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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
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Commission File Number 0-26816
IDX SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Vermont 03-0222230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Shelburne Road
South Burlington, VT 05403
(Address of principal executive offices)
Registrant's telephone number, including area
code: (802-862-1022)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports).
Yes X No
-----
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes X No
-----
The number of shares outstanding of the registrant's common stock as
of August 10, 2000 was 28,152,651.
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[Exhibit index begins on Page 30]
IDX SYSTEMS CORPORATION
FORM 10-Q
For the Quarterly Period Ended June 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. INTERIM FINANCIAL STATEMENTS (Unaudited)...........................3
Condensed Consolidated Balance Sheets..............................3
Condensed Consolidated Statements of Operations....................4
Condensed Consolidated Statements of Cash Flows....................5
Notes to Condensed Consolidated Financial Statements...............6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................27
ITEM 2. CHANGES IN SECURITIES..............................................27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................27
ITEM 5. OTHER INFORMATION..................................................28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................28
SIGNATURES..................................................................29
EXHIBIT INDEX...............................................................30
Page 2 of 30
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
June 30, December 31,
2000 1999
--------- ------------
ASSETS
Cash and short term investments $ 85,387 $ 68,359
Accounts receivable, net 92,321 110,759
Other current assets 7,133 5,153
Income tax deferred/receivable 24,987 7,890
--------- ---------
Total current assets 209,828 192,161
--------- ---------
Property and equipment, net 65,862 58,265
Other assets 12,435 17,521
Deferred tax asset, net 3,333 3,200
--------- ---------
Total assets $ 291,458 $ 271,147
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses
and other liabilities $ 51,898 $ 37,970
Deferred revenue 19,563 17,459
--------- ---------
Total current liabilities 71,461 55,429
--------- ---------
Minority interest 8,995 9,204
Stockholders' equity 211,002 206,514
--------- ---------
Total liabilities and stockholders'
equity $ 291,458 $ 271,147
========= =========
See Notes to the Condensed Consolidated Financial Statements
Restated for Comparison Purposes - See Note 1
Page 3 of 30
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
Systems sales $ 21,090 $ 37,727 $ 42,740 $ 60,578
Maintenance and service fees 58,506 53,528 113,578 100,327
-------- -------- -------- --------
TOTAL REVENUES 79,596 91,255 156,318 160,905
OPERATING EXPENSES
Cost of sales and services 60,660 56,295 115,820 105,098
Selling, general and
administrative 21,442 21,212 39,787 41,201
Research and development 13,154 13,423 25,340 27,188
Restructuring charges 21,029 - 21,029 -
Merger and nonrecurring charge - 4,045 5,810 4,045
--------- -------- --------- --------
TOTAL OPERATING EXPENSES 116,285 94,975 207,786 177,532
--------- -------- --------- --------
OPERATING LOSS (36,689) (3,720) (51,468) (16,627)
Other (income) expense, net (1,007) (790) (2,130) 381
---------- --------- ---------- ----------
Loss before income tax benefit (35,682) (2,930) (49,338) (17,008)
Income tax benefit (13,659) (680) (16,816) (6,180)
---------- --------- ---------- ---------
NET LOSS $ (22,023) $ (2,250) $ (32,522) $ (10,828)
========== ========= ========== ==========
Basic and diluted net loss
per share $ (0.79) $ (0.08) $ (1.16) $ (0.39)
========== ========= ========== ==========
Basic and diluted weighted
average shares outstanding 28,029 27,682 27,993 27,668
========== ========= ========== ==========
See Notes to the Condensed Consolidated Financial Statements
Restated for Comparison Purposes - See Note 1
Page 4 of 30
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
2000 1999
---- ----
OPERATING ACTIVITIES
Net loss $ (32,522) $(10,828)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 7,366 6,635
Amortization 274 459
Deferred tax benefit, net of business
acquisitions (133) -
Increase in allowance for doubtful accounts 705 109
Write-off of goodwill 5,810 -
Minority interest 490 247
Loss on investment impairment - 1,642
Restructuring charge 21,029 -
Changes in operating assets and liabilities,
net of business acquisitions:
Accounts receivable 14,228 (9,725)
Prepaid expenses and other assets (1,663) 981
Accounts payable and accrued expenses (3,758) 6,431
Income tax deferred/receivable (17,097) (10,132)
Deferred revenue 2,104 74
--------- ---------
Net cash used in operating activities (3,167) (14,107)
INVESTING ACTIVITIES
Purchase of property and equipment, net (15,015) (20,609)
Purchase of securities available-for-sale (8,795) (129,372)
Sale of securities available-for-sale 9,336 179,462
Business acquisitions - (6,500)
Other assets (1,019) (7,682)
--------- ----------
Net cash (used in) provided by investing
activities (15,493) 15,299
FINANCING ACTIVITIES
Proceeds from sale of common stock 4,837 2,460
Proceeds from debt issuances - 3,501
Contributions to affiliates, net (700) -
Principal repayments of debt - (11,373)
Proceeds from sale of preferred stock 32,089 -
--------- ----------
Net cash provided by financing activities 36,226 (5,412)
--------- ----------
Increase (decrease) in cash and cash equivalents 17,566 (4,220)
Cash and cash equivalents at beginning of period 18,487 11,558
--------- ----------
Cash and cash equivalents at end of period 36,053 7,338
Short term investments 49,334 63,281
--------- ----------
Total cash and short term investments $ 85,387 $ 70,619
========= ==========
See Notes to the Condensed Consolidated Financial Statements
Restated for Comparison Purposes - See Note 1
Page 5 of 30
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
All financial information for previously reported periods included in the
accompanying interim unaudited condensed consolidated financial statements of
IDX Systems Corporation ("Company" or "IDX") have been restated to reflect the
combined operations of IDX and EDiX Corporation ("EDiX") as a result of the
merger, more fully described in Note 3, which was accounted for as a pooling of
interests during the quarter ended June 30, 1999. No adjustments were required
to conform the financial reporting policies of IDX and EDiX for periods
presented.
The interim unaudited consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission and in accordance with accounting principles generally accepted in
the United States. Accordingly, certain information and footnote disclosures
normally included in annual financial statements have been omitted or condensed.
In the opinion of management, all necessary adjustments have been made to
provide a fair presentation. The operating results for the six months ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes included in the Company's latest
annual report on Form 10-K.
Note 2 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133") as amended
by SFAS No. 137, which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company has determined that the impact, if any, of
adopting SFAS No. 133 is not expected to be significant.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements." The SAB
formalizes positions the staff has expressed in speeches and comment letters.
SAB 101 is effective in 2000 but may be adopted in the quarter ending December
31, 2000 as a cumulative effect adjustment for a change in accounting principle.
In the event a cumulative effect adjustment is required, previously issued
interim financial statements will be required to be restated. The Company is
presently analyzing the impact, if any, that the adherence to the SAB will have
on its financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." The Company is required
to adopt the Interpretation on July 1, 2000. The Interpretation requires that
stock options that have been modified to reduce the exercise price be accounted
for as variable. As a result of adopting the Interpretation, the Company will be
required to adopt variable accounting to stock options that have been modified
and if the market price of the Company's stock increases it will recognize
additional compensation expense that it
Page 6 of 30
otherwise would not have incurred. The Company has not modified any stock option
grants in the past year and therefore does not anticipate any compensation
expense for stock options issued to date.
Note 3 - Restructuring Charge
On June 21, 2000 the Company announced the implementation of a workforce
restructuring program. The Company will halt development and discontinue sales
efforts on three product lines that have failed to achieve business targets or
have been deemed non-strategic to the business going forward. In addition, the
Company implemented a work-force reduction of approximately five percent. The
program resulted in a one-time charge to earnings of approximately $21 million
in the second quarter, primarily in connection with costs associated with
product discontinuations of approximately $16 million and severance arrangements
of approximately $5 million. Workforce related accruals, consisting principally
of severance costs, were established based on specific identification of
employees to be terminated, along with their job classification or functions,
and their location. Substantially all workforce-related actions are expected to
be completed during the third quarter of 2000 with the exception of product
related "sunset" support teams, although under certain circumstances the actual
payment of termination costs may extend beyond that date. Cash expenditures
related to these accruals are estimated to be substantially made as follows: $13
million in 2000, $8 million thereafter.
Note 4 - Business Acquisitions and Related Matters
On July 13, 2000, the Company announced an agreement to sell Channelhealth
Incorporated to Allscripts, Inc., a leading provider of point-of-care
e-prescribing and productivity solutions for physicians. Channelhealth provides
a set of Internet-based clinical and productivity solutions for physicians that
brings the power of the Internet to the practice of medicine. IDX will retain
the Patient and e-Commerce Channels, which were previously part of
Channelhealth, enabling IDX to integrate an Internet solution that leverages its
core competencies in physician practice management systems. In addition to the
acquisition, the Company has agreed to enter into a 10-year strategic alliance
whereby Allscripts will become the exclusive provider of point-of-care clinical
applications sold by IDX to physician practices, providing Allscripts access to
IDX's current 118,000 physician practice management customers. This will enable
IDX to offer a broader product portfolio of practice management and clinical
products, increasing the number of sales opportunities to new and existing
customers.
Under the terms of the deal, which is subject to regulatory and Allscripts'
shareholder approval, Allscripts will acquire Channelhealth in exchange for 8.6
million shares, or 21.3% of Allscripts stock on a pro forma fully diluted basis
of which IDX will receive approximately 90%. The transaction is expected to
close in the fourth quarter of 2000.
On April 23, 1999, the Company completed a merger with EDiX, a provider of
medical transcription services, which became a wholly owned subsidiary of the
Company. The transaction was accounted for as a pooling-of-interests and
accordingly, the accompanying condensed financial statements include the
accounts of EDiX for all periods presented. In connection with the merger, the
Company incurred approximately $4.0 million of merger and related costs
consisting principally of transaction costs of $2.4 million, write-offs and
adjustments of long-lived assets, principally noncompatible computer equipment
of $1.4 million and other merger related costs of $0.2 million, principally
related to integration costs incurred during the period, and the termination of
leases and other contractual obligations.
Page 7 of 30
On April 1, 1999, the Company acquired an 80% interest in Channelhealth, Inc., a
Massachusetts corporation, for $6.5 million. The acquisition was accounted for
under the purchase method and resulted in $6.5 million of goodwill being
recorded on the Company's financial statements.
On June 23, 1999, the Company acquired all of the assets of DietSite.com, Inc.
for $1.5 million. DietSite.com is a website that includes disease-oriented
dietary information with extensive proprietary content on diets, vitamins,
herbals and nutritionals. Channelhealth, Inc. and DietSite.com were originally
intended to be managed and operated with the Company's other web technology
initiatives in a separate majority-owned subsidiary. As described above certain
of Channelhealth operations will be sold to Allscripts.
Channelhealth Incorporated has determined that there has been an asset
impairment related to goodwill acquired in the purchase of a Massachusetts
corporation Channelhealth Inc. in April, 1999. In January 2000, the Company made
the decision to seek a primary provider of content and transactions for
ChannelHealth, and decided to no longer utilize certain assets acquired with the
purchase of Channelhealth. The Company recognizes impairment losses on
long-lived assets when indicators of impairment are present and future
undiscounted cash flows are insufficient to support the assets' recovery. The
amount of the impairment loss is recognized based on an analysis of discounted
cash flows estimated to be derived from the impaired asset. This asset
impairment has been recognized during the first quarter of 2000 and is reflected
as a pre-tax one-time loss on impairment of assets of approximately $5.8
million.
Note 5 - Income Taxes
The tax benefit in 2000 is lower than that expected based on the statutory rate
principally due to the non-deductible nature of the write off of goodwill
related to ChannelHealth. The 1999 tax benefit is slightly lower than that
expected based on the statutory rate due to the inclusion in the condensed
financial statements, of the net loss of EDiX Corporation, for which no tax
benefit was recognized.
Note 6- Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company adopted SFAS No. 131 effective with the fiscal year ended December 31,
1998. SFAS No. 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about major customers, products and services, and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. Up to and including the first quarter
of 1999, the Company viewed its operations and managed its business as
principally one segment, healthcare information solutions that include software,
hardware and related services. During the second quarter of 1999, the Company
acquired two companies that have separate and distinct financial information and
operating characteristics. When applicable, the information for the reportable
segments has been restated for the prior year in order to conform to the 2000
presentation.
Page 8 of 30
The Company's three business units have separate management teams and
infrastructures that offer different products and services. Accordingly, these
business units have been classified as three reportable segments (information
systems and services, Internet services and content, and medical transcription
services).
Information Systems and Services: This reportable segment consists of IDX
Systems Corporation's healthcare information solutions that include software,
hardware and related services. IDX solutions enable healthcare organizations to
redesign patient care and other workflow processes in order to improve
efficiency and quality.
The principal markets for this segment include physician groups, management
service organizations, hospitals, and integrated delivery networks primarily
located in the United States.
Internet Services and Content: Channelhealth Incorporated, a majority owned
subsidiary, offers three Internet channels that integrate IDX's core practice
management systems with extensive Internet-based services and clinically valid
content. ChannelHealth services are available to physicians through group
practices, hospitals, integrated delivery networks and managed care
organizations.
Medical Dictation and Transcription Services: This reportable segment contains
EDiX, a provider of medical transcription outsourcing services. The principal
markets for this segment include hospitals and large physician group practices
primarily located in the United States.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements included
in the Company's annual report. The Company evaluates the performance of its
operating segments based on revenue and operating income. Intersegment revenues
are immaterial. No one customer accounts for greater than 10% of revenue for any
reportable segment for the three and six month periods ended June 30, 2000, with
the exception of EDiX. EDiX's revenues from one major customer amounted to 10.5%
and 0.0% of EDiX's total revenue during the three months ended June 30, 2000 and
June 30, 1999, respectively. EDiX's revenues from one major customer amounted to
10.2% and 0.0% of EDiX's total revenue during the six months ended June 30, 2000
and June 30, 1999, respectively.
Page 9 of 30
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in thousands):
IDX
HEALTHCARE
INFORMATION
SYSTEMS AND CHANNELHEALTH
SERVICES INCORPORATED EDIX TOTAL
-------------------------------------------------
FOR THE THREE MONTHS
ENDED JUNE 30, 2000
Net operating revenues $ 60,469 $ 1,532 $ 17,595 $ 79,596
Operating income (loss) (31,269) (6,299) 879 (36,689)
Identifiable operating assets 241,049 30,029 20,380 291,458
FOR THE SIX MONTHS
ENDED JUNE 30, 2000
Net operating revenues $119,294 $ 2,751 $ 34,273 $156,318
Operating income (loss) (36,105) (17,092) 1,729 (51,468)
Identifiable operating assets 241,049 30,029 20,380 291,458
FOR THE THREE MONTHS
ENDED JUNE 30, 1999
Net operating revenues $ 80,075 $ - $11,180 $ 91,255
Operating income (loss) 1,256 (942) (4,034) (3,720)
Identifiable operating assets 260,060 1,768 12,276 274,104
FOR THE SIX MONTHS
ENDED JUNE 30, 1999
Net operating revenues $140,256 $ - $ 20,649 $160,905
Operating loss (10,610) (942) (5,075) (16,627)
Identifiable operating assets 260,060 1,768 12,276 274,104
Corporate headquarters assets are included in IDX Healthcare Information Systems
and Services. Substantially all of the Company's operations are in the United
States. The financial information disclosed herein represents all of the
material financial information related to the Company's principal operating
segments.
Page 10 of 30
Note 7 - Earnings Per Share Information
The following sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
Net loss $(22,023) $(2,250) $(32,522) $(10,828)
--------- -------- --------- ---------
Numerator for basic and diluted
loss per share $(22,023) $(2,250) $(32,522) $(10,828)
--------- -------- --------- ---------
Denominator:
Weighted-average shares 28,029 27,682 27,993 27,668
-------- -------- --------- ---------
Denominator for diluted loss per
share 28,029 27,682 27,993 27,668
-------- -------- --------- ---------
Basic and diluted loss per share $ (0.79) $ (0.08) $ (1.16) $ (0.39)
========= ======== ========= =========
Page 11 of 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company reported a net loss of $22.0 million, or $0.79 per diluted share,
for the second quarter of 2000 as compared to a net loss of $2.2 million or
$0.08 per diluted share, for the second quarter of 1999. Excluding the effect of
nonrecurring charges related to a restructuring charge announced on June 21,
2000, the Company reported a net loss of $9.0 million, or $0.32 per share, for
the second quarter of 2000. Excluding the effect of nonrecurring charges for the
acquisition of EDiX Corporation of $4.0 million, the net income for the three
months ended June 30, 1999 was $700,000 or $0.02 per diluted share.
The Company reported a net loss of $32.5 million, or $1.16 per share, for the
first six months of 2000 as compared to a net loss of $10.8 million or $0.39 per
diluted share, for the first six months of 1999. Excluding the effect of
nonrecurring charges related to a restructuring charge announced on June 21,
2000 and the write-off of goodwill associated with Channelhealth, Inc., the net
loss for the six months ended June 30, 2000 was $13.8 million or $0.49 per
share. Excluding the effect of the nonrecurring charge for the acquisition of
EDiX Corporation of $4.0 million, and the impairment of an investment of $1.6
million, the net loss for the six months ended June 30, 1999 was $7.0 million or
$0.25 per share.
RESULTS OF OPERATIONS
THREE MONTHS ENDED June 30, 2000 COMPARED TO THREE MONTHS
ENDED June 30, 1999
REVENUES
The Company's total revenues decreased to $79.6 million during the three months
ended June 30, 2000 from $91.3 million in the corresponding period in 1999, a
decrease of $11.7 million or (12.8%). Revenues from systems sales decreased to
$21.1 million during the three months ended June 30, 2000 (26.5% of total
revenues) compared to $37.7 million (41.3% of total revenues) in the
corresponding period in 1999, a decrease of $16.6 million or (44.1%). This
decrease was primarily due to a decrease in new sales and installations of
certain IDX systems. Revenues from maintenance and service fees increased to
$58.5 million during the three months ended June 30, 2000 (73.5% of total
revenues) from $53.5 million (58.7% of total revenues) in the corresponding
period in 1999, an increase of $5.0 million or 9.3%. The increase in revenues
from maintenance and service fees is primarily due to increased transcription
service fee revenue from EDiX.
During 1999 and the first six months of 2000, certain of the Company's customers
delayed making purchasing decisions with respect to certain of the Company's
software systems comprised of multiple products resulting in longer sales cycles
for such systems. Management believes such delays are due to a number of
factors, including customer organizational changes, government approvals,
pressures to reduce expenses, product complexity, competition, and customer
preoccupation with internal Year 2000 issues. In June 2000, the Company
announced that weakness in system sales experienced in the fourth quarter of
1999 and the first half of 2000 was expected to continue through the remainder
of 2000. The Company expects that the factors described above and especially the
healthcare industry's Year 2000 focus will cause reductions or delays in
spending for new systems and services in the second half of 2000. Accordingly,
the
Page 12 of 30
Company expects that it will experience deferrals and delays in sales of
software and related services, professional services, and hardware during the
remainder of 2000.
COST OF SALES AND SERVICES
The cost of sales and services increased to $60.7 million during the three
months ended June 30, 2000 from $56.3 million in the corresponding period in
1999, an increase of $4.4 million or 7.8%. The increase in cost of sales and
services resulted from growth in client services expenses, primarily related to
medical transcription costs offset by a decrease in cost of hardware due to the
reduction in system sales as compared to the prior year. The gross profit margin
on systems sales and services decreased to 23.8% in the second quarter of 2000
from 38.3% for the same period in 1999. The decrease in gross profit margin as a
percentage of sales was due to the decrease in software license revenues which
provide a higher gross profit margin, and an increase in maintenance and service
revenue which provides a lower gross profit margin. IDX's core business,
information systems and services, gross profit margin as a percentage of sales
declined to 27.0% during the second quarter of 2000 from 41.6% for the same
period in 1999 due to the effect of the revenue mix described above. The gross
profit margin for the Company's medical dictation and transcription business
segment (EDiX) increased as a percentage of sales to 18.8% in 2000 from 15.1% in
1999 due to an increase in utilization of a new transcription processing system,
which provides a higher margin, as compared to the prior year, combined with
other efficiencies in editing and telecommunications. Channelhealth experienced
a negative gross margin of 43.9% during the second quarter of 2000 primarily due
to high fixed costs relative to sales volume due to the early stage of this
business' development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $21.4 million during
the three months ended June 30, 2000 from $21.2 million during the corresponding
period in 1999, an increase of $200,000 or 1.1%. As a percentage of total
revenues, selling, general and administrative expenses increased to 26.9% during
the three months ended June 30, 2000 from 23.2% for the same period in 1999.
IDX's core business selling, general and administrative expenses decreased $3.3
million primarily due to the transfer of certain expenses to the Channelhealth
subsidiary. EDiX's selling, general and administrative expenses increased
$676,000 or 47.0% during the second quarter of 2000 as compared to the same
period in the prior year primarily due to increased costs to support sales
growth. Channelhealth's selling, general and administrative expenses were $3.7
million during the second quarter of 2000 which includes sales and marketing
expenses and administrative start up expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $13.2 million during the three
months ended June 30, 2000 from $13.4 million in the corresponding period in
1999, a decrease of $200,000 or 2.0%. The decrease is primarily due to a
reduction in the costs of efforts to address Year 2000 issues. As a percentage
of total revenues, research and development expenses increased to 16.5% of
revenue for the second quarter of 2000 compared to 14.7% for the comparable
period in 1999. IDX's core business research and development expenses decreased
$2.1 million due to the transfer of approximately $1.9 million of research and
development costs to the Internet services and content business segment
(ChannelHealth), combined with the reduction in costs to address Year 2000
issues. Research and development costs in the medical dictation and
transcription business segment (EDiX) increased from $237,000 in 1999 to
$313,000 in 2000.
Page 13 of 30
RESTRUCTURING CHARGE
On June 21, 2000 the Company announced the implementation of a workforce
restructuring program. The Company will halt development and discontinue sales
efforts on three product lines that have failed to achieve business targets or
have been deemed non-strategic to the business going forward. In addition, the
Company implemented a work-force reduction of approximately five percent. The
program resulted in a one-time charge to earnings of approximately $21 million
in the second quarter, primarily in connection with costs associated with
product discontinuations of approximately $16 million and severance arrangements
of approximately $5 million. Cash expenditures related to these accruals are
estimated to be substantially made as follows: $13 million in 2000, $8 million
thereafter.
MERGER AND RELATED COSTS
During the three months ended June 30, 1999, the Company recorded charges of
$4.0 millions related to the acquisition of EDiX. The charges were comprised
of transaction costs of $2.4 million, write-offs and adjustments for long-lived
assets, principally noncompatible computer equipment, of $1.4 million and other
merger related costs of $0.2 million, principally related to integration costs
incurred during the period and the termination of leases and other contractual
obligations.
OTHER (INCOME) EXPENSE, NET
Interest income was approximately $1.3 million during the second quarter of 2000
and 1999. Interest expense decreased approximately $221,000 during the second
quarter of 2000 as compared to the same period in the prior year due to the
payment of all outstanding debt of EDiX during the second quarter of 1999.
INCOME TAXES
Income taxes for the quarter ended June 30, 2000 were benefited at 38.0%. Income
taxes for the quarter ended June 30, 1999 were benefited at 23.2%. The 1999 tax
benefit is lower than the expected statutory rate due to the non-deductible
nature of certain merger costs related to the acquisition of EDiX Corporation
during the second quarter of 1999. Excluding the impact of the write-off of
goodwill that is non-deductible for income tax purposes, the Company anticipates
an effective tax rate of approximately 38.0% for the remainder of the year
ending December 31, 2000. Net deferred tax assets of approximately $11.5 million
are expected to be realized principally by reducing future taxable income.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
The Company's total revenues decreased to $156.3 million during the six months
ended June 30, 2000 compared to $160.9 million in the corresponding period in
1999, a decrease of $4.6 million or (2.9%). Revenues from systems sales
decreased to $42.7 million during the six months ended June 30, 2000 (27.3% of
total revenues) compared to $60.6 million (37.6% of total revenues) in the
corresponding period in 1999, a decrease of $17.8 million or (29.4%). This
decrease was primarily due to a decrease in new sales and installations of
certain IDX systems. Revenues from maintenance and service fees increased to
$113.6 million during the six months ended June 30, 2000 (72.7% of total
revenues) from $100.3 million (62.4% of total revenues) in the corresponding
period in 1999, an increase of $13.3 million or 12.2%. The increase in revenues
from maintenance and service fees was primarily due to increased transcription
service fee revenue from EDiX.
During 1999 and the first six months of 2000, certain of the Company's customers
delayed making purchasing decisions with respect to certain of the Company's
software systems comprised of multiple products resulting in longer sales cycles
for such systems. Management believes such delays are due to a number of
factors, including customer organizational changes, government approvals,
pressures to reduce expenses, product complexity, competition, and customer
preoccupation with internal Year 2000 issues. In June 2000, the Company
announced that weakness in system sales experienced in the fourth quarter of
1999 and the first half of 2000
Page 14 of 30
was expected to continue through the remainder of 2000. The Company expects that
the factors described above and especially the healthcare industry's Year 2000
focus will cause reductions or delays in spending for new systems and services
in the second half of 2000. Accordingly, the Company expects that it will
experience deferrals and delays in sales of software and related services,
professional services, and hardware during the remainder of 2000.
COST OF SALES
The cost of sales and services increased to $115.8 million during the six months
ended June 30, 2000 from $105.1 million in the corresponding period in 1999, an
increase of $10.7 million or 10.2%. The gross profit margin on systems sales and
services decreased to 25.9% during the six months ended June 30, 2000 from 34.7%
in the corresponding period in 1999. The decrease in gross profit margin was
primarily due to high fixed costs and overhead expenses in relation to decreased
revenue from installations of the Company's software systems which typically
include a greater percentage of higher margin software than of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $39.8 million during
the six months ended June 30, 2000 from $41.2 million in the corresponding
period in 1999, a decrease of $1.4 million or (3.24%). As a percentage of total
revenues, selling, general and administrative expenses decreased to 25.5% during
the six months ended June 30, 2000 from 25.6% in 1999. The decrease in total
selling, general and administrative expenses during the six months ended June
30, 2000 was primarily due to decreased salary and benefit costs.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased to $25.3 million during the six
months ended June 30, 2000 from $27.2 million in the corresponding period in
1999, a decrease of $1.8 million or (6.8%). The decrease is primarily due to
costs of efforts to address Year 2000 issues as compared to the prior year. As a
percentage of total revenues, research and development expenses decreased to
16.2% during the six months ended June 30, 2000 from 16.9% for the six months
ended June 30, 1999. The decrease as a percentage of sales for the six months
ended June 30, 2000 as compared to the prior year, is primarily due to a
decrease in outside consulting expenses.
RESTRUCTURING CHARGE
On June 21, 2000 the Company announced the implementation of a workforce
restructuring program. The Company will halt development and discontinue sales
efforts on three product lines that have failed to achieve business targets or
have been deemed non-strategic to the business going forward. In addition, the
Company implemented a work-force reduction of approximately five percent. The
program resulted in a one-time charge to earnings of approximately $21 million
in the second quarter, primarily in connection with costs associated with
product discontinuations of approximately $16 million and severance arrangements
of approximately $5 million.
MERGER AND NONRECURRING CHARGE - MERGER AND RELATED COSTS
During the first six months ended June 30, 1999, the Company recorded charges of
$4.0 million related to the acquisition of EDiX. The charges were comprised of
transaction costs of $2.4 million, write-offs and adjustments for long-lived
assets, principally noncompatible computer equipment, of $1.4 million and other
merger related costs of $0.2 million, principally related to integration costs
incurred during the period and the termination of leases and other contractual
obligations.
Page 15 of 30
NONRECURRING CHARGE - WRITE-OFF OF GOODWILL
Channelhealth Incorporated has determined that there has been an asset
impairment related to goodwill acquired in the purchase of a Massachusetts
corporation Channelhealth Inc. in April, 1999. In January 2000, the Company made
the decision to seek a primary provider of content and transactions for
ChannelHealth, and decided to no longer utilize certain assets acquired with the
purchase of Channelhealth. This asset impairment has been recognized during the
first quarter of 2000 and is reflected as a pre-tax one-time loss on impairment
of assets of approximately $5.8 million.
NONRECURRING CHARGE - WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On February 23, 1998, the Company recorded nonrecurring charges of $3.2 million
related to the acquisition of contract management technology from Trego Systems,
Inc. for cash of $4.0 million. The acquisition was accounted for under the
purchase method. The charges were expensed as in-process research and
development in connection with the Company's development of a healthcare
contract management system.
OTHER (INCOME) EXPENSE, NET
Interest income decreased to approximately $2.6 million during the first six
months of 2000 compared to $2.7 million for the same period in 1999. No interest
expense was incurred during the first two quarters of 2000 compared to $0.9
million for the same period in the prior year. Interest expense in the prior
year was primarily attributable to EDiX Corporation.
LOSS ON IMPAIRMENT OF INVESTMENT
Other expense included the write-off of an investment of $1.6 million in the
quarter ended March 31, 1999 due to the investee's inability to raise additional
equity and a decision to dissolve the business.
INCOME TAXES
Income taxes for the six months ended June 30, 2000 were benefited at 34.1%. The
tax benefit in 2000 is lower than that expected based on the statutory rate
principally due to the non-deductible nature of the write-off of goodwill
related to ChannelHealth in January of 2000. Income taxes for the six months
ended June 30, 1999 were benefited at 36.3%. The 1999 tax benefit is lower than
the expected statutory rate due to the non-deductible nature of certain merger
related costs and the inclusion in the financial statements, of the net loss of
EDiX Corporation, for which no tax benefit was recognized. Excluding the impact
of the write-off of goodwill that is non-deductible for income tax purposes, the
Company anticipates an effective tax rate of approximately 38.0% for the
remainder of the year ending December 31, 2000. Net deferred tax assets of
approximately $11.5 million are expected to be realized principally by reducing
future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows related to operations are principally comprised of net loss and
depreciation and are primarily affected by the net effect of the change in
accounts receivable, accounts payable and accrued expenses. Due to the nature of
the Company's business, accounts receivable, deferred revenue and accounts
payable fluctuate considerably due to, among other things, the length of the
sales cycle and installation efforts which are dependent upon the size of the
transaction, the changing business plans of the customer, the effectiveness of
customers' management and general economic conditions. During the three months
ended June 30, 2000 accounts receivable from customers were collected on average
within 106 days which is lower than the 1999 average of
Page 16 of 30
119 days. The 1999 average represented an increase of 13 days from the prior
year in terms of average days to collect receivables from customers. The
increase is partially attributable to unbilled receivables related to contracts
accounted for using long term contract accounting combined with a lengthening of
customer payment patterns. In connection with its workforce restructuring
program the company has accrued costs of $21 million as of June 30, 2000. Cash
expenditures related to these accruals are estimated to be substantially made as
follows: $13 million in 2000, $8 million thereafter.
Cash flows related to investing activities have historically been related to the
purchase of computer and office equipment, leasehold improvements, and the
purchase and sale of investment grade marketable securities. The Company expects
these activities to continue. Investing activities may also include purchases of
interests in, loans to and acquisitions of complementary products, technologies
and businesses. There can be no assurance that the Company will be able to
successfully complete any such purchases or acquisitions in the future.
Cash flows from financing activities historically relate to purchases of common
stock through the exercise of employee stock options and in connection with the
employee stock purchase plan. During 1999, all outstanding debt of EDiX
Corporation was paid. Cash, cash equivalents and short term investments at June
30, 2000 were $85.4 million, an increase of $17.0 million from December 31,
1999. The increase was primarily due to the issuance of preferred stock of
Channelhealth Incorporated, a majority owned subsidiary incorporated in Delaware
to Pequot Private Equity for $30 million for an equity interest in Channelhealth
of approximately 9%. The Company has a revolving line of credit with a bank
allowing the Company to borrow up to $5.0 million bearing interest at the prime
rate that will expire on September 30, 2000. There were no borrowings as of
June 30, 2000.
The Company expects that its requirements for office facilities and other office
equipment will grow as staffing requirements dictate. The Company's operating
lease commitments consist primarily of office leasing for the Company's
operating facilities. In April 2000, the Company entered into a new operating
lease for office space in Seattle Washington commencing in 2003 for a period of
12 years. The Company plans to continue increasing the number of its
professional staff during 2001 and future periods to meet anticipated sales
volume and to support research and development efforts. To the extent necessary
to support increases in staffing, the Company may obtain additional office
space.
The Company is currently leasing the Company's headquarters in South Burlington,
Vermont from BDP Realty, a related entity which is included in the Company's
consolidated financial statements. The Company started construction on an
expansion of its corporate headquarters facility in South Burlington, Vermont,
in November 1999, and is considering various options for financing including a
construction loan, sale lease-back arrangement or funding from operations. The
Company anticipates that it will spend approximately $16 million on construction
to expand its Corporate Headquarters facility. From time to time, based on the
Company's requirements, the Company may consider other purchases of additional
land or the construction of additional office space.
The Company believes that current operating funds will be sufficient to finance
its operating requirements at least through the next twelve months. To date,
inflation has not had a material impact on the Company's revenues or income.
Page 17 of 30
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of its internal use systems (both information technology related and
non-information technology related) and its products (including third party
products included in its products) and also completed and implemented
contingency planning. As a result of those efforts, the Company experienced no
significant disruptions in its products (including third party products included
in its products), internal use information technology systems, and internal use
non-information technology systems, and the Company believes all of those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
In the first half of 2000, the Company expensed most of its total remaining
project costs, which related primarily to contingency plans and remediation
efforts for internal systems. The Company will continue to monitor its products
(including third party products included in its products), mission critical
computer applications, and those of its suppliers and vendors throughout the
Year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE
This Management Discussion and Analysis of Financial Condition and Results of
Operations contains "forward-looking statements" as defined in Section 21E of
the Securities and Exchange Commission Act of 1934. For this purpose, any
statements contained in this Quarterly Report that are not statements of
historical fact may be deemed to be forward-looking statements. Words such as
"believes," "anticipates," "plans," "expects," "will" and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the results of IDX Systems Corporation to
differ materially from those indicated by these forward-looking statements
including among others, the factors set forth below. If any risk or uncertainty
identified in the following factors actually occurs, IDX's business, financial
condition and operating results would likely suffer. In that event, the market
price of IDX's common stock could decline and you could lose all or part of the
money you paid to buy IDX's common stock.
The following important factors affect IDX's business and operations generally
or affect more than one segment of our business and operations:
IDX STOCK PRICES MAY CONTINUE TO BE VOLATILE. IDX has experienced, and expects
to continue to experience fluctuations in its stock price due to a variety of
factors including:
o delay in customers purchasing decisions due to a variety of factors
such as consolidation, management changes and regulatory developments;
o market prices of competitors;
o announcements of technological innovations, including Internet delivery
of information and use of application service
provider technology;
o new product introductions by IDX or its competitors;
o market conditions particularly in the computer software and Internet
industries; and
o healthcare reform measures and healthcare regulation.
Page 18 of 30
These fluctuations have had a significant impact on the market price of our
common stock, and may have a significant impact on the future market price of
our common stock.
THESE FLUCTUATIONS MAY AFFECT OPERATING RESULTS AS FOLLOWS:
o ability to transact stock acquisitions ; and
o ability to retain and incent key employees.
ADVERSE FINANCIAL TRENDS INCLUDING DECLINING NET INCOME AND CASH FROM OPERATIONS
HAVE AND MAY CONTINUE. Year over year net income and cash from operations have
generally declined since 1998. In 1999, and the six months of 2000 IDX
generated a net loss of approximately $7.9 million and $32.5 million,
respectively. If these negative trends continue, IDX may have difficulty
financing future growth and funding operating initiatives, including future
acquisitions.
IDX EXPECTS ITS QUARTERLY OPERATING RESULTS TO FLUCTUATE AND ITS CUSTOMER SALES
AND INSTALLATION REQUIREMENTS TO CHANGE. IDX expects its quarterly results of
operations to continue to fluctuate. Because a significant percentage of IDX's
expenses are relatively fixed, the following factors could cause these
fluctuations:
o delay in customers purchasing decisions due to a variety of factors
such as consolidation and management changes;
o delay in customers' purchasing decisions due to customers' year 2000
problems;
o the volume and timing of systems sales and installations;
o recognizing revenue at various points during the installation
process;
o the timing of new product and service introductions and product upgrade
releases; and
o the sales and implementation cycles of IDX's customers.
In light of the above, IDX believes that its results of operations for any
particular quarter or fiscal year are not necessarily meaningful or reliable
indicators of future performance.
IDX'S PROPOSED TRANSACTION WITH ALLSCRIPTS, INC. MAY NOT HAPPEN OR MAY BE
UNSUCCESSFUL. In the fourth quarter of 2000, IDX intends to close the sale of
the Physician Channel Business of its subsidiary, Channelhealth Incorporated, to
Allscripts, Inc., a leading provider of point-of-care solutions for physicians,
while retaining the E-commerce Channel and Patient Channel Business. As a
condition to the sale, IDX and Allscripts have agreed to implement a 10-year
strategic alliance agreement, whereby Allscripts will become the exclusive
provider of certain point-of-care clinical applications sold by IDX to physician
practices. These transactions are subject to regulatory and Allscripts
shareholder approval, which may not happen. Even if the required approvals are
given and the transaction is closed, IDX and Allscripts may not be successful in
implementing or realizing benefits from their strategic alliance.
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:
o the generation of sufficient financing to fund potential acquisitions
and alliances;
o the successful identification and acquisition of products,
technologies or businesses;
o effective integration and operation of the acquired or aligned
products, technologies or businesses despite technical
difficulties, geographic limitations and personnel issues; and
o overcoming significant competition for acquisition and alliance
opportunities from companies that have significantly greater financial
and management resources.
Page 19 of 30
IDX MAY NOT BE SUCCESSFUL IN IMPLEMENTING ITS RESTRUCTURING PROGRAM. IDX
intends to achieve greater efficiencies through the discontinuance of develop-
ment and sales activities of three product lines and a workforce reduction. IDX
may not realize these efficiencies. Factors taht may affect IDX's ability to
realize efficiencies include:
o the successful negotiation of satisfactory negotiation compensation
arrangements with customers of the discontinuance product lines;
o the ability to manage work with fewer employees; and
o the ability to fill vacated position with qualified employees in a tight
labor market.
IDX'S SUCCESS DEPENDS ON NEW PRODUCT DEVELOPMENT AND ITS ABILITY TO RESPOND TO
RAPIDLY CHANGING TECHNOLOGY. To be successful, IDX must enhance its existing
products, respond effectively to technology changes and help its clients adopt
new technologies. In addition, IDX must introduce new products and technologies
to meet the evolving needs of its clients in the healthcare information systems
market. IDX may have difficulty in accomplishing this because of:
o the continuing evolution of industry standards, for example,
transaction standards pursuant to the Health Insurance
Portability and Accountability Act of 1996 (HIPAA); and
o the creation of new technological developments, for example, Internet
and application service provider technology.
IDX is currently devoting significant resources toward the development of
enhancements to its existing products, particularly in the area of
Internet-based functionality and the migration of existing products to new
hardware and software platforms, including relational database technology,
object-oriented programming and application service provider technology.
However, IDX may not successfully complete these product developments or the
adaptation in a timely fashion, and IDX's current or future products may not
satisfy the needs of the healthcare information systems market. Any of these
developments may adversely affect IDX's competitive position or render its
products or technologies noncompetitive or obsolete.
POLITICAL, ECONOMIC AND REGULATORY CHANGES AND CONSOLIDATION IN THE HEALTHCARE
INDUSTRY MAY CAUSE IDX TO SUFFER FINANCIALLY. IDX currently derives
substantially all of its revenues from sales of financial, administrative and
clinical healthcare information systems and related services within the
healthcare industry. As a result, the success of IDX is dependent in part on the
political and economic conditions in the healthcare industry.
Virtually all of IDX's customers and the other entities with which IDX has a
business relationship operate in the healthcare industry and, as a result, are
subject to governmental regulation, including Medicare and Medicaid regulation.
Accordingly, IDX's customers and the other entities with which IDX has a
business relationship are affected by changes in such regulations and
limitations in governmental spending for Medicare and Medicaid programs. Recent
actions by Congress have limited governmental spending for the Medicare and
Medicaid programs, limited payments to hospitals and other providers under such
programs, and increased emphasis on competition and other programs that
potentially could have an adverse effect on IDX's customers and the other
entities with which IDX has a business relationship. In addition, Federal and
state legislatures have considered proposals to reform the U.S. healthcare
system at both the federal and state level. If enacted, these proposals could
increase government involvement in healthcare, lower reimbursement rates and
otherwise change the business environment of IDX's customers and the other
entities with which IDX has a business relationship. IDX's customers and the
other entities with which IDX has a business relationship could react to these
proposals and the uncertainty surrounding these proposals by curtailing or
deferring investments, including those for IDX's products and services.
In addition, many healthcare providers are consolidating to create integrated
healthcare delivery systems with greater market power. These providers may try
to use their market power to negotiate price reductions for IDX's products and
services. If IDX were forced to reduce its prices, its operating margins would
decrease. As the healthcare industry consolidates, competition for customers
will become more intense and the importance of acquiring each customer will
become greater.
Page 20 of 30
THERE IS INTENSE COMPETITION IN THE MARKET FOR HEALTHCARE INFORMATION SYSTEMS
AND IF IDX FAILS TO COMPETE SUCCESSFULLY, IT WILL SUFFER FINANCIALLY. The market
for healthcare information systems is intensely competitive, rapidly evolving
and subject to rapid technological change. IDX believes that the principal
competitive factors in this market include the breadth and quality of system and
product offerings, the features and capabilities of the systems, the price of
system and product offerings, the ongoing support for the systems, and the
potential for enhancements and future compatible products.
Some of the IDX's competitors have greater financial, technical, product
development, marketing and other resources than IDX, and some of its competitors
offer products that it does not offer. The Company's principal existing
competitors include Cerner Corporation, Eclipsys Corporation, McKesson HBOC,
Inc. and Shared Medical Systems Corporation, each of which offers a suite of
products that compete with many of IDX's products. There are other competitors
that offer a more limited number of competing products. Many of IDX's
competitors have also announced or introduced Internet strategies that will
compete with IDX's Internet applications and services. IDX may be unable to
compete successfully against these organizations. In addition, IDX expects that
major software information systems companies, large information technology
consulting service providers and system integrators, Internet-based start-up
companies and others specializing in the healthcare industry may offer
competitive products or services.
IDX MAY BE FACED WITH PRODUCT LIABILITY CLAIMS EXCEEDING ITS INSURANCE COVERAGE.
Any failure by IDX's products that provide applications relating to patient
medical histories and treatment plans could expose IDX to product liability
claims. These potential claims may exceed IDX's current insurance coverage.
Unsuccessful claims could be costly to defend and divert management time and
resources. In addition, IDX cannot assure you that it will continue to have
appropriate insurance available to it in the future at commercially reasonable
rates.
IDX'S SUCCESS IS SIGNIFICANTLY DEPENDENT ON KEY PERSONNEL. The success of IDX is
dependent to a significant degree on its key management, sales, marketing, and
technical personnel. To be successful IDX must attract, motivate and retain
highly skilled managerial, sales, marketing, consulting and technical personnel,
including programmers, consultants, systems architects skilled in the technical
environments in which IDX's products operate. Competition for such personnel in
the software and information services industries is intense. IDX does not
maintain "key man" life insurance policies on any of its executives. Not all IDX
personnel have executed noncompetition agreements.
GOVERNMENT REGULATION MAY IMPOSE BURDENS AND COSTS ON IDX'S OPERATIONS.
Virtually all of IDX's customers and the other entities with which IDX has a
business relationship operate in the healthcare industry and, as a result, are
subject to governmental regulation. Because IDX's products and services are
designed to function within the structure of the healthcare financing and
reimbursement systems currently in place in the United States, and because IDX
is pursuing a strategy of developing and marketing products and services that
support its customers' regulatory and compliance efforts, IDX may become subject
to the reach of, and liability under, these regulations.
The Federal Anti-Kickback Law, among other things, prohibits the direct or
indirect payment or receipt of any remuneration for Medicare, Medicaid and
certain other Federal or state healthcare program patient referrals, or
arranging for or recommending referrals or other business paid for in whole or
in part by the federal health care programs. Violations of the Federal
Anti-Kickback
Page 21 of 30
Law may result in civil and criminal sanction and liability, including the
temporary or permanent exclusion of the violator from government health
programs, treble damages and imprisonment for up to five years for each
violation. If the activities of a customer of IDX or other entity with which IDX
has a business relationship were found to constitute a violation of the Federal
Anti-Kickback Law and IDX, as a result of the provision of products or services
to such customer or entity, was found to have knowingly participated in such
activities, IDX could be subject to sanction or liability under such laws,
including the exclusion of IDX from government health programs. As a result of
exclusion from government health programs, IDX customers would not be permitted
to make any payments to IDX.
The Federal Civil False Claims Act and the Medicare/Medicaid Civil Money
Penalties regulations prohibit, among other things, the filing of claims for
services that were not provided as claimed, which were for services that were
not medically necessary, or which were otherwise false or fraudulent. Violations
of these laws may result in civil damages, including treble and civil penalties
up to $11,000 for each false claim filed. In addition the Medicare/Medicaid and
other Federal statutes provide for criminal penalties for such false claims,
including fines of up to $25,000 and imprisonment up to five years for each
offense. If, as a result of the provision by IDX of products or services to its
customers or other entities with which IDX has a business relationship, IDX
provides assistance with the provision of inaccurate financial reports to the
government under these regulations, or IDX is found to have knowingly recorded
or reported data relating to inappropriate payments made to a healthcare
provider, IDX could be subject to liability under these laws.
HIPAA contains provisions regarding standardization, privacy, security, and
administrative simplification in healthcare. As a result of regulations now
proposed under HIPAA, IDX will make investments to support customer operations
in areas, such as:
o electronic data transactions;
o computer system security; and
o patient privacy.
Although it is not possible to anticipate the final form of regulations under
HIPAA, IDX has made and expects to continue to make investments in product
enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require IDX to make investments in new products
or charge higher prices. It may be expensive to implement security or other
measures designed to comply with any new legislation or regulation.
The United States Food and Drug Administration has promulgated a draft policy
for the regulation of computer software products as medical devices under the
1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To
the extent that computer software is a medical device under the policy, IDX, as
a manufacturer of such products, could be required, depending on the product,
to:
o register and list its products with the FDA;
o notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing such products; or
o obtain FDA approval by demonstrating safety and effectiveness
before marketing a product.
Page 22 of 30
Depending on the intended use of a device, the FDA could require IDX to obtain
extensive data from clinical studies to demonstrate safety or effectiveness, or
substantial equivalence. If the FDA requires this data, IDX would be required to
obtain approval of an investigational device exemption before undertaking
clinical trials. Clinical trials can take extended periods of time to complete.
IDX cannot provide assurances that the FDA will approve or clear a device after
the completion of such trials. In addition, these products would be subject to
the Federal Food, Drug and Cosmetic Act's general controls, including those
relating to good manufacturing practices and adverse experience reporting.
Although it is not possible to anticipate the final form of the FDA's policy
with regard to computer software, IDX expects that the FDA is likely to become
increasingly active in regulating computer software intended for use in
healthcare settings regardless of whether the draft is finalized or changed. The
FDA can impose extensive requirements governing pre- and post-market conditions
like service investigation, approval, labeling and manufacturing. In addition,
the FDA can impose extensive requirements governing development controls and
quality assurance processes.
SYSTEM ERRORS IN IDX'S HEALTHCARE INFORMATION SYSTEMS COULD CAUSE UNFORESEEN
LIABILITIES. IDX's healthcare information systems are very complex. As with
complex systems offered by others, IDX's healthcare information systems may
contain errors, especially when first introduced. IDX's healthcare information
systems are intended to provide information to healthcare providers for use in
the diagnosis and treatment of patients. Therefore, users of IDX's products may
have a greater sensitivity to system errors than the market for software
products generally. Failure of an IDX customer's system to perform in accordance
with its documentation could constitute a breach of warranty and require IDX to
incur additional expense in order to make the system comply with the
documentation. If such failure is not timely remedied, it could constitute a
material breach under a contract allowing the client to cancel the contract and
subject IDX to liability.
CLAIMS BY OTHER COMPANIES THAT IDX'S PRODUCTS INFRINGE THEIR PROPRIETARY RIGHTS
COULD HINDER OR BLOCK IDX'S ABILITY TO SELL ITS PRODUCTS, SUBJECT IDX TO
SIGNIFICANT MONETARY LIABILITY AND DIVERT THE TIME AND ATTENTION OF ITS
MANAGEMENT. If any of IDX's products violate third party proprietary rights, IDX
may be required to reengineer its products or seek to obtain licenses from third
parties to continue offering its products without substantial reengineering. Any
efforts to reengineer IDX's products or obtain licenses from third parties may
not be successful, in which case IDX may be forced to stop selling the
infringing product or remove the infringing functionality or feature. IDX may
also become subject to damage awards as a result of infringing the proprietary
rights of others, which could cause IDX to incur additional losses and have an
adverse impact on its financial position. IDX does not conduct comprehensive
patent searches to determine whether the technologies used in its products
infringe patents held by others. In addition, product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed,
with regard to similar technologies.
IDX'S COMPETITIVE POSITION WOULD BE ADVERSELY AFFECTED IF IT WERE UNABLE TO
PROTECT ITS PROPRIETARY TECHNOLOGY. IDX's success and competitiveness are
dependent to a significant degree on the protection of its proprietary
technology. IDX relies primarily on a combination of copyrights, trade secret
laws and restrictions on disclosure to protect its proprietary technology.
Despite these precautions, others may be able to copy or reverse engineer
aspects of IDX's products, to obtain and use information that IDX regards as
proprietary or to independently develop similar technology. Litigation may be
necessary in the future to enforce or defend IDX's
Page 23 of 30
proprietary technology or to determine the validity and scope of the proprietary
rights of others. This litigation, whether successful or unsuccessful, could
result in substantial costs and diversion of management and technical resources.
IDX MAY HAVE CONFLICTS OF INTERESTS WITH SOME OF ITS EXECUTIVES. Richard E.
Tarrant, President, Chief Executive Officer and Director, and Robert H. Hoehl,
Chairman of the Board of Directors, indirectly own, through various entities,
real estate which IDX leases in connection with its operations. During 1999, IDX
paid an aggregate of approximately $2.1 million in connection with these leases.
IDX currently leases its headquarters facilities in South Burlington, Vermont
from a real estate entity owned by Richard E. Tarrant and Robert H. Hoehl.IDX
has commenced a $16 million construction project to expand its office facilities
at that location. In connection with these arrangements, the economic interests
of these executives and directors and IDX may diverge.
The following important factors affect our Internet services and content
business segment or "ChannelHealth" business:
CHANNELHEALTH'S LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT TO VALUE AND
EVALUATE ITS BUSINESS AND FUTURE PROSPECTS. ChannelHealth commenced operations
October 1999 and only recently commercially released its first product. An
evaluation of the risks and uncertainties of ChannelHealth's business will be
difficult because of ChannelHealth's limited operating history.
In addition, ChannelHealth's limited operating history means that it has less
insight into how technoloical and market trends may affect its business as
evidenced by the writeoff of goodwill of %5.8 million in the first year of 2000
due to a change in its content strategy. The revenue and income potentional of
ChannelHealth's business and market are unproven, and its business model is
emerging and unproven. ChannelHealth's business and prospects must be
considered in light of the risks and difficulties typically encountered by
businesses in their early stages of development, particularly those in new and
rapidly evolving markets such as the Internet healthcare information industry.
CHANNELHEALTH HAS INCURRED SUBSTANTIAL LOSSES TO DATE AND MAY NOT BE ABLE TO
ACHIEVE OR MAINTAIN PROFITABILITY. ChannelHealth has incurred losses since it
began operations. ChannelHealth incurred a net loss of $12.5 million in the
first quarter of 2000 and a net loss of $5.5 million for the year ended December
31, 1999, and its accumulated deficit through December 31, 1999 was $5.5
million. ChannelHealth cannot be certain if or when it will become profitable.
ChannelHealth's failure to become profitable within the timeframe expected by
IDX investors or at all may adversely affect the market price of IDX Common
Stock. ChannelHealth expects to continue to increase its expenses in an effort
to develop its business and, as a result, will need to generate significant
revenue to achieve profitability. Even if ChannelHealth does achieve
profitability, there can be no assurance that ChannelHealth can sustain or
increase profitability on a quarterly or annual basis in the future.
Page 24 of 30
CURRENTLY, CHANNELHEALTH'S BUSINESS DEPENDS ON INTEGRATING INTERNET-RELATED
TECHNOLOGY INTO ITS CUSTOMERS' BUSINESSES, AND, AS A RESULT, ITS BUSINESS WILL
SUFFER IF USE OF THE INTERNET AS A MEANS FOR COMMERCE DECLINES. If commerce on
the Internet does not continue to grow or grows slower than expected, the need
for ChannelHealth's Internet healthcare information products and services could
decline, resulting in fewer projects and reduced revenues. Consumers and
businesses may reject the Internet as a viable commercial medium for a number of
reasons, including:
o actual or perceived lack of security of information;
o lack of access and ease of use;
o congestion of Internet traffic or other usage delays;
o inconsistent quality of service;
o increase in access costs to the Internet;
o evolving government regulation;
o uncertainty regarding intellectual property ownership;
o costs associated with the obsolescence of existing infrastructure; and
o economic viability of the Internet commerce model.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results.
The adoption of Internet solutions by healthcare participants will require the
acceptance of a new way of conducting business and exchanging information. The
healthcare industry, in particular, relies on legacy systems that may be unable
to benefit from ChannelHealth's Internet healthcare information services. To
maximize the benefits of ChannelHealth's services, healthcare participants must
be willing to allow sensitive information to be stored in ChannelHealth's
databases. ChannelHealth can process transactions for healthcare participants
that maintain information on their own proprietary databases. However, the
benefits of ChannelHealth's connectivity and sophisticated services are limited
under these circumstances. Customers using legacy and client-server systems may
refuse to adopt new systems when they have made extensive investment in
hardware, software and training for older systems.
GOVERNMENT REGULATION COULD ADVERSELY AFFECT CHANNELHEALTH'S BUSINESS.
ChannelHealth's business will be subject to government regulation. Existing as
well as new laws and regulations could adversely affect its business. Laws and
regulations may be adopted with respect to the Internet or other on-line
services covering issues such as:
o user privacy;
o system security;
o pricing;
o content;
o copyrights;
o distribution; and
o characteristics and quality of products and services.
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The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Demand for
ChannelHealth's applications and services may be adversely affected by
additional regulation of the Internet.
IF CHANNELHEALTH SYSTEMS EXPERIENCE SECURITY BREACHES OR ARE OTHERWISE PERCEIVED
TO BE INSECURE, CHANNELHEALTH'S REPUTATION AND BUSINESS WILL SUFFER. A material
security breach could damage ChannelHealth's reputation, cause users to lose
confidence in ChannelHealth's systems or result in liability. ChannelHealth will
retain confidential customer and patient information in its processing centers.
ChannelHealth may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by
breaches. Any well-publicized compromise of Internet security could deter people
from using the Internet or from conducting transactions that involve
transmitting confidential information, including confidential healthcare
information. Therefore, it is critical that these facilities and infrastructure
remain secure and are perceived by the marketplace to be secure. Despite the
implementation of security measures, this infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors, attacks by third
parties or similar disruptive problems. Any damage to ChannelHealth's reputation
or loss of user confidence as a result of a security breach could reduce the
willingness of patients and physicians to use ChannelHealth's products and
services and as a result, adversely affect ChannelHealth's business.
CHANNELHEALTH DEPENDS UPON A SINGLE TRANSACTION SERVICE PROVIDER TO PROVIDE MOST
OF CHANNELHEALTH'S TRANSACTION SERVICES AND IF THAT PROVIDER IS UNABLE OR
UNWILLING TO PROVIDE SUCH SERVICES, CHANNELHEALTH MAY NOT BE ABLE TO PROVIDE
SERVICE TO ITS CUSTOMERS. ChannelHealth currently relies on ProxyMed for most of
its electronic transaction services. ChannelHealth's reliance on a single
provider of these services exposes ChannelHealth, and IDX as a reseller of
ChannelHealth's products and services, to a number of risks, including the loss
of customer goodwill and possible liability, if ProxyMed fails to provide
transaction services. If ProxyMed is unable or unwilling to provide such
services to ChannelHealth on a timely basis, ChannelHealth may be forced to
engage additional or replacement providers, which could result in additional
expenses and delays and disruptions in ChannelHealth's service.
PERFORMANCE PROBLEMS WITH THE SYSTEMS OF CHANNELHEALTH'S TRANSACTION, SERVICE
AND CONTENT PROVIDERS COULD HARM CHANNELHEALTH'S BUSINESS. ChannelHealth will
depend on service and content providers to provide transactions and information
on a timely basis. ChannelHealth's Web sites could experience disruptions or
interruptions in service due to the failure or delay in the transmission or
receipt of this information. In addition, ChannelHealth's customers will depend
on Internet service providers, online service providers and other Web site
operators for access to our Web sites. All of these providers have experienced
significant outages in the past and could experience outages, delays and other
difficulties in the future due to system failures unrelated to ChannelHealth's
systems. Any significant interruptions in ChannelHealth's services or increases
in response time could result in a loss of potential or existing customers,
strategic partners, advertisers or sponsors and, if sustained or repeated, would
likely reduce the attractiveness of ChannelHealth's services.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 24, 2000, the Company and its subsidiary Channelhealth
Incorporated filed a lawsuit against ProxyMed, Inc., a supplier of
electronic data interchange transactions, for breach of contract in
the United States District Court for the District of Vermont. In its
lawsuit, entitled IDX SYSTEMS CORPORATION, ET AL. V. PROXYMED, INC.,
Civil Action No. 2:00-CV-172, the Company seeks damages for
breach of contract and declaratory judgment that it the contract
has been terminated and the Company is free to contract with other
suppliers for certain services. Upon notification of the Company's
lawsuit, ProxyMed caused to be served on the Company a lawsuit it had
filed in the Circuit Court for Broward County, Florida on March 10,
2000. In its lawsuit, ProxyMed seeks damages for breach of three
contracts. ProxyMed's lawsuit was removed by IDX to the United
States District Court for the Southern District of Florida and is now
entitled PROXYMED, INC. V. IDX SYSTEMS CORPORATION, Case No. 00-6886.
The litigation is in the preliminary motion stage and discovery has not
yet commenced.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company believes that no
such currently pending routine litigation to which it is party will
have a material adverse effect on its financial condition or results of
operations.
Item 2. Changes In Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its 2000 Annual Meeting of Shareholders on May 15, 2000.
Of the 28,013,339 shares of common stock outstanding and entitled to vote at
this meeting, 25,836,705 shares were represented at this meeting, in person or
by proxy. The following matter was voted upon at the Annual Meeting.
1. Henry M. Tufo, M.D., Steven M. Lash and Peter W. Van Etten were elected
to serve for a term of three years as Class II Directors. The remaining terms of
Richard E. Tarrant, Robert H. Hoehl, Frank T. Sample. Stuart H. Altman, Allen
Martin and Mark F. Wheeler continued after the meeting. The result of the vote
with respect of each nominee for office was as follows:
Votes "Against" Broker
Nominee Votes "For" or "Withheld" Abstained Non-Votes
Henry M. Tufo, M.D. 25,781,174 0 55,531 0
Steve M. Lash 25,783,024 0 53,681 0
Peter W. Van Etten 25,783,445 0 53,260 0
Page 27 of 30
Item 5. Other Information
Shareholders Proposal for 2000 Annual Meeting
As set forth in the Company's Proxy Statement for its 2000 Annual Meeting
of Stockholders, shareholders proposals submitted pursuant to Rule 14a-8 under
the Exchange Act for inclusion in the Company's proxy materials for its 2001
Annual Meeting of Stockholders must be received by the Secretary of the Company
at the principal offices of the Company no later than March 7, 2001.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5 and
14a-8 under the Exchange Act, written notice of stockholder proposals submitted
outside the processes of Rule 14a-8 for consideration at the 2001 Annual Meeting
of Stockholders must be received by the Company on or before March 7, 2001 in
order to be considered timely for purpose of Rule 14a-4. The persons designated
in the Company's proxy statement and management proxy card will be granted
discretionary authority with respect to any stockholder proposal with respect to
which the Company does not receive timely notice.
Item 6. Exhibits And Reports On Form 8-K.
(a) The exhibits filed as part of this Form 10-Q are listed on the Exhibit
Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference.
(b) There were two Forms 8-K filed during the second quarter of 2000:
On June 9, 2000, the Company filed a report on Form 8-K, reporting the
IDX News Release dated June 8, 2000 concerning the agreements entered
into among the Company, ChannelHealth Incorporated, a subsidiary of IDX,
and Healtheon/WebMD Corporation defining strategic relationships.
On June 23, 2000, the Company filed a report on Form 8-K, reporting the
IDX News Release dated June 21, 2000 concerning preliminary second
quarter results and the implementation of a cost reduction and workforce
restructuring program.
On July 20, 2000, the Company filed a report on Form 8-K, reporting the
Agreement and Plan of Merge dated July 13, 2000, by and among Allscripts
Holding, Inc., Allscripts, Inc., Bursar Acquisition, Inc., Bursar
Acquisition No. 2, Inc., IDX Systems Corporation and Channelhealth
Incorporated.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDX SYSTEMS CORPORATION
/S/ JOHN A. KANE
Date: August 14, 2000 By: ____________________________________
John A. Kane,
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
Page 29 of 30
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
Exhibit No. Description Page
- ----------- ----------- ----
10 Stock Restriction and Voting Agreement by and
among Richard E. Tarrant and Amy E. Tarrant
effective April 29, 1999 and executed
June 8, 2000
27 Financial Data Schedule
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