximately $8.1 million related to its Year
2000 Issue assessment, remediation, testing, and contingency planning efforts
identification, which is approximately 42% of the total projected costs of such
efforts. Of the amount of costs incurred to date, approximately $1.3 million
relates to Internal Use Systems, which is approximately 20% of the total of
estimated costs for such efforts, and $6.8 million relates to Company Software
Products, which is approximately 53% 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,
Page 23
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
Issues will 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.
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 relate 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.;
Page 24
. 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.
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 March 19, 1999 the last
reported sale price of IDX common stock was on the Nasdaq National Market was
$14.31 per share. On December 31, 1998, the last reported sale price of IDX
common stock on the Nasdaq National Market was $44.00. This represents a 67%
decline in the value of IDX stock since December 31, 1998.
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
declined 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, and $9.8 million in 1997. On March 5, 1999 IDX announced that based on
currently available information, the after tax loss for the first quarter ending
March 31, 1999 is expected to be ($5) to ($7) million. If these negative trends
were to continue, IDX would 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; and
. the sales and implementation cycles of IDX's customers.
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 PHAMIS, Inc. and EDiX. Since the acquisition in July 1997, the
integration of the operations and management of IDX and PHAMIS has and will
continue to:
. be a time-consuming process, particularly in regard to coordinating
product development and organizing customer support operations;
. require continued dedication of management resources, which has and
may continue to temporarily distract attention from the day-to-day
business of the combined entity; and
. cause IDX to incur significant merger and related costs including
additional unanticipated expenses.
IDX cannot assure you that it will complete this integration smoothly or
successfully.
Page 25
EDiX will present IDX operational challenges, particularly in the area of sales
coordination. In addition, 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;
. 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
Page 26
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.
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, 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 any of 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 proposals to reform the healthcare
system. If enacted, these proposals may increase government involvement in
healthcare, lower reimbursement rates and otherwise change the operating
environment for IDX's clients. 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 might have on its results of operations, financial condition or
business.
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
Page 27
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 you 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, 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 1998, IDX paid an aggregate of
approximately $4.24 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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Page 28
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(in thousands, except for per share data)
December 31
----------------
1998 1997
Assets
Current assets:
Cash and cash equivalents $ 10,953 $ 14,061
Securities available-for-sale 113,564 101,826
Accounts receivable, less allowance of $1,200 in 1998 and $1,268 in 1997 for
doubtful accounts 99,345 66,587
Refundable income taxes -- 6,080
Prepaid expenses 2,811 2,138
Other current assets 2,186 2,342
Deferred tax asset 4,720 4,159
-------- --------
Total current assets 233,579 197,193
Property and equipment:
Equipment and leasehold improvements, net of accumulated depreciation and
amortization 23,644 20,905
Real estate, net of accumulated depreciation 8,261 7,372
-------- --------
31,905 28,277
Other:
Capitalized software costs, net 665 368
Other assets 15,868 6,175
Deferred tax asset 2,307 5,305
-------- --------
18,840 11,848
-------- --------
Total assets $284,324 $237,318
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,609 $ 10,626
Accrued expenses 16,544 20,536
Federal and state taxes payable 5,429 --
Deferred revenue 18,239 21,538
Note payable and current portion of long-term debt 9 3,587
-------- --------
Total current liabilities 54,830 56,287
Long-term debt, less current portion -- 2,508
Commitments and contingencies
Minority interest 8,988 1,919
Stockholders' equity:
Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued
Common stock, par value $0.01 per share, 100,000 shares authorized,
issued and outstanding 26,560 and 26,029 in 1998 and 1997, respectively 265 260
Additional paid-in capital 142,317 128,658
Retained earnings 77,778 47,550
-------- --------
220,360 176,468
Cumulative unrealized gains (losses) on securities available-for-sale 146 136
-------- --------
Total stockholders' equity 220,506 176,604
-------- --------
Total liabilities and stockholders' equity $284,324 $237,318
======== ========
See accompanying notes.
Page 29
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(in thousands, except for per share data)
Year Ended December 31
------------------------------------
1998 1997 1996
--------- --------- -------
Revenues:
Systems sales $178,555 $134,499 $110,495
Maintenance and service fees 143,121 116,918 96,384
------------------------------------
Total revenues 321,676 251,417 206,879
Operating expenses:
Cost of sales 163,054 130,424 108,264
Selling, general and administrative 61,712 51,747 45,929
Research and development 46,565 36,312 29,768
Write-off of acquired research and development costs 3,201 2,290 --
Merger and related costs -- 20,030 292
------------------------------------
Total operating expenses 274,532 240,803 184,253
Operating income 47,144 10,614 22,626
Other (income) expense:
Interest income (6,357) (6,322) (5,532)
Interest expense 43 197 220
Minority interest 1,070 539 430
-------------------------------------
(5,244) (5,586) (4,882)
Income before income taxes 52,388 16,200 27,508
Income tax provision 22,160 8,238 10,848
------------------------------------
Net income $ 30,228 $ 7,962 $ 16,660
=====================================
Unrealized gain (loss) on securities
available-for-sale 10 143 (88)
------------------------------------
Comprehensive income $ 30,238 $ 8,105 $ 16,572
====================================
Basic net income per share $ 1.15 $ 0.31 $ 0.66
====================================
Basic weighted average shares outstanding 26,345 25,672 25,146
====================================
Diluted net income per share $ 1.11 $ 0.30 $ 0.64
====================================
Diluted weighted average shares outstanding 27,169 26,447 26,047
====================================
See accompanying notes.
Page 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Unrealized
Common Stock Gain (Loss) on
----------------- Additional Securities Total
Par Paid - in Retained Available- Stockholders'
Shares Value Capital Earnings for-Sale Equity
----------------------------------------------------------------------------------
Balances at December 31, 1995 24,693 $247 $107,255 $22,928 $ 81 $130,511
Stock issued upon exercise of
nonqualified stock options 8 56 56
Tax benefit related to
exercise of nonqualified stock
options 4,812 4,812
Stock issued upon exercise of
incentive stock options 569 6 3,037 3,043
Stock issued pursuant to
employee stock purchase plan 171 2 3,090 3,092
Stock issued to 401(k) plan 21 464 464
Change in unrealized
loss on securities
available-for-sale (88) (88)
Net income 16,660 16,660
---------------------------------------------------------------------------------
Balances at December 31, 1996 25,462 255 118,714 39,588 (7) 158,550
Stock issued upon exercise of
nonqualified stock options 73 1 1,153 1,154
Tax benefit related to
exercise of nonqualified
stock options 3,059 3,059
Stock issued upon exercise of
incentive stock options 419 4 3,887 3,891
Stock issued pursuant to
employee stock purchase plan 54 1,408 1,408
Stock issued to 401(k) plan 21 437 437
Change in unrealized gain
on securities
available-for-sale 143 143
Net income 7,962 7,962
---------------------------------------------------------------------------------
Balances at December 31, 1997 26,029 260 128,658 47,550 136 176,604
Stock issued upon exercise
of nonqualified stock options 137 1 3,971 3,972
Tax benefit related to
exercise of nonqualified
stock options 2,335 2,335
Stock issued upon exercise of
incentive stock options 293 3 4,277 4,280
Stock issued pursuant to
employee stock purchase plan 96 1 2,878 2,879
Stock issued to 401(k) plan 5 198 198
Change in unrealized gain
on securities
available-for-sale 10 10
Net income 30,228 30,228
---------------------------------------------------------------------------------
Balances at December 31, 1998 26,560 $ 265 $142,317 $77,778 $146 $220,506
=================================================================================
See accompanying notes.
Page 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31
--------------------------------
1998 1997 1996
---------- ----------- ---------
Operating Activities
Net income $30,228 $ 7,962 $ 16,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,176 8,872 7,327
Deferred tax provision (benefit), net of business acquisitions 2,937 (5,864) (1,664)
Increase (decrease) in allowance for doubtful accounts 269 593 360
Minority interest 1,070 539 430
Write-off of acquired in-process research and
development costs 3,201 2,290
Write-off of capitalized software costs and equipment
in connection with merger 7,406
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable (33,027) (18,065) (14,633)
Prepaid expenses and other assets 5,463 (2,984) (2,596)
Accounts payable 3,983 246 2,576
Accrued expenses (3,992) 10,644 545
Federal and state taxes payable 5,429 (6,815) (71)
Deferred revenue (3,299) 4,997 1,539
---------------------------------
Net cash provided by operating activities 23,438 9,821 10,473
Investing Activities
Purchase of property and equipment, net (14,602) (15,711) (8,891)
Purchase of securities available-for-sale (250,025) (151,537) (147,056)
Proceeds from sale of securities available-for-sale 238,297 150,919 112,297
Business acquisitions (5,293) (2,500)
Other assets (8,501) (1,649) (3,397)
----------------------------------
Net cash used in investing activities (40,124) (20,478) (47,047)
Financing Activities
Proceeds from sale of common stock 11,329 6,890 6,655
Tax benefit related to exercise of nonqualified
stock options 2,335 3,059 4,812
Contributions to (distributions from) affiliates, net 6,000 (700) 467
Proceeds from note payable 3,350
Principal repayments of long-term debt (6,086) (208) (783)
---------------------------------
Net cash provided by financing activities 13,578 12,391 11,151
---------------------------------
Increase (decrease) in cash and cash equivalents (3,108) 1,734 (25,423)
Cash and cash equivalents at beginning of year 14,061 12,327 37,750
---------------------------------
Cash and cash equivalents at end of year 10,953 14,061 12,327
=================================
Supplemental Cash Flow Information
Cash paid for interest $ 43 $ 190 $ 158
=================================
Cash paid for income taxes $5,362 $17,382 $ 8,321
=================================
See accompanying notes.
Page 32
IDX SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Significant Accounting Policies
Nature of Business
IDX Systems Corporation (IDX or the Company) provides healthcare
information systems and services to large integrated healthcare delivery
enterprises principally located in the United States. Revenues are derived from
the licensing of software, and the provision of maintenance and services related
to systems sales.
In July 1997, IDX completed its merger (Merger) with PHAMIS, Inc. (PHAMIS)
in a stock for stock transaction. The transaction, which was accounted for as a
pooling-of-interests, was effected through the exchange of .73 shares of IDX
common stock in exchange for each PHAMIS share outstanding. Approximately 4.6
million shares of common stock were issued in connection with the Merger. PHAMIS
was a Seattle-based provider of enterprise-wide, patient-centered healthcare
information systems.
The consolidated financial statements for all periods prior to the Merger
have been restated to include the accounts and results of operations of PHAMIS.
No adjustments were required to conform the financial reporting policies of IDX
and PHAMIS for the periods presented.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its subsidiaries and a real estate trust. Investments in entities, representing
an ownership interest of less than 20%, are accounted for under the cost method.
The Company leases a substantial portion of its space, including its
corporate headquarters and certain sales and support offices, from real estate
partnerships and trusts owned by stockholders and certain key employees of the
Company. These real estate partnerships and trusts include 116 Huntington Avenue
Limited Partnership ("HLP"), BDP Realty Associates ("BDP") and other real estate
partnerships and trusts ("REPs"). The Company's consolidated financial
statements include the accounts of the Company and BDP whose real estate is
leased exclusively by the Company and for which the Company is subject to
substantially all the risks of ownership. Real estate owned by HLP and REPs is
leased to the Company under operating leases. All transactions between the
Company and BDP are eliminated. Minority interest represents net income and
equity of BDP.
Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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. The Company views its operations and manages its business as
principally one segment, healthcare information solutions that include software,
hardware and related services.
Substantially all of the Company's operations are in the United States. No
one customer accounted for 10% or more of the Company's revenues in 1998, 1997,
or 1996. As a result, the financial information disclosed herein represents all
of the material financial information related to the Company's principal
operating segment.
Page 33
Revenue Recognition
In 1997 and 1996, the Company recognized revenue in accordance with the
provisions of Statement of Position (SOP) No. 91-1, "Software Revenue
Recognition." In October 1997, the American Institute of Certified Public
Accountants issued SOP No. 97-2, "Software Revenue Recognition," which
supersedes SOP 91-1. In 1998 the Company adopted SOP No. 97-2, as amended by SOP
No. 98-4, which generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of those elements. The fair value of an element must be
based on objective evidence that is specific to the vendor. If the vendor does
not have evidence of the fair value for all the elements in a multiple-element
arrangement, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered. Additionally, the Company
periodically enters into certain long term contracts to which SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts," is applied. For these agreements, revenue is recognized under a
percentage of completion basis as appropriate measures of completion for each
contract are achieved. The Company also generates service revenues from the sale
of product maintenance contracts and consulting contracts.
Accordingly, revenue from software licensing arrangements is principally
recognized upon delivery subject to specified milestones and dates. Revenue from
consulting services is recognized in the period in which services are performed.
Revenue from hardware sales is recognized upon delivery. Revenue from
maintenance contracts is recognized ratably over the term of the support period,
which is typically one year.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" which the Company adopted on January 1, 1998.
The adoption of this new accounting standard is reflected in the Company's
consolidated statements of income and comprehensive income.
Research and Development Costs
Research and development costs are expensed as incurred. Software
development costs incurred after the establishment of technological feasibility
and until the product is available for general release are capitalized, provided
recoverability is reasonably assured. Technological feasibility is established
upon the completion of a working model. Software development costs, when
material, are stated at the lower of unamortized cost or net realizable value.
Net realizable value for each software product is assessed based on anticipated
profitability applicable to sales of the related product in future periods.
Amortization of capitalized software costs begins when the related product is
available for general release to customers and is provided for each product
based on the greater of the amount computed using (i) the ratio of current gross
revenues to total current and anticipated future gross revenues for the related
software or (ii) the straight-line method over a three-year life or the
product's estimated economic life, if shorter. Capitalized software development
costs of $665,000 and $368,000 at December 31, 1998 and 1997, respectively, net
of accumulated amortization, are included in other assets in the accompanying
balance sheets. Amortization of capitalized software amounted to $203,000,
$806,000 and $1,337,000 in 1998, 1997 and 1996, respectively. In connection
with the Merger, the Company wrote-off $5.6 million of capitalized software
development costs attributable to the elimination of overlapping and obsolete
products.
Cash Equivalents
The Company considers highly liquid investments generally with a maturity
of three months or less when purchased, to be cash equivalents. Cash equivalents
are stated at cost, which approximates market value.
Risks and Uncertainties
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents,
securities available-for-sale and trade receivables.
Page 34
The Company invests excess cash primarily in money market mutual funds and
tax exempt municipal funds with high credit ratings, debt securities with highly
rated issuers and treasury notes and bonds issued by the United States
Government and the State of Vermont.
The Company's customers are substantially all large integrated healthcare
delivery enterprises principally located in the United States. To reduce credit
risk, the Company performs ongoing credit evaluations of the financial condition
of its customers and generally does not require collateral. Although the
Company is directly affected by the overall financial condition of the
healthcare industry, management does not believe significant credit risk exists
at December 31, 1998. The Company's losses related to collection of trade
accounts receivables have consistently been within management's expectations.
Significant Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates and assumptions by management affect the
Company's allowance for doubtful accounts, revenue recognition and certain
accrued expenses. Actual results could differ from those estimates.
Investment Securities
The Company accounts for investment securities based on SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
provides the accounting and reporting requirements for investments in securities
that have readily determinable fair values and for all investments in debt
securities. All of the Company's investments have been classified as available-
for-sale securities at December 31, 1998 and 1997. Available-for-sale securities
are carried at fair value with unrealized gains and losses reported as a
component of stockholders' equity and comprehensive income.
Property and Equipment
Real estate, which includes land, buildings and related improvements owned
by BDP, is stated at cost. Buildings and related improvements are depreciated
using the straight-line method over their estimated useful lives of 30 to 40
years.
Equipment is stated at cost and is depreciated over its estimated useful
life by using the straight-line method. Equipment under capital leases is stated
at the lower of the present value of minimum lease payments discounted at the
Company's incremental borrowing rate at the beginning of the lease term or fair
value at the inception of the lease. Depreciation is generally computed based on
useful lives of two to five years for computer equipment and software and five
to ten years for furniture and fixtures. Leasehold improvements are amortized
using the straight-line method over the lesser of the term of the respective
lease or the estimated useful life of the asset.
The Company includes costs of developing and obtaining software for
internal use, following its adoption of SOP No.98-1, "Accounting for the Costs
of Computer Software Developed for Internal Use", in Property and Equipment.
Long Lived Asset Impairment
In accordance with SFAS No. 121 "Impairment of Long Lived Assets and Long
Lived Assets to be Disposed of", 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.
Income Taxes
The Company accounts for income taxes using the liability method as
required by SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred income taxes are recognized for the future tax consequences of
differences between the tax and financial accounting of assets and liabilities
at each year end. Deferred income taxes are based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Page 35
Stock-based Compensation
The Company grants stock options to employees for a fixed number of shares
with an exercise price equal to the fair value of the shares at the date of the
grant. The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Stock options and other stock-based awards to non-employees are
accounted for based on the provisions of SFAS No. 123.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share.
All net income per share amounts for all periods have been presented to conform
to the SFAS No. 128 requirements.
2. Business Combinations
On May 5, 1998, the Company acquired the net assets of Laureate Enterprises
Inc. a provider of project and process consulting services for cash of $1.3
million. The acquisition was accounted for under the purchase method.
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.
In February 1997, the Company acquired certain data model technology from
Medaphis Healthcare Information Technology Company for cash of $2.5 million. The
acquisition was accounted for under the purchase method. Approximately $2.3
million of the purchase price was expensed as in-process research and
development in connection with the Company's development of a healthcare data
model.
Had these acquisitions occurred as of the beginning of the years in which
they occurred, the pro forma operating results for 1998 and 1997 would not be
materially different than as reported in the accompanying consolidated financial
statements.
In July 1997, the Company completed the Merger with PHAMIS which became a
wholly-owned subsidiary of the Company. The transaction was accounted for as a
pooling-of-interests and accordingly, the accompanying financial statements
include the accounts of PHAMIS for all periods presented. In connection with the
Merger, the Company incurred approximately $20 million of merger and related
costs consisting principally of transaction costs of $5.1 million, write-offs
and adjustments of $7.4 million of long-lived assets, primarily capitalized
software development costs and equipment due to the elimination of overlapping
and obsolete products and operations, employee termination and related costs of
$2.7 million and other merger related costs of $4.8 million related to
integration costs incurred during the year and the termination of leases and
other contractual obligations.
Page 36
The results of operations previously reported by the separate enterprises
and the consolidated amounts for the year ended December 31, 1996 and the six
months ended June 30, 1997 are summarized below.
Six months ended Year ended December 31,
June 30, 1997 1996
(in thousands)
Total revenues:
IDX $ 92,606 $157,579
PHAMIS 24,385 49,300
-------- --------
Consolidated $116,991 $206,879
======== ========
Net income (loss):
IDX $ 8,417 $ 14,882
PHAMIS (44) 1,778
-------- --------
Consolidated $ 8,373 $ 16,660
======== ========
On September 11, 1998, the Company entered into a merger agreement with
EDiX Corporation, a provider of medical transcription services with annual
revenues of approximately $29 million. The acquisition, which is subject to
regulatory and EDiX shareholder approval and satisfaction of other closing
conditions, will be accounted for as a pooling of interests and is scheduled to
close in the second quarter of 1999. The merger agreement provides for the
issuance by the Company of shares of its Common Stock, subject to certain
exchange ratios, based on an acquisition value of $19,302,000. The merger
agreement provides, however, that in no event will the Company be required to
issue more than an aggregate of 1,000,000 shares of its Common Stock.
3. Securities Available-for-Sale
The following is a summary of securities available-for-sale at December 31,
1998 and 1997:
Gross Gross Gross Estimated
Unrealized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------- ----------- ---------
(in thousands)
December 31, 1998
U.S. government securities.... $ 17,357 $ 49 $ $ 17,406
Other debt securities......... 23,762 51 23,813
-------- ------- -------- --------
Total debt securities....... 41,119 100 41,219
Tax-deferred municipal funds.. 36,958 46 37,004
Money market fund............. 35,341 35,341
-------- ------- -------- --------
$113,418 $ 146 $ $113,564
======== ======= ========= ========
December 31, 1997
U.S. government securities.... $31,292 $ 75 $ (8) $ 31,359
Other debt securities......... 10,995 33 (6) 11,022
------- ------- -------- --------
Total debt securities......... 42,287 108 (14) 42,381
Tax-deferred municipal funds.. 25,181 46 (4) 25,223
Money market fund............. 34,222 34,222
-------- ------- -------- --------
$101,690 $ 154 $ (18) $101,826
======== ======= ======== ========
The net unrealized gain on securities available-for-sale included as a
separate component of stockholders' equity totaled $146,000 and $136,000 at
December 31, 1998 and 1997, respectively.
Page 37
The amortized cost and estimated fair value of debt securities at December
31, 1998, by contractual maturity, are shown below.
Estimated
Cost Fair Value
---- ----------
(in thousands)
Due in one year or less........................................... $107,995 $108,068
Due after one year through three years............................ 3,709 3,752
Due after three years............................................. 1,714 1,744
-------- --------
$113,418 $113,564
======== ========
4. Property and Equipment
Equipment and leasehold improvements consists of the following:
December 31
1998 1997
-------- ---------
(in thousands)
Computer equipment and software................................... $ 43,415 $ 32,954
Furniture and fixtures............................................ 7,665 6,567
Leasehold improvements............................................ 7,349 7,334
-------- --------
58,429 46,855
Less accumulated depreciation and amortization.................... 34,785 25,950
-------- --------
$ 23,644 $ 20,905
========= ========
Real estate consists of the following:
December 31
1998 1997
--------- --------
(in thousands)
Corporate headquarters............................................. $ 9,903 $ 8,794
Less accumulated depreciation...................................... 1,642 1,422
-------- --------
$ 8,261 $ 7,372
======== ========
5. Other Investments and Advances
In February 1996, PHAMIS signed a Distribution Agreement (the Agreement)
with Point-of-Care Systems Inc., a software developer of mobile computing
solutions for the home healthcare marketplace. The Agreement allows PHAMIS to
distribute the home healthcare solutions throughout its direct sales network. In
addition to the Agreement, PHAMIS purchased a minority equity interest in the
developer for approximately $950,000 in cash. During 1997 and 1998 an
appropriate additional $600,000 was invested by the Company. The equity interest
is accounted for under the cost method of accounting.
During 1996 and 1997 the Company advanced $511,000 to PICIS, a company that
develops, markets and supports CareSuite which is an integrated critical care
and perioperative software solution. The Company is a distributor of PICIS'
products in North America.
On September 11, 1998, the Company signed a definitive agreement to acquire
EDiX Corporation, a provider of medical transcription outsourcing services to
hospitals and large physician group practices. During 1998 the Company advanced
loans to EDiX under a term loan agreement in the amount of $3,000,000.
Page 38
6. Accrued Expenses
Accrued expenses consist of the following:
December 31,
1998 1997
(in thousands)
----------------
Employee compensation and benefits.... $12,326 $12,653
Merger related costs.................. 3,098
Other................................. 4,218 4,785
------- -------
$16,544 $20,536
======= =======
7. Financing Arrangements
Under a line of credit arrangement with a bank, the Company may borrow up
to $5,000,000 on a demand basis subject to terms and conditions upon which the
Company and the bank may mutually agree. The line of credit arrangement expires
on May 31, 1999. At December 31, 1998 and for each of the three years in the
period then ended, there were no borrowings under this arrangement.
BDP had a $4,000,000 demand line of credit agreement with a bank, under
which borrowings of $3,350,000, bearing interest of 7.4%, were outstanding at
December 31, 1997. These borrowings were repaid in January 1998.
Long-term debt, repaid in 1998, consisted of the following as of December
31, 1997:
(in thousands)
Obligation under industrial revenue bond, principal
installments of $200, interest at a floating
variable rate (4.45% at December 31, 1997),
secured by real estate owned by BDP................. $2,700
Other................................................ 45
------
2,745
Less current portion................................. 237
------
Long-term debt....................................... $2,508
======
Page 39
Operating Leases
The Company leases approximately 47% of the office space in a commercial
office building owned by HLP. HLP is owned and controlled by stockholders and
certain key employees of the Company. At December 31, 1998, future obligations
due under the operating lease with HLP, REPs and unrelated parties for sales and
support offices are as follows:
Unrelated
HLP REPs Sub Total Parties Total
--------- ------- --------- ------- -------
(in thousands)
Year ending December 31:
1999..................... $ 2,462 $ 454 $ 2,916 $ 7,135 $10,051
2000..................... 2,673 454 3,127 6,948 10,075
2001..................... 2,673 454 3,127 6,958 10,085
2002..................... 2,673 206 2,879 6,582 9,461
2003..................... 2,673 0 2,673 4,089 6,762
Thereafter............... 30,866 0 30,866 9,832 40,698
------- ------- ------- ------- -------
$44,020 $ 1,568 $45,588 $41,544 $87,132
======= ======= ======= ======= =======
Total rent expense amounted to $7,971,000, $6,906,000 and $5,563,000,
during 1998, 1997 and 1996, respectively. Total rent expense includes
$2,898,000, $3,024,000 and $2,621,000 in 1998, 1997 and 1996, respectively,
related to the lease with HLP. Total rent expense includes $525,000, $448,000
and $381,000 in 1998, 1997 and 1996, respectively, related to the leases with
REPs.
8. Income Taxes
The provision for income taxes consists of the following:
1998 1997 1996
------- -------- --------
(in thousands)
Currently payable:
Federal................................. $15,918 $11,282 $10,317
State................................... 3,805 2,820 2,195
------- ------- -------
19,723 14,102 12,512
Deferred (benefit), principally Federal.. 2,437 (5,864) (1,664)
------- ------- -------
$22,160 $ 8,238 $10,848
======= ======= =======
A reconciliation of the federal statutory rate to the effective income tax
rate during 1998, 1997 and 1996 is as follows:
1998 1997 1996
----- ----- -----
Tax at federal statutory rate............ 35.0% 35.0% 35.0%
State taxes, net of federal benefit...... 5.5 5.5 5.2
Non-deductible costs of acquisitions..... 2.4 10.4 (.2)
Other, net............................... (.6) (.6)
---- ----- -----
42.3% 50.9% 39.4%
===== ===== =====
Page 40
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
1998 1997
------ ------
(In thousands)
Deferred tax assets:
Allowances and accruals............................................................... $ 3,317 $ 6,101
Depreciation.......................................................................... 2,307 2,049
Deferred revenue...................................................................... 1,403 1,314
------- -------
Total deferred tax assets.......................................................... 7,027 9,464
Less current portion............................................................... 4,720 4,159
------- -------
$ 2,307 $ 5,305
======= =======
9. Net Income Per Share
The following sets forth the computation of basic and diluted earnings per
share:
1998 1997
------- --------
....................................................................................
Numerator:
Net income............................................................................ $30,228 $ 7,962
------- -------
Numerator for basic and diluted earnings per share................................... $30,228 $ 7,962
Denominator:
Denominator for basic earnings per share--
weighted-average share.............................................................. 26,345 25,672
Effect of employee stock options...................................................... 824 775
------- -------
Denominator for diluted earnings per share........................................... 27,169 26,447
======= =======
Basic earnings per share............................................................... $1.15 $ 0.31
======= =======
Diluted earnings per share............................................................. $1.11 $ 0.30
======= =======
10. Benefit Plans
Retirement Plans:
Profit Sharing Retirement Plan
The Company maintains a profit sharing retirement plan for all IDX
employees meeting age and service requirements. In 1998 PHAMIS employees are not
eligible for the profit sharing retirement plan due to their eligibility in the
PHAMIS 401(k) plan described below. Effective January 1, 1999 PHAMIS employees
are eligible for profit sharing contributions when the former PHAMIS 401(k) plan
is merged into the new IDX Systems Corporation Retirement Income Plan. The
contributions to the plan are discretionary, as determined by the Board of
Directors. The Company expects to continue the plan indefinitely; however, IDX
has reserved the right to modify, amend or terminate the plan. For the years
ended December 31, 1998, 1997 and 1996, the Company has expensed $4,184,000,
$4,316,000 and $2,840,000, respectively.
401(k) Retirement Savings Plan
During 1998, the Company maintained a 401(k) retirement savings plan in
which all PHAMIS full-time employees are eligible to participate. Effective
January 1, 1999 the PHAMIS 401(k) retirement savings plan merged into the new
Page 41
IDX Systems Corporation Retirement Income Plan and the Company's stock was not
an available investment election. Participants become eligible for the
employer-matching contribution on the first day of the calendar quarter
immediately following the completion of one year of service. Prior to the
Merger, the Company matched 50% of participant contributions up to a maximum
contribution of $1,500 per employee in company stock. The 401(k) retirement
savings plan was amended in July 1997 to provide for the Company match to be
made in cash. Matching contributions to the plan were $413,000, $357,000 and
$320,000 in the years ended December 31, 1998, 1997 and 1996, respectively. A
total of 240,000 shares of Common Stock have been reserved for issuance under
the 401(k) retirement savings plan.
Stock Purchase Plans
In September 1995, IDX's Board of Directors and stockholders approved the
1995 Employee Stock Purchase Plan, as amended in July 1997, (the "ESPP") under
which eligible employees may purchase Common Stock at a price per share equal to
85% of the lower of the fair market value of the Common Stock at the beginning
or end of each offering period. Participation in the offering is limited to 10%
of an employee's compensation (not to exceed amounts allowed under Section 423
of the Internal Revenue Code), may be terminated at any time by the employee and
automatically ends on termination of employment with the Company. A total of
1,400,000 shares of Common Stock have been reserved for issuance under this
plan. During the years ended December 31, 1998, 1997 and 1996, an aggregate of
approximately 96,000, 54,000, and 171,000 shares, respectively, were purchased
under these stock purchase plans.
Stock Option Plans:
IDX Option Plans
During 1985 and 1994, the Company established incentive stock option plans
providing for the grant of options for the issuance of 959,540 and 183,200
shares, respectively, of Common Stock. Options were granted at fair market value
at the time of grant and became immediately exercisable at the time of the
initial public offering. The options expire on the tenth anniversary of the date
of the grant or upon termination of employment. The 1994 Plan was terminated
upon the completion of the initial public offering. The 1985 Plan was terminated
for purposes of prospective eligibility in March 1995. At December 31, 1998,
options to purchase 55,850 and 130,600 shares of Common Stock were outstanding
and exercisable under the 1994 Plan and the 1985 Plan, respectively.
In September 1995, the Company's stockholders approved the 1995 Stock
Option Plan as amended in July 1997, (the "1995 Option Plan"). The 1995 Option
Plan provides for the grant of stock options to employees, officers and
directors of, and consultants or advisors to, the Company. Under the 1995 Option
Plan, the Company may grant options that are intended to qualify as incentive
stock options under provisions of the Internal Revenue Code or options not
intended to qualify as incentive stock options. The option grants, exercise
price, vesting and expiration are authorized by a compensation committee
comprised of certain of the Company's directors. A total of 4,500,000 shares of
Common Stock may be issued upon the exercise of options granted under the 1995
Option Plan. At December 31, 1998, options to purchase 1,459,172 shares of
Common Stock were outstanding under the 1995 Option Plan, of which 434,189 were
exercisable.
In September 1995, IDX's Board of Directors approved the 1995 Director
Stock Option Plan as amended in May and July 1997, (the "IDX Director Plan"),
which provides that each non-employee director of the Company be granted an
option to acquire 2,000 shares of Common Stock on the date that person becomes a
director but, in any event, not earlier than the effective date of the IDX
Director Plan. Options are granted at a price equal to the fair market value on
the date of grant. The option becomes exercisable on the first anniversary of
the date of grant, and the term of the option is ten years from the date of
grant. The Company has reserved 80,000 shares of Common Stock for issuance under
the IDX Director Plan. At December 31, 1998, options to purchase 13,940 shares
of Common Stock were outstanding under the IDX Director Plan of which 9,596
where exercisable.
PHAMIS Stock Option Plans
Options to purchase shares of PHAMIS Common Stock under the PHAMIS, Inc.
Amended and Restated 1983 Combined Nonqualified and Incentive Stock Option Plan
(the "1983 Option Plan"), the PHAMIS, Inc. 1993 Combined Incentive and
Nonqualified Stock Option Plan (the "1993 Option Plan") and the PHAMIS, Inc.
1994 Nonemployee Director Stock Option Plan (the "PHAMIS Director Plan") which
were outstanding at the effective date of the Merger were effectively assumed by
IDX based on the exchange ratio of .73 shares of IDX Common Stock for each share
of PHAMIS
Page 42
Common Stock. Pursuant to the terms of the aforementioned plans, all unvested
and unexercisable option grants were fully vested and became exercisable
immediately prior to the Merger. The aforementioned PHAMIS plans were terminated
for purposes of prospective eligibility at the effective time of the Merger. At
December 31, 1998, options to purchase 12,862, 96,950 and 3,650 shares of IDX
Common Stock were outstanding and exercisable under the 1983 Option Plan, the
1993 Option Plan and the PHAMIS Director Plan, respectively.
Stock Based Compensation
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options and shares issued pursuant to the ESPP
under the fair value method of that Statement. The fair value for these options
and shares issued pursuant to the ESPP were estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Options ESPP
-------- -----
1998 1997 1996 1998 1997 1996
-------- ----- ----- ----- ----- -----
Expected life (years).. 6.4 6.3 6.3 .5 .5 .55
Interest rate.......... 5.7% 6.0% 6.4% 5.5% 6.1% 6.3%
Volatility............. 41.4% 42.7% 43.3% 41.4% 42.7% 40.4%
Dividend yield......... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for net income per share
information):
1998 1997 1996
------ ------ -------
Pro forma net income............ $26,320 $ 467 $14,285
Pro forma net income per share.. $ 0.97 $0.02 $ 0.55
Pro forma net income and net income per share in 1997 includes the effect
of accelerated vesting of all outstanding options of PHAMIS as of the merger.
The effect of accelerated vesting was to reduce pro forma net income in 1997
from $3,812,000 to $467,000 and to reduce pro forma net income per share from
$0.15 to $0.02.
The effects on 1996, 1997 and 1998 pro forma net income and net income per
share of expensing the estimated fair value of stock options and shares issued
pursuant to the ESPP are not necessarily representative of the effects on
reporting the results of operations for future years as the periods presented
include only one, two and three years of option grants under the Company's
plans.
Page 43
Stock Based Compensation (continued)
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
1998 1997 1996
---------- ---------- --------
Weighted Weighted Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at beginning of
year 2,078,927 $24.73 1,950,916 $ 17.88 1,702,936 $ 8.18
Granted 173,602 $42.17 679,129 $ 30.78 873,906 $28.54
Exercised (424,051) $19.03 (494,706) $ 12.28 (579,130) $ 5.16
Forfeited (55,454) $32.28 (56,412) $ 25.18 (46,796) $21.54
--------- ------ --------- -------- --------- ------
Outstanding at end of year 1,773,024 $27.56 2,078,927 $ 24.73 1,950,916 $17.88
========= ====== ========= ======== ========= ======
Exercisable at end of year 743,697 $21.23 805,073 $ 16.73 777,732 $ 7.22
========= ====== ========= ======== ========= ======
Weighted-average fair value of
options granted during the
year $21.10 $ 16.56 $14.94
Available for future grants 2,435,276 2,553,424 821,578
========= ========= ========
The following table presents weighted-average price and life information
about significant option groups outstanding at December 31, 1998:
Options Outstanding Options Exercisable
---------------------------- -------------------
Weighted- Weighted- Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ----------------------------------------------------------------------------------------
$4.32 - $18.00 386,530 5.62 years $11.09 320,592 $ 9.67
$20.72 - $30.25 188,857 7.52 years $27.65 105,512 $26.19
$30.63 - $31.22 497,962 7.88 years $30.72 202,943 $30.68
$31.56 - $51.19 699,675 8.80 years $34.39 114,650 $32.24
--------- -------
1,773,024 743,697
========= =======
Page 44
11. Quarterly Information (Unaduited)
A summary of operating results for the quarterly periods in the two years ended
December 31, 1998 is set forth below:
Quarter Ended
--------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
-------- --------- ------------ ----------- --------
(in thousands, except per share amounts)
Year ended December 31, 1998
Total revenues............................... $72,737 $79,364 $83,358 $86,217 $321,676
Gross profit................................. 35,489 38,956 40,954 43,223 158,622
Net income................................... 4,402 8,106 8,465 9,255 30,228
Net income per share - basic................. $ 0.17 $ 0.31 $ 0.32 $ 0.35 $ 1.15
Net income per share - diluted............... $ 0.16 $ 0.30 $ 0.31 $ 0.34 $ 1.11
Year ended December 31, 1997
Total revenues............................... $59,559 $57,432 $64,598 $69,828 $251,417
Gross profit................................. 29,595 26,371 30,986 34,041 120,993
Net income (loss)............................ 4,498 3,875 (7,355) 6,944 7,962
Net income (loss) per share -
basic....................................... $ 0.18 $ 0.15 $( 0.29) $ 0.27 $ 0.31
Net income (loss) per share -
diluted..................................... $ 0.17 $ 0.15 $ (0.29) $ 0.26 $ 0.30
The first three quarters of 1997 net income (loss) per share amounts have
been restated to comply with SFAS No. 128, "Earnings per Share," and to reflect
the Merger with PHAMIS which was accounted for as a pooling of interests.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Bad Debts Balance at
Beginning Costs and Other Written Off Net End of
Description of Period Expenses Accounts of Collections Period
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Allowance for doubtful accounts $1,268,000 $269,000 $137,000 $1,200,000
Year ended December 31, 1997:
Allowance for doubtful accounts $ 787,000 $593,000 $112,000 $1,268,000
Year ended December 31, 1996:
Allowance for doubtful accounts $ 592,000 $360,000 $165,000 $ 787,000
Page 45
REPORT OF INDEPENDENT AUDITORS
Board of Directors
IDX Systems Corporation
We have audited the accompanying consolidated balance sheets of IDX Systems
Corporation, its subsidiaries and affiliate as of December 31, 1998 and 1997,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the 1996 financial statements of PHAMIS, Inc., a
wholly-owned subsidiary, which statements reflect total revenues of $49,300,000
for the year ended December 31, 1996. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for PHAMIS, Inc., is based solely on the report of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of IDX Systems Corporation, its subsidiaries
and affiliate at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
Effective January 1, 1998, the Company adopted Statement of Position (SOP)
97-2 "Software Revenue Recognition" as amended by SOP 98-4, and SOP 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."
Ernst & Young LLP
Boston, Massachusetts
February 2, 1999
Page 46
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
PHAMIS, Inc.:
We have audited the consolidated statements of income, shareholders' equity and
cash flows of PHAMIS, Inc. and subsidiaries for the year ended December 31, 1996
(not presented separately herein). The financial statements of PHAMIS, Inc. and
subsidiaries are the responsibility of the Company's management. Our
responsibility is to express an opinion on the PHAMIS, Inc. and subsidiaries'
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
PHAMIS, Inc. and subsidiaries for the year ended December 31,1996 in conformity
with generally accepted accounting principles.
KPMG LLP
Seattle, Washington
January 31, 1997, except for
note 14 to the PHAMIS, Inc.
and subsidiaries' consolidated
financial statements, which is
as of March 25, 1997
Page 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's
accountants on accounting or financial disclosure during the two most recent
fiscal years or any subsequent interim period.
PART III
Item 10. Directors and Officers of the Registrant
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I hereof, and the remainder is contained in
the Company's 1998 Proxy Statement under the caption "Election of Directors" and
is incorporated herein by reference. Information relating to delinquent filings
of Forms 3, 4 and 5 of the Company is contained in the Company's 1999 Proxy
Statement under the caption "Compliance with Section 16 Reporting Requirements."
Item 11. Executive Compensation
The response to this item is contained in this Company's 1999 Proxy
Statement under the captions "Board of Directors Compensation" and "Compensation
of Executive Officers" and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is contained in the Company's 1999 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The response to this item is contained in the Company's 1999 Proxy
Statement under the captions "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following consolidated financial statements of IDX Systems Corporation
are included in Item 8.
1. Consolidated Balance Sheets at December 31, 1998 and 1997.............
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996.
Consolidated Statements of Stockholders' Equity for the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996.
Notes to the Consolidated Financial Statements........................
Report of Independent Auditors on Financial Statements................
2. The consolidated financial statement Schedule II is included in Item 8.
All other schedules are omitted as the information required is inapplicable.
3. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits
are filed as a part of this Annual Report on Form 10-K.
(b) No Current Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
Page 48
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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 on the 30th day of
March, 1999.
IDX SYSTEMS CORPORATION
By: /s/ Richard E. Tarrant
------------------------------
Richard E. Tarrant,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------- ---------------------- --------------
/s/ Richard E. Tarrant Chief Executive March 30, 1999
- ----------------------- Officer and Director
Richard E. Tarrant (Principal Executive Officer)
/s/ James H. Crook, Jr. President and Chief Operating March 30, 1999
- ------------------------ Officer
James H. Crook, Jr.
/s/ John A. Kane Vice President, Finance March 30, 1999
- ------------------------ and Administration, Chief
John A. Kane Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Henry M. Tufo Director March 30, 1999
- ------------------------
Henry M. Tufo, M.D.
/s/ Robert H. Hoehl Director March 30, 1999
- ------------------------
Robert H. Hoehl
/s/ Stuart H. Altman Director March 30, 1999
- -------------------------
Stuart H. Altman, Ph.D.
/s/ Steven M. Lash Director March 30, 1999
- -------------------------
Steven M. Lash
Page 49
/s/ Frank T. Sample Director March 30, 1999
- -------------------------
Frank T. Sample
/s/ Mark F. Wheeler Director March 30, 1999
- -------------------------
Mark F. Wheeler, M.D.
/s/ Allen Martin Director March 30, 1999
- -------------------------
Allen Martin, Esq.
Page 50
Exhibit Index
The following exhibits are filed as part of this Annual Report on Form 10-K.
Exhibit No. Description
- ----------- -----------
3.1* Second Amended and Restated Articles of Incorporation.
3.2* Second Amended and Restated Bylaws.
4.1* Specimen Certificate for shares of Common Stock, $.01 par value,
of the Registrant.
10.1#* 1985 Incentive Stock Option Plan.
10.2#* 1994 Incentive Stock Option Plan.
10.3#* 1995 Stock Option Plan.
10.4#* 1995 Director Stock Option Plan.
10.5#* 1995 Employee Stock Purchase Plan.
10.6#* Description of Registrant's Executive Bonus Plan.
10.7* Agreement between Richard E. Tarrant, Robert H. Hoehl and Paul
L. Egerman dated as of June 24, 1994.
10.8* Agreement between the Registrant, Richard E. Tarrant, Robert H.
Hoehl and Paul L.Egerman dated as of September 18, 1995.
10.9#* Amended and Restated Consulting/Employment Agreement between
the Registrant and Henry M. Tufo, dated as of March 7, 1995,
and related Letter Agreement between Mr. Tufo and the
Registrant dated August 11, 1995.
10.10* Employment, Noncompetition and Nondisclosure Agreement between
the Registrant and Richard E. Tarrant.
10.11* Employment, Noncompetition and Nondisclosure Agreement between
the Registrant and Robert H. Hoehl.
10.12* Employment, Nondisclosure and Noncompetition Agreement between
the Registrant and Jeffrey M. Blanchard.
10.13* Employment, Noncompetition and Nondisclosure Agreement between
the Registrant and James H. Crook, Jr. dated September 19,
1995.
10.14* Agreement between the Registrant and Robert F. Galin dated
April 5, 1982.
10.15* Employment Agreement between the Registrant and John A. Kane
dated October 15, 1984.
10.16* Redemption Agreement between the Registrant, Richard E. Tarrant
and Robert H. Hoehl dated as of April 1, 1993.
Exhibit No. Description
- ----------- -----------
10.17* First Amendment to Redemption Agreement between the Registrant,
Richard E. Tarrant and Robert H. Hoehl.
10.18* Amended and Restated Certificate and Agreement of Limited
Partnership of 4901 LBJ Limited Partnership between the
Registrant and Richard E. Tarrant, Robert H. Hoehl, Paul L.
Egerman, John A. Kane, Robert F. Galin and certain of the
Registrant's employees dated as of April 1, 1992, as amended on
July 1, 1993.
10.19* Lease Agreement between the Registrant and 4901 LBJ Limited
Partnership dated as of April 7, 1992.
10.20* Indenture of Lease between the Registrant and IDS Realty Trust
dated as of December 1, 1981, as amended on June 29, 1995.
10.21* Lease Agreement between the Registrant and BDP Realty
Associates relating to 1500 Shelburne Road dated July 6, 1979.
10.22 Extensions of Lease Agreement between the Registrant and BDP
Realty Associates relating to 1500 Shelburne Road dated as of
August 16, 1995 and March 23, 1999.
10.23* Guaranty Modification Agreement relating to 1400 Shelburne Road
dated as of September 15, 1995.
10.24* Reimbursement Agreement among the Registrant, BDP Realty
Associates and State Street Bank and Trust Company dated as of
January 25, 1993.
10.25* Agreement of Lease between the Registrant and Huntington Avenue
Limited Partnership dated as of April 13, 1994, as amended
through January 1, 1995.
10.26* Guaranty Release Agreement relating to 116 Huntington Avenue.
10.27* Option Agreement between the Registrant and BDP Realty
Associates.
10.28* Tax Indemnification Agreement between the Registrant and the
stockholders listed on Schedule A thereto.
10.29* Employment, Noncompetition and Nondisclosure Agreement between
the Registrant and Pamela J. Pure effective April 3, 1995.
10.30#* Letter Agreement between the Registrant and Pamela J. Pure
dated March 7, 1995.
10.31#* Letter Agreement between the Registrant and Pamela J. Pure
dated October 23, 1995.
10.32#* Nonqualified Stock Option Agreement dated as of September 1,
1991 between the Registrant and John A. Kane.
10.33#* Nonqualified Stock Option Agreement dated as of September 1,
1992 between the Registrant and John A. Kane.
Exhibit No. Description
- ----------- -----------
10.34# Letter Agreement between the Registrant and Jeffrey V.
Sutherland, Ph.D. dated August 16, 1996
10.35# Employment, Noncompetition and Nondisclosure Agreement between
the Registrant and Jeffrey V. Sutherland, Ph.D. dated
September, 1996.
10.36+ Agreement and Plan of Merger dated as of March 25, 1997 by and
among the Registrant, Penguin Acquisition Corporation and
PHAMIS, Inc.
10.37#@ PHAMIS, Inc. Amended and Restated 1983 Combined Nonqualified
and Incentive Stock Option Plan
10.38#@ PHAMIS, Inc. 1993 Combined Incentive and Nonqualified Stock
Option Plan as amended through May 14, 1996
10.39#@ PHAMIS, Inc. 1994 Nonemployee Director Stock Option Plan as
amended through January 1, 1996
10.40#@ PHAMIS, Inc. Salary Savings and Deferral Plan and Trust as
amended through February 22, 1996
10.41#@ Stock Option Agreement dated August 20, 1990 between PHAMIS,
Inc. and Michael Cain.
10.42# Amended and Restated Lease Agreement between BDP Realty
Associates and IDX Systems Corporation dated as of November 1,
1997
10.43 Amendment to Amended and Restated Consulting/Employment
Agreement between the Registrant and Henry M. Tufo, M. D. dated
February 16, 1999
10.44 Specimens of Stock Option Agreements under the 1995 Stock
Option Plan
10.45 Third Addendum to Lease Agreement between 4901 LBJ Limited
Partnership and IDX Systems Corporation dated as of February 1,
1998.
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for each 12 Month Period from
1996-1998
27.3 Restated Financial Data Schedule for First Three Quarters of
1997
27.4 Restated Financial Data Schedule for First Three Quarters of
1998
# Management contract or compensatory plan or arrangement filed as an exhibit
to or incorporated by reference into this Form pursuant to Items 14(a) and 14(c)
of Form 10-K.
* Incorporated herein by reference from the Company's Registration Statement on
Form S-1, as amended (File No. 33-97104).
+ Incorporated herein by reference from the Company's Registration Statement on
Form S-4, as amended (File No. 333-2891).
@ Incorporated herein by reference from the Company's Registration Statement on
Form S-8, as amended (File No. 333-31045).