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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 SEPTEMBER 30, 1997
-------------------------------
Commission File Number 0-26816
IDX SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
VERMONT 03-0222230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 SHELBURNE ROAD
SOUTH BURLINGTON, VT 05403
(Address of principal executive offices)
Registrant's telephone number, including area code: (802-862-1022)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports).
Yes X No
---
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes X No
---
The number of shares outstanding of the registrant's common stock as of
November 12, 1997 was 25,907,723.
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[Exhibit index begins on Page 16]
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IDX SYSTEMS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Interim Financial Statements:
a) Condensed consolidated balance sheets as of
September 30, 1997 and December 31, 1996 (unaudited).............3
b) Condensed consolidated statements of income for the three
and nine months ended September 30, 1997 and 1996
(unaudited)......................................................4
c) Condensed consolidated statements of cash flows for
the nine months ended September 30, 1997 and 1996
(unaudited)......................................................5
d) Notes to condensed consolidated financial statements.............6
ITEM 2. Management's discussion and analysis of financial
condition and results of operations.................................9
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings..................................................18
ITEM 2. Changes in securities..............................................18
ITEM 3. Defaults upon senior securities....................................18
ITEM 4. Submission of matters to a vote of security holders................18
ITEM 5. Other information..................................................19
ITEM 6. Exhibits and reports on Form 8-K...................................19
SIGNATURES.................................................................20
EXHIBIT INDEX..............................................................21
Page 2 of 23
PART I...FINANCIAL INFORMATION
Item 1...Interim Financial Statements
IDX SYSTEMS CORPORATION
FINANCIAL HIGHLIGHTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
1997 1996
---- ----
ASSETS
Cash and securities $ 120,947 $ 113,391
Accounts receivable, net 54,043 49,115
Other current assets 6,769 7,244
--------- ---------
TOTAL CURRENT ASSETS 181,759 169,750
Property & equipment, net 26,643 22,233
Capitalized software costs, net 385 5,120
Other assets 6,890 5,219
--------- ---------
33,918 32,572
--------- ---------
TOTAL ASSETS $215,677 $ 202,322
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
expenses $ 20,945 $ 21,309
Deferred revenue 23,754 16,541
-------- --------
TOTAL CURRENT LIABILITIES 44,699 37,850
Deferred income taxes 2,745 1,191
Long term debt 2,500 2,651
Minority interest 2,027 2,080
Stockholders' equity 163,706 158,550
-------- -------
170,978 164,472
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $215,677 $ 202,322
========= =========
See Notes to the Condensed Consolidated Financial Statements
Page 3 of 23
Item 1. Interim Financial Statements.
IDX SYSTEMS CORPORATION
FINANCIAL HIGHLIGHTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
---- ---- ---- ----
REVENUES
Systems sales $34,703 $26,456 $98,029 $ 81,924
Maintenance and service fees 29,895 24,946 83,560 70,180
------- ------- ------- --------
TOTAL REVENUES 64,598 51,402 181,589 152,104
OPERATING EXPENSES
Cost of sales 33,612 27,162 94,637 79,767
Selling, general, and
administrative 12,541 11,474 37,847 33,298
Research and development 9,271 7,357 26,356 22,185
Write-off of acquired research
and development costs 2,290
Merger and related costs 20,030 20,030 292
------ ------ ------- -------
TOTAL OPERATING EXPENSES 75,454 45,993 181,160 135,542
Operating income (loss) (10,856) 5,409 429 16,562
Other (income) expense (1,480) (1,288) (4,154) (3,477)
-------- ------- ------- -------
Income (loss) before income
taxes (9,376) 6,697 4,583 20,039
Income tax provision
(benefit) (2,021) 2,597 3,566 7,908
------- ------- ------ --------
NET INCOME (LOSS) $ (7,355) $ 4,100 $ 1,017 $ 12,131
========= ========== ========= =========
NET INCOME (LOSS) PER SHARE $ (0.28) $ 0.16 $ 0.04 $ 0.48
========= ========== ========= =========
Weighted average shares
outstanding 26,506 26,096 26,407 26,032
========= ========== ========= =========
See Notes to the Condensed Consolidated Financial Statements
Page 4 of 23
Item 1...Interim Financial Statements
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
---- ----
OPERATING ACTIVITIES
Net income $ 1,017 $ 12,131
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,875 5,413
Increase in allowance for doubtful accounts 422 125
Minority interest (52) 440
Write-off of acquired in-process research and
development costs 2,290 --
Write-off of capitalized software costs and equipment
in connection with merger 7,406 --
Changes in operating assets and liabilities:
Accounts receivable (5,350) (10,116)
Prepaid expenses 188 (115)
Accounts payable (3,498) 1,654
Accrued expenses 11,557 4,150
Federal and state taxes payable (10,994) 112
Deferred revenue 7,213 2,268
Short-term debt 2,571 --
Other, net 1,318 (112)
-------- ---------
Net cash provided by operating activities 19,963 15,950
INVESTING ACTIVITIES
Purchase of property and equipment, net (10,524) (6,798)
Purchase of securities available-for-sale, net (76,111) (116,119)
Sale of securities available-for-sale 76,226 82,570
Capitalized software development costs (2,433) (2,573)
Other investment and advances (940) (1,104)
Purchase of certain net assets (2,500) --
--------- ---------
Net cash used in investing activities (16,282) (44,024)
FINANCING ACTIVITIES
Proceeds from sale of common stock 4,073 4,905
Payments on long-term debt related to real estate (151) (442)
Net change in note payable to bank -- (209)
--------- ---------
Net cash provided by financing activities 3,922 4,254
--------- ---------
Increase (decrease) in cash and cash equivalents 7,603 (23,820)
Cash and cash equivalents at beginning of period 12,327 37,750
-------- --------
Cash and cash equivalents at end of period $ 19,930 $ 13,930
========= =========
See Notes to the Condensed Consolidated Financial Statements
Page 5 of 23
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
All financial information for previously reported periods included in the
accompanying interim unaudited condensed consolidated financial statements of
IDX Systems Corporation ("Company" or "IDX") has been restated to reflect the
combined operations of IDX and PHAMIS, Inc. ("PHAMIS") as a result of the
merger, more fully described in Note 2, which has been accounted for as a
pooling of interests in the quarter ended September 30, 1997. No adjustments
were required to conform the financial reporting policies of IDX and PHAMIS for
the periods presented.
The interim unaudited consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission and in accordance with generally accepted accounting principles.
Accordingly, certain information and footnote disclosures normally included in
annual financial statements have been omitted or condensed. In the opinion of
management, all necessary adjustments have been made to provide a fair
presentation. The operating results for the nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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 - Business Acquisitions
On July 10, 1997 (the "Closing Date"), pursuant to an Agreement and Plan of
Merger dated as of March 25, 1997 (the "Merger Agreement") by and among IDX
Systems Corporation, a Vermont corporation, Penguin Acquisition Corporation, a
Washington corporation and wholly-owned subsidiary of IDX ("Penguin") and
PHAMIS, Inc., a Washington corporation, IDX acquired PHAMIS by means of a merger
(the "Merger") of Penguin with and into PHAMIS, with PHAMIS remaining as the
surviving corporation in the Merger. As a result of the Merger, PHAMIS became a
wholly-owned subsidiary of IDX. PHAMIS offers healthcare information solutions
that are part of a complete software and hardware system strategy design for
integrated healthcare delivery enterprises. Penguin was formed solely for the
purpose of effecting the Merger.
Pursuant to the Merger Agreement, each outstanding share of PHAMIS Common Stock
was converted into .73 of a share of IDX Common Stock. Based upon the
capitalization of PHAMIS as of the Closing Date, IDX issued approximately 4.6
million shares of IDX Common Stock to former PHAMIS stockholders in the Merger.
No fractional shares were issued in the Merger. PHAMIS stockholders otherwise
entitled to receive a fraction of a share of IDX Common Stock in the Merger
instead received an amount of cash equal to such fraction multiplied by the
price per share of IDX Common Stock on the Nasdaq national Market, as reported
by Nasdaq, on the business day immediately preceding the Closing Date. The
Merger was accounted for as a pooling of interests in the quarter ended
September 30, 1997. All previously reported operating results of IDX have been
restated to reflect the combined operations of IDX and PHAMIS.
Page 6 of 23
All options to purchase PHAMIS Common Stock outstanding immediately prior to the
Merger were effectively assumed by IDX pursuant to the Merger Agreement. IDX
registered on a Registration Agreement on Form S-8 approximately 865,568 shares
of IDX Common Stock for issuance upon the exercise of stock options formerly
exercisable for shares of PHAMIS Common Stock and in connection with the PHAMIS
Salary Savings and Deferral Plan.
Separate results of the combining entities for the six months ended June 30,
1997 and 1996 are as follows:
(In thousands)
(Unaudited)
1997 1996
---- ----
Net revenues:
IDX $ 92,606 $ 76,427
PHAMIS 24,486 24,275
---------- ----------
Combined $ 117,092 $ 100,702
========= =========
Net income (loss):
IDX $ 8,417 $ 7,209
PHAMIS (44) 822
---------- ---------
Combined $ 8,373 $ 8,031
========= =========
Net income (loss)
per share:
IDX $ .39 $ .34
PHAMIS (.01) .13
Combined .32 .31
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.
Note 3 - Merger and Related Costs
During the third quarter ended September 30, 1997, the Company recorded charges
of $20.0 million related to the merger with PHAMIS. The charges were comprised
of transaction costs of $6.8 million, long-lived assets, principally capitalized
software development costs and equipment, write-offs and adjustments of $7.4
million, attributable to the elimination of overlapping products and operations,
employee termination and related costs of $3.6 million, and other merger related
costs of $2.2 million, principally related to integration costs incurred during
the period and the termination of leases and other contractual obligations.
Page 7 of 23
At September 30, 1997, accounts payable and accrued expenses include accrued
costs of $4.3 million related to the termination of employees, leases and other
contractual obligations, substantially all of which will be paid within one
year. The write-off of long-lived assets is not expected to materially affect
amortization and depreciation of future reporting periods. In addition, the
provision for termination of employees, leases and other contractual obligations
is not expected to materially affect selling, general and administrative expense
of future periods. Management does not expect to incur significant charges
related to the merger in subsequent reporting periods.
Note 4 - Income Taxes
The provision for income taxes for the quarter ended September 30, 1997 was
provided for at the taxable income rate of approximately 20%, which is less than
the Company's historical rate of 40%. This reduction is due to a portion of the
charges, principally transaction costs, incurred in the merger of PHAMIS being
non-deductible for income tax purposes.
Note 5 - Earnings Per Share Information
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. Earnings per share as calculated under Statement
128 is not materially different from the primary and fully diluted earnings per
share amounts contained herein.
Note 6 - Reclassifications
Certain prior period amounts have been reclassified to conform with current
period presentations.
Page 8 of 23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
All information included herein for all periods has been presented to reflect
the combined operations of IDX and PHAMIS, as a result of the merger more fully
described in Note 2 to the condensed consolidated financial statements as of and
for the period ended September 30, 1997 and Significant Agreements disclosed
below.
The Company reported a net loss of $7.4 million, or $0.28 per share for the
three months ended September 30, 1997. Excluding nonrecurring expenses for costs
associated with the merger with PHAMIS, the Company reported net income of $6.4
million, or $0.24 per share, for the third quarter of 1997 as compared to net
income of $4.1 million, or $0.16 per share, for the third quarter of 1996. For
the nine months ended September 30, 1997, exclusive of the merger and related
expenses, the Company reported net income of $16.1 million for the nine month
period, or $0.61 per share as compared to net income of $12.4 million, or $0.48
per share, for the same period in 1996.
This Management's Discussion and Analysis of Financial Conditions and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
including those discussed below that could cause actual results to differ
materially from historical results or those anticipated. The Company has
identified by italics or all capital letters, various sentences within this
Quarterly Report which contain such forward-looking statements, and words such
as "believes," "may," "plans," "anticipates," "expects," "intends," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. In addition, the disclosures in
the section on page 14 under the caption "Factors Affecting Future Results,"
which is not italicized or capitalized for improved readability, consists
principally of a discussion of risks which may affect future results and, are
thus, in their entirety forward-looking in nature. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996.
REVENUES
The Company's total revenues increased to $64.6 million during the three months
ended September 30, 1997 from $51.4 million in the corresponding period in 1996,
an increase of $13.2 million or 25.7%. Revenues from systems sales increased to
$34.7 million during the three months ended September 30, 1997 (53.7% of total
revenues) from $26.4 million (51.5% of total
Page 9 of 23
revenues) in the corresponding period in 1996, an increase of $8.3 million or
31.2%. The increase was primarily due to an increase in installations of certain
of the Company's Ambulatory Suite and LASTWORD systems. Revenues from
maintenance and service fees increased to $29.9 million during the three months
ended September 30, 1997 (46.3% of total revenues) from $25.0 million (48.5% of
total revenues) in the corresponding period in 1996, an increase of $4.9 million
or 19.8%. The increase in revenues from maintenance and service fees was due
principally to additional maintenance revenues resulting from the continued
growth in the Company's installed client base.
COST OF SALES
The cost of sales and services increased to $33.6 million during the three
months ended September 30, 1997 from $27.1 million in the corresponding period
in 1996, an increase of $6.5 million or 23.7%. The gross profit margin on
systems sales and services increased to 48.0% during the three months ended
September 30, 1997 from 47.2% in the corresponding period in 1996. The increase
in gross profit was due primarily to the increase in the installations of
certain of the Company's products from its Ambulatory Suite and LASTWORD
systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $12.5 million during
the three months ended September 30, 1997 from $11.5 million in the
corresponding period in 1996, an increase of $1.0 million or 9.3%. As a
percentage of total revenues, selling, general and administrative expenses
decreased to 19.4% during the three months ended September 30, 1997 from 22.3%
in the corresponding period in 1996. The increase in selling, general and
administrative expenses during the three months ended September 30, 1997 was
principally due to an increase in the Company's sales and marketing staff.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $9.3 million during the three
months ended September 30, 1997 from $7.4 million in the corresponding period in
1996, an increase of $1.9 million or 26.0%. The increase is attributed to an
increase in personnel expenses and outside consultants to support the
development of additional products for the Company. As a percentage of total
revenues, research and development expenses increased slightly to 14.4% during
the three months ended September 30, 1997 compared to 14.3% in the corresponding
period in 1996.
MERGER AND RELATED COSTS
During the third quarter ended September 30, 1997, the Company recorded charges
of $20.0 million related to the merger with PHAMIS. The charges were comprised
of transaction costs of $6.8 million, long-lived assets, principally capitalized
software development costs and equipment, write-offs and adjustments of $7.4
million, attributable to the elimination of overlapping products and operations,
employee termination and related costs of $3.6 million, and other merger related
costs of $2.2 million, principally related to integration costs incurred during
the period and the termination of leases and other contractual obligations.
Page 10 of 23
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES
The Company's total revenues increased to $181.6 million during the nine months
ended September 30, 1997 from $152.1 million in the corresponding period in
1996, an increase of $29.5 million or 19.4%. Revenues from systems sales
increased to $98.0 million during the nine months ended September 30, 1997
(54.0% of total revenues) from $81.9 million (53.9% of total revenues) in the
corresponding period in 1996, an increase of $16.1 million or 19.7%. The
increase was primarily due to an increase in installations of certain of the
Company's Ambulatory Suite and LASTWORD systems. Revenues from maintenance and
service fees increased to $83.6 million during the nine months ended September
30, 1997 (46.0% of total revenues) from $70.2 million (46.1% of total revenues)
in the corresponding period in 1996, an increase of $13.4 million or 19.1%. The
increase in revenues from maintenance and service fees was due principally to
additional maintenance revenues resulting from the continued growth in the
Company's installed client base.
COST OF SALES
The cost of sales and services increased to $94.7 million during the nine months
ended September 30, 1997 from $79.8 million in the corresponding period in 1996,
an increase of $14.9 million or 18.6%. The gross profit margin on systems sales
and services increased to 47.9% during the nine months ended September 30, 1997
from 47.6% in the corresponding period in 1996. The increase in gross profit was
due primarily to the increase in the installations of certain of the Company's
products from its Ambulatory Suite and LASTWORD systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $37.8 million during
the nine months ended September 30, 1997 from $33.3 million in the corresponding
period in 1996, an increase of $4.5 million or 13.7%. As a percentage of total
revenues, selling, general and administrative expenses decreased to 20.8% during
the nine months ended September 30, 1997 from 21.9% in the corresponding period
in 1996. The increase in selling, general and administrative expenses during the
nine months ended September 30, 1997 was principally due to an increase in the
Company's sales and marketing staff.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $26.4 million during the nine
months ended September 30, 1997 from $22.2 million in the corresponding period
in 1996, an increase of $4.2 million or 18.8%. The increase is attributed to an
increase in personnel expenses and outside consultants to support the
development of additional products for the Company. As a percentage of total
revenues, research and development expenses decreased slightly to 14.5% during
the nine months ended September 30, 1997 from 14.6% in the corresponding period
in 1996.
MERGER AND RELATED COSTS
During the third quarter ended September 30, 1997, the Company recorded charges
of $20.0 million related to the merger with PHAMIS. The charges were comprised
of transaction costs of $6.8 million, long-lived assets, principally capitalized
software development costs and
Page 11 of 23
equipment, write-offs and adjustments of $7.4 million, attributable to the
elimination of overlapping products and operations, employee termination and
related costs of $3.6 million, and other merger related costs of $2.2 million,
principally related to integration costs incurred during the period and the
termination of leases and other contractual obligations.
WRITE-OFF ON ACQUIRED IN PROCESS RESEARCH AND DEVELOPMENT
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.
SIGNIFICANT AGREEMENTS
On July 10, 1997 (the "Closing Date"), pursuant to an Agreement and Plan of
Merger dated as of March 25, 1997 (the "Merger Agreement") by and among IDX
Systems Corporation, a Vermont corporation, Penguin Acquisition Corporation, a
Washington corporation and wholly-owned subsidiary of IDX ("Penguin") and
PHAMIS, Inc., a Washington corporation, IDX acquired PHAMIS by means of a merger
(the "Merger") of Penguin with and into PHAMIS, with PHAMIS remaining as the
surviving corporation in the Merger. As a result of the Merger, PHAMIS became a
wholly-owned subsidiary of IDX. PHAMIS offers healthcare information solutions
that are part of a complete software and hardware system strategy design for
integrated healthcare delivery enterprises. Penguin was formed solely for the
purpose of effecting the Merger.
Pursuant to the Merger Agreement, each outstanding share of PHAMIS Common Stock
was converted into .73 of a share of IDX Common Stock. Based upon the
capitalization of PHAMIS as of the Closing Date, IDX issued approximately 4.6
million shares of IDX Common Stock to former PHAMIS stockholders in the Merger.
No fractional shares were issued in the Merger. PHAMIS stockholders otherwise
entitled to receive a fraction of a share of IDX Common Stock in the Merger
instead received an amount of cash equal to such fraction multiplied by the
price per share of IDX Common Stock on the Nasdaq National Market, as reported
by Nasdaq, on the business day immediately preceding the Closing Date. The
merger was accounted for as a pooling of interests in the quarter ended
September 30, 1997. All previously reported operating results have been restated
to reflect the combined operations of IDX and PHAMIS.
All options to purchase PHAMIS Common Stock outstanding immediately prior to the
Merger were effectively assumed by IDX pursuant to the Merger Agreement. IDX
registered on a Registration Agreement on Form S-8 approximately 865,568 shares
of IDX Common Stock for issuance upon the exercise of stock options formerly
exercisable for shares of PHAMIS Common Stock and in connection with the PHAMIS
Salary Savings and Deferral Plan.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1969, the Company has funded its operations, working
capital needs and capital expenditures primarily from operations, except for
real estate owned by certain partnerships and trusts financed through industrial
development bonds.
Page 12 of 23
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 payable and accrued expenses. Due to the seasonality of the Company's
business, accounts receivable, deferred revenue and accounts payable fluctuate
considerably but almost completely due to the volume of business and timing of
the recognition of revenue. In general, accounts receivable from customers have
been collected consistently within 90 days.
Cash flows related to investing activities have principally been related to the
purchase of computer and office equipment, leasehold improvements, and the
purchase and sale of investment grade marketable securities. MANAGEMENT EXPECTS
THESE ACTIVITIES TO CONTINUE. INVESTING ACTIVITIES MAY ALSO INCLUDE PURCHASES OF
INTERESTS IN AND ACQUISITIONS OF COMPANIES WITH COMPLEMENTARY PRODUCTS,
TECHNOLOGIES AND BUSINESSES.
Cash and cash equivalents at September 30, 1997 were $19.9 million, an increase
of $7.6 million from December 31, 1996. The majority of the increase was due to
cash provided by operating activities. 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 September 30, 1997 or
1996.
The Company's operating lease commitments consist primarily of office leasing
for the Company's operating facilities. THE COMPANY EXPECTS THAT ITS
REQUIREMENTS FOR OFFICE FACILITIES AND OTHER OFFICE EQUIPMENT WILL GROW AS
STAFFING REQUIREMENTS DICTATE. THE COMPANY PLANS TO CONTINUE INCREASING THE
NUMBER OF ITS PROFESSIONAL STAFF DURING 1997 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 1997. To date, inflation
has not had a material impact on the Company's revenues or income.
INCOME TAXES
The provision for income taxes for the quarter ended September 30, 1997 was
provided for at the taxable income rate of approximately 20%, which is less than
the historical rate of 40%. This reduction is due to a portion of the charges
incurred in the merger, principally transaction costs, of PHAMIS being
non-deductible for income tax purposes. FOR THE FORESEEABLE FUTURE, THE COMPANY
ANTICIPATES AN EXPECTED TAX RATE OF APPROXIMATELY 40% OF PRE-TAX INCOME.
NEW ACCOUNTING STANDARDS
In October, 1997 the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 92-7, Software Revenue Recognition, revising
certain aspects of SOP 91-1. The SOP will be effective for transactions
occurring in years beginning after December 15, 1997. THE COMPANY DOES NOT
EXPECT THE SOP WILL MATERIALLY AFFECT ITS REVENUE RECOGNITION POLICIES WITH
RESPECT TO SOFTWARE LICENSE FEES WHICH ARE PRINCIPALLY RECOGNIZED IN CONNECTION
WITH THE FULFILLMENT OF CONTRACTUAL OBLIGATIONS BASED UPON ACHIEVEMENTS OF
MILESTONES.
Page 13 of 23
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. Earnings per share as calculated under Statement
128 is not materially different from the primary and fully diluted earnings per
share amounts contained herein.
FACTORS AFFECTING FUTURE RESULTS
As announced on July 10, 1997 the Company completed its acquisition of PHAMIS.
The operations of IDX and PHAMIS involve the creation, sale and support of
computer systems for healthcare clients. Such operations differ primarily with
respect to the nature of each of IDX's and PHAMIS's clientele and product
technologies. Integrating the operations (including product development,
installation of information and software systems, client services, marketing
plans and activities, employee hiring and training, and expansion strategy) and
management of the two companies has been and is expected to continue to be a
time-consuming process, and there can be no assurance that this integration will
result in the achievement of any of the anticipated synergies and other benefits
expected to be realized from the Merger. Moreover, the integration of these
organizations will require the dedication of management resources, which may
temporarily distract attention from the day-to-day business of the Company. The
inability of management to successfully integrate the operations of the two
companies could have a material adverse effect on the business and operating
results of the operations of IDX and PHAMIS after the merger. As previously
discussed in the section "Merger and Related Costs" the Company has incurred
significant merger and related costs. Additional unanticipated expenses may be
incurred in connection with the integration of the business of the Company and
PHAMIS.
The Company's revenues and operating results can vary significantly from quarter
to quarter as a result of a number of factors, including the volume and timing
of systems sales and installations, and length of sales cycles and installation
efforts. The timing of revenues from systems sales is difficult to forecast
because the Company's sales cycle can vary depending upon factors such as the
size of the transaction, the changing business plans of the customer, the
effectiveness of customer's management, and general economic conditions. In
addition, because revenue is recognized at various points during the
installation process, the timing of revenue recognition varies considerably
based on a number of factors, including availability of personnel, availability
of the customer's resources and complexity of the needs of the customer's
organization. The Company's initial contact with a potential customer depends in
significant part on the customer's decision to replace, expand, or substantially
modify its existing information systems, or modify or add business processes or
lines of business. How and when to implement, replace, expand or substantially
modify an information system or modify or add business processes or lines of
business, are major decisions for health care organizations. Accordingly, the
sales cycle for the Company's systems is typically three to 18 months or more
from contract execution to completion of installation. During the sales cycle
and the installation cycle, the Company expends substantial time, effort and
funds preparing contract proposals, negotiating the contract and implementing
the system. Because a significant percentage of the Company's expenses are
relatively fixed, a variation in the timing of systems sales and installation
can cause significant
Page 14 of 23
variations in operating results from quarter to quarter. The Company's future
operating results may fluctuate as a result of these and other factors, such as
customer purchasing patterns, and the timing of new product and service
introductions and product upgrade releases.
The Company's revenues have historically followed seasonal patterns with a lower
level of sales and installations occurring in the fiscal quarter ending
September 30. The Company believes that such seasonal fluctuation is
attributable to a number of factors, including the vacation schedules of its
clients. The Company is not able to predict what impact, if any, the change will
have on the seasonality of the Company's business. The Company believes that
quarterly results of operations will continue to be subject to significant
fluctuations and that its results of operations for any particular quarter or
fiscal year may not be indicative of results of operations for future periods.
There can be no assurance that future seasonal and quarterly fluctuations will
continue and will not have a material adverse effect on the Company's results of
operations, financial condition or business.
The stock market has, from time to time, experienced extreme price and volume
fluctuations, particularly in the high technology and health care information
technology sectors, which have often been unrelated to the operating performance
of particular companies. The Company experiences fluctuations in its stock price
related to these general market swings as well as announcements of technological
innovations, new product introductions by the Company or its competitors, market
conditions in the computer software or hardware industries and healthcare reform
measures. These fluctuations could have a significant impact on the future
market price of the Company's Common Stock.
As a developer of information systems, the Company must anticipate and adapt to
evolving industry standards and new technological developments. The market for
the Company's products is characterized by continued and rapid technological
advances in both hardware and software development, requiring ongoing
expenditures for research and development and the timely introduction of new
products and enhancements to existing products. The establishment of standards
is largely a function of user acceptance. Therefore, such standards are subject
to change. The Company's future success will depend in part upon its ability to
enhance its existing products, to respond effectively to technology changes, to
migrate its clients to new technologies, to sell additional products to its
existing client base and to introduce new products and technologies to meet the
evolving needs of its clients in the health care information systems market. The
Company is currently devoting significant resources toward the development of
enhancements to its existing products and the migration of existing products to
new hardware and software platforms. There can be no assurance that the Company
will successfully complete the development of these products or this migration
in a timely fashion or that the Company's current or future products will
satisfy the needs of the health care information systems market. Further, there
can be no assurance that products or technologies developed by others will not
adversely affect the Company's competitive position or render its products or
technologies noncompetitive or obsolete.
The Company currently derives a significant percentage of its revenues from
sales of financial and administrative information systems and related services.
As a result, any factor adversely affecting sales of these products and services
could have a material adverse effect on the Company's results of operations,
financial condition or business. Although the Company has
Page 15 of 23
experienced increasing annual sales, revenues associated with existing products
may decline as a result of several factors, including price competition. There
can be no assurance that the Company will continue to be successful in marketing
its current products or any new or enhanced products or maintaining the current
pricing for its existing products.
Certain of the Company's products record and make available patient medical
histories and treatment plans. Any failure by the Company's products to provide
accurate, secure and timely information could result in product liability claims
against the Company by its clients or their affiliates or patients. The Company
maintains insurance that it believes is adequate to protect against claims
associated with the use of its products, but there can be no assurance that its
insurance coverage would adequately cover any claim asserted against the
Company. A successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the Company's results
of operations, financial condition or business. Even unsuccessful claims could
result in the expenditure of funds in litigation, as well as diversion of
management time and resources. There can be no assurance that the Company will
not be subject to product liability claims, that such claims will not result in
liability in excess of its insurance coverage or that the Company's insurance
will cover such claims or that appropriate insurance will continue to be
available to the Company in the future at commercially reasonable rates.
The success of the Company is dependent to a significant degree on its key
management, sales and marketing, and technical personnel. The Company believes
that its continued future success will also depend upon its ability to attract,
motivate and retain highly skilled, managerial, sales and marketing, and
technical personnel, including software programmers and systems architects
skilled in the computer languages in which the Company's products operate.
Competition for such personnel in the software and information services
industries is intense. The loss of key personnel, or the inability to hire or
retain qualified personnel, could have a material adverse effect on the
Company's results of operations, financial condition or business. Although the
Company has been successful to date in attracting and retaining skilled
personnel, there can be no assurance that the Company will continue to be
successful in attracting and retaining the personnel it requires to successfully
develop new and enhanced products and to continue to grow and operate
profitably.
The health care industry in the United States is subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of health care organizations. The Company's products are designed to
function within the structure of the health care financing and reimbursement
system currently being used in the United States. During the past several years,
the health care industry has been subject to increasing levels of governmental
regulation of, among other things, reimbursement rates and certain capital
expenditures. From time to time, certain proposals to reform the health care
system have been considered by Congress. These proposals, if enacted, may
increase government involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's clients. Health
care organizations may react to these proposals and the uncertainty surrounding
such proposals by curtailing or deferring investments, including those for the
Page 16 of 23
Company's products and services. The Company cannot predict with any certainty
what impact, if any, such proposals or health care reforms might have on its
results of operations, financial condition or business.
The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy
for the regulation of certain computer software products as medical devices
under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic
Act (the "FDC Act") and has recently indicated it may modify such draft policy
or create a new policy. To the extent that computer software is a medical device
under the policy, the manufacturers of such products could be required,
depending on the product, to (i) register and list their products with the FDA,
(ii) notify the FDA and demonstrate substantial equivalence to other products on
the market before marketing such products, or (iii) obtain FDA approval by
demonstrating safety and effectiveness before marketing a product. In addition,
such products would be subject to FDC Acts general controls, including those
relating to good manufacturing practices and adverse experience reporting.
Although it is not possible to anticipate the final form of the FDA's policy
with regard to computer software, the Company expects that, whether or not the
draft is finalized or changed, the FDA is likely to become increasingly active
in regulating computer software that is intended for use in health care
settings. The FDA can impose extensive requirements governing pre- and
post-market conditions such as service investigation, approval, labeling and
manufacturing. In addition, the FDA can impose extensive requirements governing
development controls and quality assurance processes. There can be no assurance
that actions taken by the FDA to regulate computer software products will not
have a material adverse effect on the Company's results of operations, financial
condition or business.
The Company intends to continue to grow in part through acquisitions of
complementary products, technologies and businesses or alliances with
complementary businesses. The Company's ability to expand successfully through
acquisitions or alliances depends on many factors, including the successful
identification and acquisition of products, technologies or businesses and
management's ability to effectively integrate and operate the acquired or
aligned products, technologies or businesses. There is significant competition
for acquisition and alliance opportunities in the health care information
systems industry, which may intensify due to consolidation in the industry,
thereby increasing the costs of capitalizing on such opportunities. The Company
competes for acquisition and alliance opportunities with other companies that
have significantly greater financial and management resources. There can be no
assurance that the Company will be successful in acquiring or aligning with any
complementary products, technologies or businesses; or, if acquired or aligned
with, that the Company will be able to successfully integrate any such products,
technologies or businesses into its current business and operations. The failure
to successfully integrate any significant products, technologies or businesses
could have a material adverse effect on the Company's results of operations,
financial condition or business.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results.
Page 17 of 23
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Special Meeting of Shareholders on July 9, 1997. Of the
21,041,258 shares of Common Stock outstanding and entitled to vote at this
meeting, 20,072,170 were represented at the meeting, in person or by proxy,
constituting a quorum. The following matters were voted upon.
1. Holders of 19,371,448 shares of Common Stock of the Company voted to adopt
and approve the Merger Agreement among the Corporation, Penguin Acquisition
Corporation and PHAMIS, Inc. and the issuance of shares of IDX Common Stock
in exchange for shares of PHAMIS Common Stock as described more
fully in the Joint Proxy Statement/Prospectus dated June 5, 1997.
Holders of 3,847 shares voted against such approval and 1,696
abstained from voting, with 695,179 broker non-votes.
2. Holders of 19,745,861 shares of the Common Stock of the Company voted to
approve an amendment to the IDX Second Amended and Restated Articles of
Incorporation (the "IDX Articles") to increase the total number of
shares of capital stock which IDX has the authority to issue from
55,000,000 to 105,000,000 and the total number of shares of IDX Common
which IDX has the authority to issue from 50,000,000 to
100,000,000. Holders of 322,936 shares voted against such approval
and 2,895 shares abstained from voting, with 478 broker non-votes.
3. Holders of 16,243,307 shares of Common Stock of the Company voted to
approve an amendment to the IDX Articles to increase the shareholder vote
required to approve certain business combinations from a majority to
two-thirds in the event that the then current or preexisting IDX Board does
not recommend such business combinations to the shareholders.
Holders of 2,185,676 shares voted against such approval and 951,640
shares abstained from voting, with 691,547 broker non-votes.
Page 18 of 23
4. Holders of 17,034,326 shares of Common Stock of the Company voted to
approve an amendment to IDX's 1995 Stock Option Plan to increase the number
of shares of IDX Common Stock authorized for issuance thereunder from
1,470,000 to 4,500,000 and to continue the 1995 Stock Option Plan as
described more fully in the Joint Proxy Statement/Prospectus. Holders
of 2,340,520 shares voted against such approval and 2,145 shares
abstained from voting, with 695,179 broker non-votes.
5. Holders of 19,370,530 shares of Common Stock of the Company voted to
approve an amendment to the IDX's Employee Stock Purchase Plan to increase
the number of shares of IDX Common Stock authorized for issuance thereunder
from 500,000 to 1,400,000 as described more fully in the Joint Proxy
Statement/Prospectus. Holders of 13,809 shares voted against such
approval and 1,611 shares abstained from voting, with 686,220 broker
non-votes.
6. Holders of 18,849,858 shares of Common Stock of the Company voted to
approved an amendment to IDX's Director Stock Option Plan to increase the
number of shares of IDX Common Stock authorized for issuance thereunder
from 30,000 to 80,000 as described more fully in the Joint Proxy
Statement/Prospectus. Holders of 534,665 shares voted against such
approval and 5,059 shares abstained from voting, with 682,588 broker
non-votes.
Item 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this Form 10-Q are listed on the Exhibit
Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1997, or
subsequent to that date but prior to the filing date of this Form10-Q:
On July 25, 1997 the Company filed a report on Form 8-K, reporting that on
July 10, 1997, pursuant to an Agreement and Plan of Merger dated as of
March 25, 1997 (the "Merger Agreement") by and among the Company, Penguin
Acquisition Corporation, a wholly-owned subsidiary of IDX ("Penguin") and
PHAMIS, Inc., IDX acquired PHAMIS by means of a merger (the "Merger") of
Penguin with and into PHAMIS, Inc., with PHAMIS remaining as the surviving
corporation in the Merger. As a result of the Merger, PHAMIS became a
wholly-owned subsidiary of IDX. Penguin was formed solely for the purpose
of effecting the Merger.
Page 19 of 23
SIGNATURES
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDX SYSTEMS CORPORATION
Date: November 13, 1997 By:/s/JOHN A. KANE
--------------------------------
John A. Kane,
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
Page 20 of 23
EXHIBIT INDEX
Exhibit Index
-------------
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
Exhibit No. Description Page
- ----------- ----------- ----
11 Statement regarding computation of per share earnings. 22
12 Statement regarding computation of per share earnings. 23
Page 21 of 23
EXHIBIT 11
IDX SYSTEMS CORPORATION
SCHEDULES OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
PRIMARY FULLY DILUTED
================== ==================
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
================== ==================
Weighted average
shares outstanding 25,735 25,323 25,735 25,323
Net dilutive effect of
stock options-based
on the treasury
stock method using
the average price for
primary and ending
price, if higher, for
fully diluted 771 773 771 773
------------------- ------------------
Total shares 26,506 26,096 26,506 26,096
=================== ==================
Income (loss) ($7,355) $ 4,100 ($ 7,355) $ 4,100
======== ======== ========= ========
Net income (loss) per share ($ 0.28) $ 0.16 ($ 0.28) $ 0.16
======== ======== ========= ========
Page 22 of 23
EXHIBIT 12
IDX SYSTEMS CORPORATION
SCHEDULES OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
PRIMARY FULLY DILUTED
------------------- ---------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------------- ---------------------
Weighted average
shares outstanding 25,607 25,091 25,607 25,091
Net dilutive effect of
stock options-based
on the treasury stock
method using the average
price for primary and
ending price, if higher,
for fully diluted 800 941 800 941
---------------------- -----------------------
Total shares 26,407 26,032 26,407 26,032
====================== =======================
Net income $1,017 $12,131 $1,017 $12,131
====== ======= ====== =======
Net income per share $ 0.04 $ 0.48 $ 0.04 $ 0.48
====== ======= ====== =======
Page 23 of 23