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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999 Commission File No. 000-26816
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IDX SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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VERMONT 03-0222230
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
1400 Shelburne Road, P.O. Box 1070, South Burlington, Vermont 05403
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (802) 862-1022
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
The aggregate market value of voting Common Stock held by nonaffiliates
of the registrant was $464,153,699 based on the last reported sale price of
the Common Stock on the Nasdaq consolidated transaction reporting system on
March 15, 2000.
Number of shares outstanding of the registrant's class of Common Stock
as of March 15, 2000: 28,011,437
Documents incorporated by reference:
Proxy Statement for the 2000 Annual Meeting of Stockholders--
Part II and Part III
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PART I
ITEM 1. BUSINESS
OVERVIEW
IDX is a leading provider of healthcare information solutions in the United
States. IDX offers solutions including software, hardware, and related services
required by physician groups, management services organizations (MSOs),
hospitals, and integrated delivery networks (IDNs). IDX solutions use computer
and Internet technologies to reengineer clinical, financial and administrative
processes to improve healthcare efficiency and quality.
The Company operates its information systems and services business segment under
the IDX(R) name, consisting of hardware sales, software licensing and related
services. In October 1999, the Company announced it had organized its Internet
services and content business segment, formerly referred to as IDX.com, under
the name of ChannelHealth(TM), which integrates content, transactions, and
information systems using Internet technology. IDX is the exclusive distributor
of ChannelHealth's products and services to customers of IDX products. In April
1999, the Company acquired EDiX Corporation (formed in 1994), and the Company
conducts its medical dictation and transcription services business segment under
the EDiX(TM) name.
IDX solutions are packaged as the IDXtendR(TM) @ the Site Series, where the
"Site" corresponds to settings across the care continuum: IDXtendR @ the Group
Practice, IDXtendR @ the MSO, IDXtendR @ the Hospital (also known as
"LastWord(TM)"), and IDXtendR @ the IDN. IDX's radiology and imaging products
are marketed as IDXrad (TM)and the IDX Imaging Suite. The IDXtendR and radiology
product lines employ relational, scalable, client/server architecture and
provide both ambulatory and hospital capabilities. The EDiX(TM) line of medical
dictation and transcription services are sold to IDNs, hospitals, and physician
groups and employ telephone communications, a digital recording system, and a
secure, centralized transcription operations hub for collection and
distribution. ChannelHealth's line of Internet services are packaged as three
"channels," that correspond to specialized deployments to physicians, patients,
and administrators.
As of December 31, 1999, IDX's systems were deployed by approximately 118,000
physicians and were installed at over 2065 client sites, including over 265
large group practices with greater than 75 physicians, over 510 small group
practices with less than 75 physicians, and more than 280 IDNs representing more
than 370 hospitals.
IDX was incorporated in Vermont on June 2, 1969. IDX's executive offices are
located at 1400 Shelburne Road, South Burlington, Vermont 05403 and its
telephone number is (802) 862-1022.
INDUSTRY BACKGROUND
Healthcare costs in the United States have risen dramatically over the past two
decades relative to the overall rate of inflation. While reimbursement for
healthcare has historically been based on a fee-for-service model of payment,
managed care organizations and other payors utilize alternative reimbursement
models that shift the financial risk of delivering healthcare from payors to
both physicians and institutional providers. The Company believes that pressures
to control costs have contributed to the movement of care from more expensive
inpatient settings, such as hospitals, to ambulatory settings. Further, the
Company believes that ambulatory care providers, particularly physician groups,
continue to deliver the majority of healthcare services, bear an increasing
share of financial risk, and control a substantial portion of total healthcare
resources.
Over the past decade, individual physicians, physician groups and other
ambulatory care providers joined and affiliated with other physicians, managed
care organizations, hospitals and other enterprises to form larger healthcare
organizations known as IDNs. These organizations have been formed to manage the
continuum of healthcare services for population groups across both inpatient and
ambulatory settings to improve quality and reduced costs for patients and
members.
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Recently, the consolidation of physicians into larger groups has slowed.
However, the Company believes that smaller physician groups will continue to
form relationships to consolidate information technology and practice management
functions. The Company does believe that many existing large physician groups
are growing and their information technology needs are becoming increasingly
complex. The Company expects the total number of IDNs to remain stable, but the
Company expects existing IDNs to continue to grow by expanding their market
coverage through the acquisition of hospitals and group practices, with a
resulting increase in their needs for information technology integration.
Management believes a key operational principle for healthcare organizations
will be to control and influence the complete treatment of a patient during an
episode (or entire lifetime) of care, regardless of the organization's legal
structure or sources of payment for care.
The Company expects that continued growth in Internet usage will have a
profound impact on healthcare for both patients and providers. While commercial
health Web sites, offer consumers valuable insights and increased involvement in
their own health issues, the Company believes healthcare organizations will be
concerned that patients may rush to clinical judgment based on incomplete,
incorrectly interpreted, or even inaccurate information. In addition, the
Company believes healthcare organizations will be concerned that use of
commercial health Web sites by patients will undermine the personal and local
relationship between patients and physicians. The Company expects that these
organizations will need to use the Internet to establish and cultivate online
relationships with patients that will improve the effectiveness of healthcare
they deliver and enhance physician patient relationships.
In response to the proliferation of Internet use, the "eHealth" industry is
currently emerging. The Company believes information solutions vendors will
significantly alter their products and services to take advantage of the eHealth
opportunity, resulting in increased customer expectations for improved
connectivity to partners, access to data, system reliability, and lower costs.
The Company believes the broad use of Web technology presents an opportunity to
benefit all constituencies in healthcare strengthening the relationship between
patients and physicians, enabling physicians to improve the coordination and
quality of care, and connecting healthcare organizations with trading partners
to increase efficiency and save money.
The Company believes that increased consumer, government, employer, and payor
awareness of the high incidence and resulting cost of medical errors will result
in increased interest in clinical information systems. It has been estimated
that in the U.S., between 44,000 and 98,000 unnecessary deaths result each year
from errors in medical treatment, making medical errors the eighth leading cause
of death, ahead of automobile accidents, breast cancer, and AIDS. Aside from
human costs, the total financial cost of medical errors has been estimated at up
to $8 billion per year. A significant portion of medical errors result from
incorrect administration of medications - the wrong drug (often stemming from
misinterpreted handwriting or medications with similar sounding names) the wrong
dosage, or contraindications (unanticipated interactions) with other drugs or
patient conditions that were not noted). Online information processing,
specifically computerized physician ordering of medications, can decrease the
incidence of adverse drug events resulting from medication errors. Overall, the
Company believes that reducing medical errors will require extensive changes
throughout the healthcare delivery system. The Company anticipates that
increased use of information systems will be a significant factor in changing
industry practices to reduce medical errors.
Healthcare organizations face increasing regulation and scrutiny by federal,
regional and local authorities. Compliance with regulations governing healthcare
cost reimbursement, insurance, and administration impose financial burdens on
healthcare organizations. Managed care and payor rules continue to grow in
number and complexity. Recently, proposed regulations published under the Health
Insurance Portability and Accountability Act of 1996 (HIPAA) have created
significant operational challenges to healthcare providers and payors. The
Company believes that well designed, up-to-date information solutions can play
significant roles in complementing the implementation of healthcare
organizations' internal compliance policies.
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STRATEGY
IDX seeks to maximize value for its clients by delivering information solutions
designed to improve healthcare quality, reduce healthcare costs, and improve
operations. The IDX strategy includes building on its success as a leading
vendor of comprehensive administrative and financial information systems and
building on the reputation of its LastWord clinical product to create increased
opportunities for comprehensive clinical solutions. In addition, IDX expects to
increase penetration of the group practice market by combining service offerings
and products to improve customers' operational processes. IDX believes that
information systems can play a significant role in supporting regulatory
compliance efforts of healthcare organizations and will offer products and
services to address these efforts.
IDX, through ChannelHealth, provides a set of modular Internet services that
integrate with the core practice management and clinical systems used by
healthcare providers. IDX believes it can leverage its presence in the physician
group practice and hospital markets to rapidly build a significant base for
ChannelHealth's physician desktop solutions. IDX will seek to co-brand
ChannelHealth's services with IDX's healthcare provider customers, leveraging
strong patient-provider relationships to drive usage of ChannelHealth's Internet
services. IDX believes that establishing a significant presence with
ChannelHealth's Physician, Patient and eCommerce Channels will permit
ChannelHealth to sell value-added products and services and capture recurring
revenue from the eHealth sector, including fees from processing clinical,
financial and administrative transactions.
IDX will seek to position EDiX as a vendor of comprehensive medical dictation
and transcription services, on an outsourcing basis, to take advantage of
opportunities where customers seek to reduce costs in non-core areas.
IDX believes that the combined strengths of IDX clinical, financial and
administrative products, EDiX medical dictation and transcription services, and
ChannelHealth Internet solutions will position IDX to provide high-value,
comprehensive technologies to healthcare organizations, with an emphasis on
clinical excellence, Internet connectivity, and support of compliance efforts.
Key elements of IDX's strategy are:
MARKET CLINICAL PRODUCTS AS COMPREHENSIVE CLINICAL SOLUTIONS. The Company offers
a broad range of clinical products, including the LastWord clinical system,
IDXtendR patient service applications, EDiX medical dictation and transcription
services, ChannelHealth Physician Services, and IDXrad radiology information
system. The Company believes these separate clinical offerings used in
combination present a comprehensive solution for healthcare organizations
seeking improvements in clinical care. The Company will invest in LastWord
product improvements to include enhancements to ambulatory clinical workflow,
nursing workflow, physician order entry, expert systems for decision support,
structured text capabilities and pharmacy and medication management workflow.
The Company will differentiate its clinical solutions by emphasizing the broad
range of clinical functions available from the combination of its diverse
offerings.
PROVIDE PRODUCTS THAT SUPPORT REGULATORY AND COMPLIANCE EFFORTS. The Company
believes that information tools to support regulated customer business practices
will be beneficial to customers seeking greater reliability and predictability
of their business practices. The Company has invested in automated work flows,
primarily in its financial and clinical products, that can be tailored by
healthcare organizations to compliment their internal regulatory compliance
policies and efforts. The Company will market this complementary functionality
as tools to assist healthcare organizations in implementing their own regulatory
compliance policies.
Key Elements of IDX's information systems and services business segment are:
CROSS SELL LASTWORD PRODUCTS TO IDXTENDR CUSTOMERS. The Company will continue
investments in the integration of the ambulatory and acute care components of
IDXtendR and LastWord to meet IDN enterprise requirements for clinical and
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administrative processes that span complex healthcare enterprises. The Company
believes that market acceptance of LastWord will provide opportunities to expand
its market position in the IDN market. The Company expects its relationships
with prestigious medical groups and academic medical practices that are
affiliated with hospitals will enhance opportunities to cross sell LastWord
enterprise functionality.
EXPAND MEDICAL GROUP PRACTICE MARKET SHARE. The Company will seek to enhance its
current large group practice and academic practice market leadership by
increasing sales efforts in the smaller and midsized group practice market. In
addition, the Company expects to market a combination of group practice products
and consulting services as combined solutions or "programs" to address the needs
of the group practice market to continue to achieve efficiency and reduce costs.
IDX expects to design programs to deliver solutions to administrative problems
involving patient flow, financial flow, and decision support. IDX plans to
incorporate consulting services to measure organizational and solution
performance against industry best practices will be incorporated into these
programs. ChannelHealth will incorporate physician and business services into
the core practice management offerings. By emphasizing integration among
LastWord, IDXtendR, and IDXrad, the Company expects to target independent
imaging centers and group practices with large radiology components.
ACCELERATE DELIVERY OF PRODUCTS AND SERVICES. Increasingly competitive pressures
on healthcare organizations are creating a need for a faster return on
investment in information solutions. At the same time, customers are responding
to the increasing complexity of information technology with requests for more
consultative assistance in the area of systems implementations. To address these
needs, the Company has developed an improved implementation process called
"IDXpedite" which uses a consultative process to align prioritized business
objectives directly to system functionality. Through detailed project scoping,
consultation, and the use of prototypes in the design phase, IDXpedite will
allow customers to go live on key functionality more quickly and reduce overall
implementation time.
Key elements of IDX's Internet services and content business segment are:
MARKET A COMPREHENSIVE EHEALTH SOLUTION. The Company believes that to take
advantage of Internet capability, a comprehensive healthcare information system
must access the essential financial, clinical, and administrative data residing
in practice management and clinical systems. Through enabling technologies, IDX
will provide the essential "backbone" to bring data from both IDX and non-IDX
systems to a single, integrated Web desktop. The Company will market its systems
such as LastWord and IDXtendR, together with ChannelHealth's desktop services as
a physician desktop that integrates essential medical workflow and a broad range
of content and transactions.
PRODUCTS AND SERVICES
IDX offers a comprehensive suite of information technology solutions to help
healthcare organizations improve the quality and reduce the cost of care
delivery. The core IDX financial, administrative, and clinical solutions
combined with ChannelHealth(TM) Internet-based services and EDiX transcription
services will deliver a broad information system solution to physician group
practices, management service organizations, academic medical centers,
hospitals, and IDNs.
IDX products provide a wide range of technology solutions for healthcare
organizations, including electronic medical records, practice management
systems, acute care systems, imaging, transcription, and connectivity services.
Key healthcare processes automated by IDX solutions include:
- - financial and managed care functions such as billing,
- - collections, benefit management, contract management, and data
analysis
- - administrative functions such as scheduling, registration, and visit
management
- - clinical functions such as medical records, transcription, laboratory,
pharmacy, and radiology information management.
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Below is a description of IDX, ChannelHealth, and EDiX products and services as
of February 29, 2000.
PRODUCTS AND SERVICES OF INFORMATION SYSTEMS AND SERVICES BUSINESS SEGMENT
IDXTENDR. Provides comprehensive and integrated financial, administrative, and
managed care applications for large group practices, academic medical centers,
and IDNs.
ENTERPRISE WIDE SCHEDULING (EWS)
- - schedules patients, providers, and resources in physician group settings
or across a healthcare delivery enterprise
- - manages schedules and coordinates appointments in the acute care
environment and is integrated with orders for procedure scheduling
REGISTRATION
- - stores patient demographics and insurance information
- - creates a single master database of patient information across multiple
care settings
- - includes patient registration, charge entry, fee schedule, patient
list, user registration, security and text messaging functions
VISIT MANAGEMENT
- - provides inpatient and outpatient admission and discharge capabilities for
physician practices, outpatient care centers and hospitals
- - reports information related to patient registration, visits, bed
management, and insurance management
- - tracks patient interactions to build the comprehensive electronic medical
record
BILLING AND ACCOUNTS RECEIVABLE (BAR)
- - integrated billing and receivables management with comprehensive analysis
and reporting
- - includes a check writer for patient refunds
- - provides patient billing and insurance billing for professional
charges, HCFA 1500
- - supports insurance and employer package pricing and workers compensation
billing
HOSPITAL PATIENT ACCOUNTING (HPA)
- - manages patient billing, collection and insurance management from initial
registration through resolution of payment
- - supports HCFA 1500 and UB92 billing
TRANSACTION EDITING SYSTEM (TES)
- - captures, evaluates, and facilitates editing of charge and claim data
- - allows transactions to be edited for completeness and re-tested before
they are entered into BAR and MCA applications
MANAGED CARE (MCA)
- - maintains member registration, demographic, and financial data and
automatically applies benefits as defined in the member's plan
- - provides a comprehensive referrals system with authorization tracking,
concurrent review, pre-certification, length of stay assignment, and
provider selection
- - provides case identification, care plan tracking, cost simulation,
form letters, and linking of service records
- - adjudicates and processes claims and statistical encounters
- - provides billing for employer groups and self-pay members and manages
receivables
- - provides flexible risk management (fund accounting), tracking, and
reporting
- - provides issue tracking, responsibility assignment, workflow management
with automatic ticklers, and letter production
- - manages capitated contracts across the enterprise
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CONTRACT REFERENCE
- - catalogs and maintains insurance plan information providing ready access to
referral and authorization requirements, covered and non-covered
procedures, and copayment information
ELECTRONIC DATA INTERCHANGE
- - automates the computer-to-computer exchange of data such as claims
submittals and remittances, health plan eligibility information, and
integrated credit card processing
INTERCEPT(TM)
- - facilitates contract administration, encoding, modeling, cost allocation,
and determination of contract reimbursement through a sophisticated
contract management system
ANALYZER
- - provides relational reporting and analysis of IDX data using Microsoft SQL
Server and on-line analytical processing (OLAP) for multi-dimensional
analysis in a graphical user environment
- - assists in understanding critical business data to improve key business
measures
ENTERPRISE VIEW
- - provides an enterprise-wide, system independent, relational data
repository for retrospective decision support
- - supports both clinical quality and outcomes improvement studies as well
as financial and marketing knowledge management
- - features a Web-based front-end access tool
ENTERPRISE INDEX
- - provides a master person index used to track patient and member
registration information and visit histories across multiple locations in a
delivery network
LASTWORD ENTERPRISE CLINICAL SYSTEM. Provides comprehensive and integrated
clinical, administrative, and financial applications to hospitals and IDNs
Clinical Information Management
- - facilitates an interdisciplinary approach to management of the care process
by providing a cross-continuum patient record and access to a structured
medical knowledge database that supports protocols and outcomes management
- - provides automated tools supporting caregiver activities such as
assessments, charting, and patient classification in a variety of
inpatient and outpatient settings, enhancing clinical productivity and
streamlining workflow
- - supports population health management with specialized tools, including
automated alerts for patient health maintenance activities and patient
panel tracking and querying
- - provides comprehensive order management and results reporting for inpatient
and ambulatory settings, supporting direct entry of orders by physicians
and streamlined processes for ordering and results review
MEDICAL RECORDS
- - provides abstracting and encoding using ICD-9, CPT-4 and DRG codes
- - streamlines chart completion activities for medical records personnel
- - streamlines all activities related to tracking physical medical
records throughout a multi-site organization
- - automates activities related to releasing patient record information to
external requesters, including tracking, billing and collection
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PHARMACY MANAGEMENT
- - provides comprehensive inpatient and outpatient pharmacy department support
that creates a closed-loop medication administration process across both
inpatient and ambulatory settings to increase efficiency and decrease the
potential for medication errors
EMERGENCY DEPARTMENT MANAGEMENT
- - provides patient flow management and tracking support for the emergency
department that is fully integrated with the inpatient and ambulatory
system, making all care activities performed in the emergency department
available as part of the patient's long-term record
GROUP PRACTICE MANAGEMENT SYSTEM (GPMS). Provides integrated financial and
administrative applications such as scheduling, registration, billing,
collections, referrals, and reporting for the small to mid-size physician group
practice
IDXSITE(TM). Provides integrated financial, administrative, and managed care
applications for midsize physician organizations such as management service
organizations, independent physician associations, and physician practice
management companies and features a Web-based thin client architecture that
provides an open desktop for access to third party applications and enables
centralized system management, reduced desktop costs, and incremental system
investments as the number of users grow
IDXRAD(TM) AND THE IDX IMAGING SUITE ENTERPRISE AND DEPARTMENTAL RADIOLOGY
SYSTEM. Automates a radiology department's clinical, demographic,
administrative, billing, scheduling, and film information.
- - provides enterprise access to patient data, exam information, results,
and corresponding digital images via the Web, supporting a filmless
and paperless environment that substantially reduces instances of film
loss and delays in reporting to physicians
- - provides bi-directional links between IDXrad, PACS and diagnostic imaging
equipment via Imaging Suite, thereby ensuring accurate data throughout the
radiology enterprise
PRODUCTS AND SERVICES OF INTERNET SERVICES AND CONTENT BUSINESS SEGMENT
THE PHYSICIAN CHANNEL(TM)
PHYSICIAN HOMEBASE(TM) . A configurable Web portal for physicians to access
Web-based content and services relevant to users' professional and personal
activities, including visual alerts and indicators of relevant clinical and
administrative events, access to medical knowledge bases, navigation to business
and clinical applications, and access to personal Web content, products, and
services.
CLINICAL WORKS. Modular and Web-based services that can be customized and
implemented incrementally to manage clinical workflow, access lab and radiology
results, manage patient medications, create notes and orders, create an
electronic medical record, including:
- - MedWorks for prescription ordering, drug utilization review and
formulary checking
- - ResultWorks for viewing clinical results and demographic and
insurance information
- - DocWorks for clinical documentation management including
transcription attestation and editing (Currently in development.)
- - ChargeWorks for clinical charge capture and procedure and billing
coding (Currently in development.)
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THE PATIENT CHANNEL(TM) (Currently in development). Includes Web-based tools
such as the "Virtual Office" that enhance the relationship between the physician
and the patient by providing patient access to physicians' Web sites for online
appointment scheduling, secure messaging, prescription renewal processing,
referral requests, account balance inquiry and payment, and online test results.
ECOMMERCE CHANNEL(TM) (Currently in development) Provides Internet services to
help manage the financial and administrative aspects of care delivery enabling
healthcare organizations to interact electronically with providers, payors,
pharmacies, labs, and other suppliers.
CLINICAL MANAGEMENT SYSTEM (CMS)
- - a comprehensive ambulatory electronic medical record including clinical
guidelines, patient health plan requirements, and drug interaction
information
- - supports physician workflow by helping to organize tasks, facilitate
communication, and enable efficient documentation and care planning
- - includes ambulatory clinical repository for clinical data tracking and
reporting
OUTREACH(TM) Provides remote access to IDX business and clinical applications
through the Internet or intranets.
EDIXPRESS(TM) Web-based tool for viewing transcriptions produced by EDiX's
medical dictation and transcription services.
DIETSITE(TM) Provides information on health, nutrition, food, and diet choices
to guide consumers, including o analysis of diets and recipes o sports nutrition
information o information on specialized diets o nutrition facts and news o a
chat room for consumers
SERVICES OF MEDICAL DICTATION AND TRANSCRIPTION SERVICES BUSINESS SEGMENT
EDIX MEDICAL DICTATION AND TRANSCRIPTION SERVICES
- - provides a dictation and transcription outsourcing solution to
physician groups, hospitals, and integrated delivery networks
- - automates the transcription process helping to meet regulatory
compliance requirements
- - employs a proprietary technology gateway and intranet technology
to ensure quality and conformity of transcribed data
- - uses encrypted data transmission for the highest level of data security
- - includes automated report routing for enhanced quality and fast turn
around
BUSINESS RELATIONSHIPS
COMPAQ
Compaq is a leading provider of hardware and operating system software used by a
majority of the applications offered by IDX. The IDXtendR suite of applications
runs on Compaq's Alpha platform using the OpenVMS operating system. The LastWord
suite of applications is powered by Compaq's Tandem platform in a non-stop
architecture. A number of other IDX applications running on Microsoft NT and SQL
Server are powered by Compaq's Proliant platform.
IBM
IBM is a leading provider of hardware and operating systems software used by
many of the applications offered by IDX. The IDXtendR and GPMS suite of
applications run on the RISC System/6000 platform using the AIX operating
system. A number of other IDX applications, including IDXsite, are powered by
IBM's Netfinity servers using Microsoft NT and SQL Server.
INTERSYSTEMS
IDX uses Intersystems database offerings exclusively for its IDXtendR suite of
products. These database systems include OpenM and Cache.
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MICROSOFT
The Microsoft product suite is used in many different areas of IDX. Internally,
Windows NT, SQL Server, Internet Explorer and Office Professional are the
standards. IDXrad uses NT, SQL Server and Internet Explorer as the platform for
its flagship products. IDXsite, CMS and IDXtendR use Microsoft products to
varying degrees.
PROXYMED, INC.
ProxyMed is a provider of networked transaction services that link physicians,
laboratories, pharmacies, and payers. ProxyMed currently supplies electronic
transaction services to IDX and its customers on a preferred basis.
HEALTHEON/WEBMD
On January 24, 2000, IDX and ChannelHealth announced a strategic alliance with
Healtheon/WedMD. The strategic alliance is contingent on the acquisition by
ChannelHealth of an interest in Healtheon/WebMD in exchange for approximately 3%
of the common stock of ChannelHealth. ChannelHealth's acquisition of an interest
in Healtheon/WebMD is subject to regulatory approval, and therefore the
strategic alliance will not be consummated without regulatory approval of the
stock acquisition transaction. Upon regulatory approval, Healtheon/WebMD would
become the primary provider of content and transactions for ChannelHealth.
On March 24, 2000 the Company received a request from the U. S. Department of
Justice for additional information and documents with respect to the proposed
transaction with Healtheon/WebMD. As a result, the regulatory review process may
continue for an extended period of time. There can be no assurance that the
proposed transaction with Healtheon/WebMD will receive regulatory approval or
will ever be implemented.
SERVICES
IDX maintains a client services organization to install its products and to
support and provide professional, technical and other services to its client
base. IDX possesses the healthcare information systems expertise desired by the
growing number of larger and more sophisticated healthcare enterprises as they
reengineer healthcare delivery processes and deploy information systems to
support these processes. The services organization is experienced at installing
and supporting systems in very large organizations with thousands of computer
users across multiple departments.
INSTALLATION SERVICES. IDX installation representatives work with clients to
tailor and optimize IDX products to meet specific business needs. Services
include project management, train-the-trainer programs, best practices
comparison to other IDX clients and systems conversion and implementation
assistance. In 1999, the Company introduced a new implementation methodology
called IDXpedite, designed to provide customers with a faster return on
investment for IDX solutions while answering the need for more consultative
assistance in the area of systems implementation.
MAINTENANCE SERVICES. IDX provides ongoing software support to substantially all
of its clients of IDXtendR and LastWord products under contracts that are
typically for a term of one or more years. These contracts generally are
renewable automatically unless terminated at the option of either the client or
IDX. Software maintenance services consist of providing the client with certain
new software releases, as available, and general support, including error
corrections and telephone consultation. Software maintenance services are
generally available either on a 24-hour-a-day basis or during normal business
hours.
PROFESSIONAL AND TECHNICAL SERVICES. IDX offers professional and technical
services to assist clients in building an information infrastructure to operate
in a complex and changing healthcare environment. The work performed by IDX
includes information systems planning, process redesign, project management,
contract programming, network design, education and training. These value-added
services, combined with IDX's systems expertise, enable IDX to support its
clients' efforts to develop consistent enterprise-wide systems and processes.
Through these services, IDX believes it strengthens its relationship with
clients, builds a knowledge base of best practices in the use of IDX's systems,
and gains information regarding future client needs.
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The following sets forth a description of the services provided by the IDX
consulting organization:
PROFESSIONAL SERVICES OF INFORMATION SYSTEMS AND SERVICES BUSINESS SEGMENT
THE LAUREATE GROUP
Consulting services for all LastWord applications, implementation process,
project management, technical (systems and report writing), expert rules,
upgrades, release migration, programming, and best practices.
THE HUNTINGTON GROUP
Process redesign, organizational change management, outsourcing, and systems
integration.
TECHNICAL CONSULTING SERVICES
Performance and investment analysis and hardware upgrades, network review,
systems operational analysis, and various utilities and tools.
APPLICATION CONSULTING SERVICES
Project management, upgrades, temporary services, and operational analysis.
NETWORK CONSULTING SERVICES
Network analysis, design and implementation, temporary networking services,
client-server design and installation, and support services.
RADIOLOGY CONSULTING SERVICES
System analysis and process redesign for radiology groups.
TECHNOLOGY STRATEGY AND HARDWARE PLATFORMS
IDX designs its software to operate on a variety of technical platforms,
including computer equipment from Compaq, Hewlett Packard Company ("HP"), Data
General, and International Business Machines Corporation ("IBM"). The IDX
technology strategy employs advanced technology and connectivity solutions to
solve business problems based on a philosophy of technology for performance. Key
IDX product features embodying the strategy include a single desktop
presentation, integrated business functions, workflow across all participants,
and decision support tools. To fulfill this strategy, the IDX Technology and
Architecture Group has established an IDX Target Architecture that uses the most
current Web standards and protocols. The design of the architecture is
service-oriented, an approach recommended by the Gartner Group because it
facilitates product integration across vendors by providing standardized
interfaces that third party systems can readily understand. New products will be
built to this standard and existing IDX applications will migrate to the Target
Architecture over time. Fundamental components of the Target Architecture
include:
- - The IDX Web Framework
- - Objects and components
- - Customizable user interface and workflow tools
- - Platform independence
The IDX Web Framework is a set of software tools, user interface standards, and
style conventions that provides the ability to integrate many different
applications into a single desktop presentation. The IDX Web Framework is built
on thin client Web technology that enables an organization to deliver an
integrated IDX desktop from a Web server. The Web Framework supports single
sign-on to multiple applications and facilitates integration across applications
in a cost-effective, secure environment.
Component-based software is a software design methodology that uses concepts and
actions by describing their attributes in a programming language. Once a concept
or action has been described, that description and its accompanying software
code can be reused broadly as the building blocks for different applications.
This software design approach leads to faster development processes and allows
IDX to "plug" components together in tailored configurations, providing greater
congruence with client needs and expectations. The approach facilitates
cross-product and multi-vendor interoperability and connectivity.
Page 11
Customizable user interface and workflow tools provide the flexibility to adapt
the IDX system to meet unique business needs. A distributed workflow engine
based on Web standards (http, XML, etc.) is under development. This will allow a
heathcare institution to dynamically update and superimpose their business
processes across the enterprise by integration of multiple vendor products in an
e-commerce environment.
The platform independence foundation allows IDX and our customers to use the
best technologies available. This strategy provides options that balance the
scalability, price, and functionality issues that are involved with platform
decisions. The addition of Web-enabled IDX applications reduces the risks of
changing technologies and ensures that IDX customers have the tools needed to
operate in complex clinical and business office settings.
IDX strives to utilize technology for performance by applying the new
technologies, such as the Web, as they prove themselves able to perform well in
large-scale, transaction-driven environments. The technology for performance
philosophy seeks to protect customer investments in current systems with a
technology framework designed to allow them to expand and take advantage of new
features and new technologies as they become available. The architecture of IDX
products is expected to enable clients to incrementally migrate from one
technology to another. With a focus on reliable, scaleable hardware and software
solutions, IDX applications are expected to migrate to platform independence,
beginning with a migration to SQL and Windows NT. IDX believes that its approach
to technology, particularly the emphasis on Web-based, thin client architecture,
will provide IDX customers with flexibility and utility, while reducing costs
and deployment risks.
As a service to its clients, IDX sells third-party computers, terminals,
printers, storage devices and other peripheral devices. IDX also provides
value-added services to configure client systems. Hardware is purchased from
Compaq, IBM, Data General, and HP under renewable one-year reseller agreements.
IDX does not maintain an inventory of hardware, but relies on suppliers'
inventories to meet client delivery requirements. IDX believes that its
relationships with vendors are good.
SALES AND MARKETING
IDX sells its products and the services of ChannelHealth and EDiX exclusively
through a direct sales force. IDX is the exclusive seller of ChannelHealth's
services to the IDX customer base. The majority of IDX's sales calls are in
response to requests for proposals. IDX generates these requests and other sales
primarily through referrals from clients and consultants. IDX also seeks to
enhance market recognition through participation in industry seminars and
tradeshows, its Web site, direct mail campaigns, telemarketing and
advertisements in trade journals. IDX products typically have a 3 to 18 month
sales cycle for new client sales.
No single client accounted for more than 5% of IDX's annual revenues in fiscal
1997, 1998 or 1999. In 1999, one customer of EDiX accounted for approximately
11% of EDiX's revenues.
At December 31, 1999, the Company had total backlog of $340.6 million, including
$110.2 million attributable to systems sales and $230.4 million attributable to
services. Systems sales backlog consists of fees due under signed contracts
which have not yet been recognized as revenues. Service backlog represents
contracted software maintenance services, consulting services, remote computing
service fees and medical transcription service fees for a period of 12 months.
At December 31, 1998, the Company had total backlog of $299.3 million including
$129.0 million attributable to systems sales and $170.3 million attributable to
services. Of the total 1999 backlog of $340.6 million, the Company expects that
$40.9 million will not be fulfilled in the current fiscal year.
PRODUCT DEVELOPMENT
To ensure that its products continue to meet the evolving needs of the
healthcare industry, IDX allocates a significant portion of annual revenues to
research and development. IDX's research and development expenses for the fiscal
years 1997, 1998 and 1999 were $37.4 million, $47.3 million, and $53.2 million
respectively.
Page 12
IDX's product development activities include enhancement of existing products
and the development of new products, as well as the implementation of new
technologies. IDX is devoting significant resources to integrating the LastWord
and IDX products, developing a relational practice management solution, and
expanding its Web-based architecture. IDX is also currently migrating its
products to the Web-based thin-client architecture. IDX's development process is
focused on building components for its integrated product rather than on
stand-alone products. These components can be integrated and configured to
address specific client needs.
IDX utilizes client focus groups, user groups and industry experts, including
physicians, nurses, healthcare administrators and consultants, for advice in
developing and enhancing its products.
COMPETITION
The market for healthcare information systems is highly competitive. IDX
believes that the principal competitive factors in this market are the ability
to effectively market, install, support and integrate systems, the resources to
support ongoing research and development, financial stability and perceived
value relative to price. IDX believes it competes favorably with respect to
these factors. Competitors vary in size, and in the scope and breadth of the
products and services offered.
IDX experiences competition from companies with strengths in various segments of
the healthcare information systems market, such as physician group practice
systems, hospital information systems, clinical information systems, ancillary
departmental systems and systems integration. In addition, other entities not
currently offering products and services similar to those offered by IDX,
including claims processing organizations, hospitals, third-party
administrators, insurers, healthcare organizations and others, may enter certain
markets in which IDX competes. In particular, as IDX has now begun to offer
Internet-based products and services for physician organizations and their
patients through ChannelHealth, the Company can expect to experience competition
in these markets from emerging Internet-based electronic commerce providers.
INFORMATION SYSTEMS AND SERVICES BUSINESS SEGMENT
Certain of IDX's competitors have greater financial, development, technical,
marketing and sales resources than IDX and have a greater penetration into
segments of the market in which IDX competes. In addition, as the markets for
IDX's products and services develop, additional competitors may enter those
markets and competition may intensify.
MEDICAL DICTATION AND TRANSCRIPTION SERVICES BUSINESS SEGMENT
For EDiX's dictation and transcription services, competition consists of several
national competitors and an estimated 1,000 to 1,500 local and regional
competitors. In addition, EDiX must compete against in-house transcription
departments for those healthcare providers who do not currently outsource
transcription.
INTERNET SERVICES AND CONTENT BUSINESS SEGMENT
ChannelHealth faces competition from other healthcare information systems
companies, and systems integrations and from Internet content providers and
Internet "portals." ChannelHealth competes with various vendors for the key
service offerings of connectivity, content, clinical modules, and integration
between line-of-business applications and the browser-based desktop user
interface. While ChannelHealth enjoys the advantage of access to IDX's large
installed base of practicing physicians in the United States and the strong
relationships IDX has with executive management at prestigious healthcare
organizations nationwide, ChannelHealth expects competitors to aggressively
target that customer base. ChannelHealth faces competition from other vendors
that have focused on partnerships to develop a comprehensive service offering.
These partnerships provide the financial resources necessary to market a new
Internet initiative.
Page 13
Some current and potential competitors may have advantages over ChannelHealth,
including:
- - Greater financial resources for the introduction and roll out of
their services;
- - Greater brand recognition and larger marketing budgets; and
- - Strategic media relationships to apply consumer-based tactics for
wide-scale promotion of their Internet services.
IDX believes the principal competitive factors in attracting and promoting the
ChannelHealth strategy of a sustained use model for physicians are aggressive
price discounting, depth and breadth of transaction and content services, data
security, system reliability, and integration to practice other clinical,
administrative and financial systems. Other important factors lie in the ability
to prove clinical relevance, ease-of-use and physician resistance to computer
use. The Company expects competition to continue to increase as new companies
enter the market and existing companies continue to expand their services.
PROPRIETARY RIGHTS AND LICENSES
IDX depends upon a combination of trade secret, copyright and trademark laws,
license agreements, nondisclosure and other contractual provisions, and
technical measures to protect its proprietary rights in its products. IDX
distributes its products under software license agreements that grant clients a
nonexclusive, nontransferable license to use IDX's products and contain terms
and conditions prohibiting the unauthorized reproduction or transfer of IDX's
products. In addition, IDX attempts to protect its trade secrets and other
proprietary information through agreements with employees and consultants. All
current employees of IDX have signed a nondisclosure agreement, and all current
employees involved in product development have signed an assignment of
inventions agreement. There can be no assurance that the legal protections
afforded to IDX or the steps taken by IDX will be adequate to prevent
misappropriation of IDX's technology. In addition, these protections do not
prevent independent third-party development of functionally equivalent or
superior technologies, products or services. Any infringement or
misappropriation of IDX's proprietary software would disadvantage IDX in its
efforts to retain and attract new clients in a highly competitive market and
could cause IDX to lose revenues or incur substantial litigation expense. IDX
believes that, due to the rapid pace of innovation within the software industry,
factors such as the technological and creative skills of its personnel and
ongoing reliable product maintenance and support are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections afforded to its technology.
Although IDX believes that its products, trademarks and other proprietary rights
do not infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against IDX in
the future and that such claims will not have a material adverse effect on IDX's
results of operations, financial condition or business. Recent proliferation of
patents involving the Internet and business processes involving computers and
the Internet may result in litigation against the Company that could be
expensive and time consuming.
IDX utilizes a variety of intellectual property rights that are licensed from
third parties. These third party licenses may not be available to IDX on
commercially reasonable terms. IDX's loss of or inability to maintain or obtain
upgrades to any of these licenses could significantly harm IDX. In addition,
since IDX and ChannelHealth license a majority of their content from third
parties, their exposure to copyright infringement actions may increase because
they must rely upon such third parties for information as to the origin and
ownership of such licensed content.
Page 14
GOVERNMENT REGULATION
The Company's products and services are subject to regulation in the United
States by numerous regulatory authorities, including the Federal Food and Drug
Administration (FDA), the Federal Trade Commission (FTC), and comparable
regulatory authorities in foreign countries. In addition, the Company's products
are intended to support some operations of its customers that are regulated by
numerous regulatory authorities, including the Health Care Financing
Administration (HCFA) and comparable regulatory authorities in foreign
countries. These regulatory authorities and other federal, state, and local
entities will regulate, among other things, healthcare billing and claims for
reimbursement, healthcare data exchange transactions, computer security and
patient privacy.
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.
REGULATIONS PERTAINING TO MEDICAL BILLING AND REIMBURSEMENT.
Virtually all of IDX's customers and the other entities with which IDX has a
business relationship operate in the healthcare industry and, as a result, are
subject to governmental regulation. Because IDX's products and services are
designed to function within the structure of the healthcare financing and
reimbursement systems currently in place in the United States, and because IDX
is pursuing a strategy of developing and marketing products and services that
support its customers' regulatory and compliance efforts, IDX may become subject
to the reach of, and liability under, these regulations.
The Federal Anti-Kickback Law, among other things, prohibits the direct or
indirect payment or receipt of any remuneration for Medicare, Medicaid and
certain other Federal or state healthcare program patient referrals, or
arranging for or recommending referrals or other business paid for in whole or
in part by the federal health care programs. Violations of the Federal
Anti-Kickback Law may result in civil and criminal sanction and liability,
including the temporary or permanent exclusion of the violator from government
health programs, treble damages and imprisonment for up to five years for each
violation. If the activities of a customer of IDX or other entity with which IDX
has a business relationship were found to constitute a violation of the Federal
Anti-Kickback Law and IDX, as a result of the provision of products or services
to such customer or entity, was found to have knowingly participated in such
activities, IDX could be subject to sanction or liability under such laws,
including the exclusion of IDX from government health programs. As a result of
exclusion from government health programs, IDX customers would not be permitted
to make any payments to IDX.
Page 15
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.
New Regulations Pertaining to Patient Confidentiality and Computer System
Security. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") contains provisions regarding standardization for financial and
administrative transactions, including standards to enable electronic exchange
of information in health claims and health plan administration, and standards
for computer system security and privacy of patient information. Many of the
standards mandated by HIPAA and the regulations thereunder will become effective
in the year 2000 and will be applicable to the customer operations involving the
use of the Company's products. It is necessary for the Company to ensure that
its products support HIPAA compliance by its customers insofar as the Company's
products are intended to be used in customer operations governed by HIPAA and
the regulations thereunder.
HIPAA requires the Secretary of Health and Human Services (the "Secretary")
to adopt national standards for certain types of electronic health information
transactions and the data elements used in such transactions and to adopt
standards to ensure the integrity and confidentiality of health information. The
Secretary has recently issued proposed standards regarding four of the five sets
of standards that are ultimately expected. IDX believes that the proposed
standards issued to date would not materially affect the business of the Company
if adopted as proposed. IDX cannot predict the potential impact of the standards
that have not yet been proposed or any other standards that might be finally
adopted instead of the proposed standards. As required by HIPAA, the Secretary
submitted recommendations to Congress for legislation to protect privacy and
confidentiality of personal health information on September 11, 1997. Congress
failed to enact legislation concerning privacy and confidentiality of personal
health information by August 21,1999 as required by HIPAA. Also as required by
HIPAA, the Secretary subsequently proposed such protections by regulation, which
have not yet become final. Congress may yet adopt legislation that may change,
override, conflict with or preempt regulations. The creation and dissemination
of medical record information is also frequently proposed and debated at the
state level. Such legislation, if enacted, could require patient consent before
even non-individually-identifiable (e.g., coded or anonymous) patient
information may be shared with third parties and could also require that holders
or users of such information implement specified security measures. These laws
or regulations, when adopted, could restrict the ability of customers to obtain,
use or disseminate patient information. This could adversely affect demand for
the products of the Company.
FDA Regulation. Unless a product is exempted from premarket submission and
clearance, FDA approval or clearance of the Company's products that meet the
definition of a medical device under the Federal Food Drug and Cosmetic Act (FDC
Act), is required before the products may be marketed in the United States. FDA
has a draft policy for the regulation of computer software products that meet
the definition of a medical device, and has indicated that it may modify its
draft policy or create a new policy. Although it is not possible to anticipate
the final content of FDA's policy with regard to computer software, IDX expects
that, whether or not the draft is finalized or changed, FDA will become
increasingly active in regulating computer software intended for use in
healthcare settings. FDA can impose extensive requirements governing premarket
and postmarket activities, including product design development and
manufacturing quality assurance controls, clinical investigations, marketing
clearance or approval, and labeling and promotion. There can be no assurance
that the company will be able to comply with any requirements or guidelines that
the FDA may issue.
Page 16
FDA already actively regulates computer software used to capture, communicate,
and store images and information used in medical diagnosis and treatment;
depending on the intended use and technological characteristics of the product,
it may require clearance under section 510(k) of the FDC Act before it may be
marketed. In order to obtain clearance for marketing, a manufacturer must
demonstrate substantial equivalence to similar legally marketed products by
submitting a premarket notification (510(k)) to the agency. FDA may require
additional data to support a substantial equivalence determination, and there is
no assurance FDA will find a device substantially equivalent. If FDA finds that
a device is not substantially equivalent, the manufacturer may ask the FDA to
make a risk-based classification to place the device in Class I or Class II.
However, if a timely request for risk-based classification is not made, or if
FDA determines that a Class III designation is appropriate, an approved
premarket approval application (PMA) will be required before the device may be
marketed.
The PMA approval process is lengthy, expensive, and typically requires, among
other things, extensive data from preclinical testing and a well-controlled
clinical trial or trials that demonstrates a reasonable assurance of safety and
effectiveness. Clinical trials can take extended periods of time to complete. In
addition, if FDA requires an approved Investigational Device Exemption (IDE)
before clinical trials may commence, there is no guarantee that the agency will
approve the IDE, and an IDE approval process could result in significant delay.
There is no assurance that review will result in timely or any PMA approval, and
there may be significant conditions on approval, including limitations on
labeling and advertising claims and the imposition of post-market testing,
tracking, or surveillance requirements.
Whether or not a product is required to be approved or cleared before marketing,
continuing compliance with strict FDA requirements concerning good manufacturing
practices, enforced by periodic inspections, and medical device reporting (MDR)
regulations, among other requirements, will be required. The MDR regulations
require that reports be submitted to FDA to report device-related deaths,
serious injuries, and malfunctions the recurrence of which would likely cause
serious injury or death. MDRs can result in agency action such as inspection,
recalls, and patient/physician notifications, and are often the basis for agency
enforcement actions. Because MDRs are publicly available, they can also become
the basis for private tort suits, including class actions.
If a manufacturer makes a change to a device cleared for marketing under section
510(k) that is a major change in intended use, or is a change to design,
material, composition, energy source, or manufacture that could significantly
affect the safety and effectiveness of the marketed device, a new 510(k) will be
required before the modified device may be marketed. Changes to approved PMA
devices that affect safety and effectiveness require supplemental PMA approvals
before the modified PMA device may be marketed, except for manufacturing changes
that affect safety or effectiveness, which may be deemed approved after a 30-day
notice unless the FDA requests a supplement. There is no guarantee that such
additional clearances or approvals will be granted. In addition, the nature of
marketing claims that the Company will be permitted to make in the labeling and
advertising of its products will be limited to those specified in an FDA
clearance or approval, and claims exceeding those that are cleared or approved
will constitute violation of the Act. Violations of the Act or regulatory
requirements at any time during the product development process, approval or
clearance process, or after clearance or approval may result in agency
enforcement actions, including voluntary or mandatory recall, suspension or
withdrawal of marketing clearance or approval, seizure of products, fines,
injunctions and/or civil or criminal penalties.
The Company's advertising of its products will also be subject to regulation by
the Federal Trade Commission (FTC) under the FTC Act. The FTC Act prohibits
unfair methods of competition and unfair or deceptive acts in or affecting
commerce. Violations of the FTC Act, such as failure to have substantiation for
product claims, would subject the Company to a variety of enforcement actions,
including compulsory process, cease and desist orders, and injunctions. FTC
enforcement can result in orders requiring, among other things, limits on
advertising, corrective advertising, consumer redress, and recision of
contracts. Violations of FTC enforcement orders can result in substantial fines
or other penalties.
Page 17
EMPLOYEES
At December 31, 1999, IDX and its subsidiaries employed 3,586 full-time
employees, of which 1,386 were employed in its EDiX business segment and 112
were employed in its ChannelHealth business segment. No employees are covered by
any collective bargaining agreements.
ITEM 2. PROPERTIES
The Company's principal corporate offices are located at 1400 Shelburne Road,
South Burlington, Vermont 05403. The Company maintains sales, research and
support facilities in South Burlington, Vermont; Boston, Massachusetts; and
Seattle, Washington. The Company maintains regional sales and support offices in
the greater metropolitan areas of Arlington, Virginia; Chicago, Illinois;
Dallas, Texas; San Francisco, California; Deerfield Beach, Florida; and Atlanta,
Georgia. The Company owns or has contracted to purchase all of its facilities in
South Burlington, Vermont, consisting of approximately 181,500 square feet of
office space. The Company leases all of its other facilities which, in the
aggregate, constitute approximately 563,000 square feet of office space. The
Company's leases expire between March 31, 1999 and April 12, 2014. The Company
believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required. The Company is
currently negotiating to acquire the land and buildings at Shelburne Road in
South Burlington, Vermont, from BDP Realty Associates, a related party included
in the consolidated financial statements, consisting of approximately 112,000
square feet of office space and has commenced construction of approximately
90,000 additional square feet of office space at that location.
ITEM 3. LEGAL PROCEEDINGS
On February 2, 2000, the Company entered into a license agreement with the
plaintiff resolving the litigation entitled Allcare Health Management System,
Inc. v. Cerner Corporation, et al., filed in the United States District Court
for the Northern District of Texas Fort Worth Division. The terms of the
agreement will have no material adverse effect on the financial condition or
results of operations of the Company.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 18
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth: (i) the name and age of each current executive officer
of the Company; (ii) the position(s) currently held by each named person; and
(iii) the principal occupations held by each person named for at least the past
five years.
Executive Officer Age Position
----------------- --- --------
Richard E. Tarrant 57 Chief Executive Officer and Director
James H. Crook, Jr. 43 President and Chief Operating Officer
Robert W. Baker, Jr., Esq. 51 Vice President, General Counsel, and
Corporate Secretary
Gene H. Barduson 61 Vice President, EDiX Business Unit
Jeffrey M. Blanchard 43 Vice President, Enterprise Solutions
Division
Vicki S. Blanchard 46 Vice President, Integrated Solutions
Division
Robert F. Galin 55 Vice President Sales
Stephen C. Gorman 34 Vice President, Systems Division
John A. Kane 47 Vice President, Finance and
Administration, Chief Financial Officer,
and Treasurer
Walt N. Marti 44 Vice President, Radiology and Imaging
Solutions Division
Mr. Tarrant co-founded the Company in 1969 and served as the President from June
1969 to February 1999. He has served as Chief Executive Officer of the Company
and as a Director since 1969. Mr. Tarrant served as a member of the Board of
Trustees for the University Health Center (Vermont), an academic medical center,
from July 1988 to December 1994 and as Chairman of the Board of Trustees for the
University Health Center (Vermont) from 1992 to 1994.
Mr. Crook, who joined the Company in April 1981, served as Vice President of the
Company from June 1984 to February 1999. He served as a Director of the Company
from July 1984 to June 1995. He has served as President and Chief Operating
Officer since February 1999.
Mr. Baker joined the Company as General Counsel and Secretary in July 1989. He
has served as Vice President since April 1996.
Mr. Barduson has served as Vice President of the Company since December 1999. He
also has served as Vice President and General Manager of EDiX Corporation, a
subsidiary of the Company, since April 1999 and served as President and Chief
Executive Officer of EDiX Corporation from September 1997 until April 1999.
Prior to joining EDiX Corporation, Mr. Barduson served as Vice President of
Western Operations and National Health Services for Shared Medical Systems,
Inc., a publicly traded health care information services company.
Mr. Blanchard, who joined the Company in August 1987, has served as Vice
President, Client Services since March 1995. Prior to that time, Mr. Blanchard
served the Company in various capacities, including most recently as Director,
Customer Support from November 1992 to March 1995.
Ms. Blanchard, who joined the Company as a customer support representative in
April 1983, has served as Vice President since December 1999 and is currently
the General Manager of Integrated Solutions Division. Prior to that time, Ms.
Blanchard served the Company in various capacities, including Manager of
Development, Manager of Product Implementation, Manager of Customer Support,
Director of Merger Integration, National Manager of Installations and Eastern
Regional Manager of Customer Support.
Page 19
Mr. Galin has served as Vice President, Sales since August 1992. He served as
Director of Sales from April 1982 to August 1992.
Mr. Gorman, who joined the Company as a sales representative in June 1991, has
served as Vice President since December 1999 and has served as General Manager
of the Systems Division since May 1999. Prior to that time, Mr. Gorman served
the Company in various capacities, including Southeast Region Operations Manager
from 1995 to 1997, and National Operations Manager from 1997 to 1999.
Mr. Kane has served as the Vice President, Finance and Administration, Chief
Financial Officer and Treasurer since joining the Company in October 1984. Mr.
Kane is a C.P.A.
Mr. Marti, who joined the Company as a sales representative in March 1989, has
served as Vice President since December 1999 and has served as General Manager
of Radiology Imaging Solutions Division since February 1999. Prior to that time,
Mr. Marti served the Company in various capacities, including Sales Manager of
Systems Division, Regional Manager of Systems Division and Directors of Sales of
Radiology Imaging Solutions Division.
Each officer serves at the discretion of the Company's Board of Directors. There
are no family relationship among the named officers.
Page 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED MATTERS. The
Common Stock of IDX is traded on the Nasdaq National Market under the symbol
"IDXC." The following table sets forth for the periods indicated the high and
low sales prices per share of the Common Stock as reported by the Nasdaq
National Market.
Quarter/Year High Low
- --------------------------------------------------------------------------------
1998
First Quarter 1998 $ 47.50 $ 33.25
Second Quarter 1998 $ 49.56 $ 39.50
Third Quarter 1998 $ 55.75 $ 41.75
Fourth Quarter 1998 $ 52.25 $ 36.38
1999
First Quarter 1999. $ 46.63 $ 13.75
Second Quarter 1999 $ 28.13 $ 12.44
Third Quarter 1999 $ 24.44 $ 18.13
Fourth Quarter 1999 $ 32.75 $ 15.63
On March 15, 2000, the Company had approximately 480 stockholders of record.
(This number does not include stockholders for whom shares are held in a
"nominee" or "street" name.) On March 15, 2000, the closing price of the
Company's Common Stock on the Nasdaq National Market was $29.75.
The Company anticipates that all future earnings will be retained for
development of its business and will not be distributed to stockholders as
dividends. Restrictions or limitations on the payment of dividends may be
imposed in the future under the terms of credit agreements or under other
contractual provisions. In the absence of such restrictions or limitations, the
payment of any dividends will be at the discretion of the Company's Board of
Directors.
(b) RECENT SALES OF UNREGISTERED SECURITIES. On May 17, 1999, the Company issued
a total of 1,603 shares of Common Stock to the four outside directors of the
Company in consideration of one year's past service as a director of the
Company. The shares of Common Stock issued in these transactions were offered
and sold in reliance upon the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), relating to sales
by an issuer not involving any public offering. All such securities are deemed
restricted securities for purposes of the Securities Act. There were no
underwriters involved in such transactions.
Page 21
ITEM 6. SELECTED FINANCIAL DATA
Financial Highlights
Summary of Consolidated Financial Data
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
----------------------------------------------------
(in thousands, except per share data)
Statements of Operations
Data:
Revenues $ 181,142 $ 215,116 $ 272,007 $ 350,187 $ 340,999
Operating Income (Loss) 15,622 14,863 (4,890) 34,994 (12,649)
Net Income (Loss) 16,939 8,210 (7,982) 16,834 (7,944)
Net Income (Loss) Per
Share $ .64 $ (0.30) $ 0.60 $ (0.29)
Pro Forma Net Income 13,915
Pro Forma Net Income Per
Share $ 0.63
Balance Sheet Data:
Cash and Investments $ 106,581 $ 113,885 $ 116,567 $125,132 $ 68,359
Working Capital 112,091 130,116 140,015 169,671 136,732
Total Assets 175,316 208,145 245,459 289,223 271,147
Long-term Debt, less current
portion 3,726 4,266 4,876 2,261 -
Total Stockholders' Equity $ 133,739 $ 159,171 $ 177,855 $210,211 $ 206,514
The consolidated financial data set forth above has been restated to include the
results of operations and accounts of PHAMIS for all periods prior to its
acquisition by IDX on July 10, 1997, and for EDiX for all periods prior to its
acquisition on April 23, 1999. Both of these acquisitions, as more fully
described in Note 2 to the Consolidated Financial Statements, have been
accounted for as poolings of interests.
Per share amounts represent diluted net income (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Revenues declined 2.6% to $341.0 million in 1999 from 1998 revenues of $350.2
million. Systems sales declined 30.2% in 1999 while maintenance and service fees
grew 26.1% as compared to the prior year. In February 2000, the Company
announced that, during the first quarter of 2000, it expected a net loss
excluding one time charges related to the impairment of goodwill related to
ChannelHealth of approximately ($0.11)-($0.19) per share in the first quarter of
2000.
Operating income decreased from $35.0 million in 1998 to an operating loss of
($12.6) million in 1999, a decrease of $47.6 million or 136.1%. Excluding
expenses related to the write-off of acquired research and development in 1998
and merger and related costs in 1999, operating income declined from $38.2
million in 1998 to an operating loss of ($8.6) million in 1999, a decrease of
$46.8 million or 122.5%. Net income (loss) decreased from net income of $16.8
million in 1998 to a net loss of ($7.9) million in 1999, a decrease of $24.8
million or 147.2%. Excluding the write-off of acquired research and development
in 1998, and merger and related costs as well as loss on impairment of assets in
1999, net income (loss) declined from net income of $19.4 million in 1998 to a
net loss of ($3.9) million in 1999, a decrease of $23.3 million or 120.0%. The
decrease in net income and income per share is primarily due to a substantial
decrease in sales of the Company's higher margin software systems. Overall
revenue decreased 2.6% from 1998, despite a system sales decrease of 30.2%. The
Page 22
majority of the decrease in system sales revenue was offset by an increase in
revenues from maintenance and service fees that provide a lower gross profit
margin. The decrease in gross profit due to the change in revenue mix had a
significant negative impact on earnings (loss) per share. In addition, increased
costs related to Internet initiatives, product development and strengthening of
the Company's infrastructure contributed to the net loss.
During 1999, 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, product complexity, competition,
and customer preoccupation with internal Year 2000 issues. In February 2000, the
Company announced that weakness in system sales experienced in the fourth
quarter of 1999, due in part to customer focus on final preparations for Year
2000, was expected to continue through the first half of 2000. The Company
expects that the healthcare industry's Year 2000 focus will cause reductions in
spending for new systems and services in the first half of 2000. Accordingly,
the Company expects that it will experience Year 2000 related postponements in
sales of software and related services, professional services, and hardware
during the first half of 2000.
On April 23, 1999, the Company acquired EDiX Corporation ("EDiX"), a provider of
medical transcription services which was accounted for as a pooling of
interests. In accordance with the merger agreement, the Company issued
approximately one million shares of its common stock, which amounted to an
acquisition value of $16.7 million based on the closing stock price on the date
of the merger, plus the assumption of EDiX debt of approximately $14.0 million
that subsequently has been paid.
YEAR ENDED DECEMBER 31, 1999 AND 1998
REVENUES. The Company's total revenues decreased to $341.0 million in 1999 from
$350.2 million in 1998, a decrease of $9.2 million or 2.6%. Revenues from
systems sales decreased to $124.6 million in 1999 (36.5% of total revenues) from
$178.6 million in 1998 (51.0% of total revenues), a decrease of $53.9 million or
30.2%. 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 $216.4 million in 1999
(63.5% of total revenues) from $171.6 million in 1998 (49.0% of total revenues),
an increase of $44.8 million or 26.1%. Approximately $18.4 million of the
increase was due to an increase in EDiX's medical transcription service fee
revenue combined with a $14.3 million increase due to maintenance revenue
resulting from price increases and annualization of 1998 growth in the Company's
IDX systems installed client base. Professional and technical services revenues
increased to $31.3 million in 1999 (9.2% of total revenues) from $28.8 million
in 1998 (8.2% of total revenues), an increase of $2.5 million, or 8.7%. The
Company's Internet services and content business segment, operated by
Channelhealth Incorporated, a majority owned subsidiary of the Company
incorporated in September 1999, contributed approximately $1.5 million in
service revenue, primarily from backlog revenue from IDX contracts transferred
to Channelhealth Incorporated.
COST OF SALES. The cost of sales and services increased to $216.6 million in
1999 from $196.5 million in 1998, an increase of $20.1 million or 10.2%. The
increase in cost of sales and services resulted from growth in client services
expenses, including maintenance, installation, and consulting staff. The gross
profit margin on systems sales and services decreased to 36.5% in 1999 from
43.9% in 1998. 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, offset by an increase in maintenance and service revenue which
provide a lower gross profit margin. IDX's core business, information systems
and services, gross profit margin declined from 49.3% in 1998 to 40% 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 from (17.2%) in 1998 to 14.4% in 1999 due to
an increase in utilization of a new higher margin transcription processing
system as compared to the prior year, combined with other efficiencies in
editing and telecommunications.
Page 23
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $79.9 million in 1999 from $68.2 million in
1998, an increase of $11.6 million or 17.1%. As a percentage of total revenues,
selling, general and administrative expenses increased to 23.4% in 1999 from
19.5% in 1998. Approximately $5 million of this increase is related to the
Internet busines setment (ChannelHealth). The remaining increase resulted
primarily from IDX's investment in internet strategies of $1.4 million, the
absorption of certain administrative functions provided by IDX for EDiX and an
increase in the Company's sales, marketing and administrative staff. EDiX's
selling, general and administrative expenses decreased $0.6 million during the
year ended December 31, 1999 as compared to the same period in 1998. This
decrease is a result of the merger due to the elimination of overlapping
services in EDiX.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $53.2
million in 1999 from $47.3 million in 1998, an increase of $5.9 million or
12.5%. As a percentage of total revenues, research and development expenses
increased to 15.6% in 1999 from 13.5% in 1998. The increase was due to the
hiring of additional staff to support the development of additional products
including IDXsite and Web technology applications, and for the costs of efforts
to address Year 2000 issues. Of this increase, approximately $3.7 million is
related to research and development costs in the Internet services and content
business sement (ChannelHealth). Research and development costs in the medical
dictation and transcription business segement (EDiX) increased from $700
thousand in 1998 to $1.0 million in 1999.
As described in Note 1 to the Notes to Consolidated Financial Statements,
software development costs incurred subsequent to the establishment of
technological feasibility until general release of the related products are
capitalized. Historically costs incurred during beta site testing have not been
material. Although the Company presently expects costs to complete beta site
testing in the future to be insignificant, as the Company develops products to
operate using other technologies as well as more comprehensive clinical systems,
the time and effort required to complete beta site testing may be significantly
more extensive. Consequently, capitalized software development costs may become
material in future reporting periods.
MERGER AND RELATED COSTS. During the second quarter of 1999, the Company
recorded charges of $4.0 million related to the acquisition of EDiX Corporation.
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. At December 31, 1999, accounts payable
and accrued expenses included $1.3 million related to terminations of lease and
other contractual obligations.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. On February 23, 1998,
the Company recorded charges of $3.2 million related to the acquisition of
contract management system technology from Trego Systems, Inc. for cash of $4.0
million. The acquisition was accounted for under the purchase method. The
charges were expensed as in-process research and development in connection with
the Company's development of a healthcare contract management system.
INTEREST AND OTHER INCOME (EXPENSE). Interest income decreased to approximately
$4.1 million during 1999 compared to $6.4 million for the same period in 1998
due to a decrease in average invested balances during 1999. Interest expense
decreased to approximately $900,000 during 1999 compared to $1.3 million for the
same period in the prior year. The decrease in interest expense is due to the
payment of all outstanding EDiX debt after the merger during the second quarter
of 1999.
Page 24
LOSS ON INVESTMENT IMPAIRMENT. Other expense included the write-off of an
investment of $1.6 million in the quarter ended March 31, 1999 due to the
investees inability to raise additional equity and decision to dissolve the
business.
INCOME TAXES. Income taxes for the year ended December 31, 1999 were benefited
at approximately 35%, which reflects a lower rate than the Company's historical
statutory rate of 40%. This rate is due to a portion of the charges incurred in
the second quarter ended June 30, 1999 related to the acquisition of EDiX
Corporation, which are non-deductible for income tax purposes. Income taxes in
1998 were provided at 56.8%. The higher rate in 1998 is due to the inclusion in
the financial statements, of the net loss of EDiX Corporation, for which no tax
benefit was recognized. In addition, a portion of the charges incurred in the
first quarter ended March 31, 1998 related to the acquisition of Trego Systems,
Inc. were non-deductible for income tax purposes. The Company anticipates an
effective tax rate of approximately 38% on continuing operations for IDX's core
business and for ChannelHealth for the year ending December 31, 2000. The
Company anticipates that EDiX's effective tax rate in 2000 will be less than the
statutory rate due to the use of operating loss carry forwards, subject to
annual limitation.
NET INCOME. Net income (loss) decreased ($24.8) million to a net loss of ($7.9)
million in 1999 compared to net income of $16.8 million in 1998. In February
2000, the Company announced that, during the first quarter of 2000, it expected
a net loss excluding one time charges related to the impairment of goodwill
related to ChannelHealth of approximately ($0.11)-($0.19) per share in the first
quarter of 2000.
YEAR ENDED DECEMBER 31, 1998 AND 1997.
REVENUES. The Company's total revenues increased to $350.2 million in 1998 from
$272.0 million in 1997, an increase of $78.2 million or 28.7%. Revenues from
systems sales increased to $178.6 million in 1998 (51.0% of total revenues) from
$134.5 million in 1997 (49.4% of total revenues), an increase of $44.1 million
or 32.8%. The increase was primarily due to installations of certain of the
Company's systems. Revenues from maintenance and service fees increased to
$171.6 million in 1998 (49.0% of total revenues) from $137.5 million in 1997
(50.6% of total revenues), an increase of $34.1 million or 24.8%. Approximately
$12.8 million of the increase was due to additional maintenance revenue
resulting from the continued growth in the Company's installed client base.
EDiX's revenues increased to $28.5 million in 1998 from $20.6 million in 1997,
an increase of $7.9 million or 38.5%. Professional and technical services
revenues increased to $28.8 million in 1998 (8.9% of total revenues) from $20.4
million in 1997 (8.1% of total revenues), an increase of $8.4 million or 41.2%
as a result of the Company's increased marketing efforts in that area.
COST OF SALES. The cost of sales and services increased to $196.5 million in
1998 from $154.6 million in 1997, an increase of $41.9 million or 27.1%. The
gross profit margin on systems sales and services increased to 43.9% in 1998
from 43.2% in 1997. The increase in gross profit margin was due primarily to the
increase of additional license revenues in the installations of certain of the
Company's products from its IDXtend, Radiology, GPMS/IDXsite and LastWord
systems, as well as growth in service revenues. EDiX's gross profit margin
decreased to ($4.9) million in 1998 from ($3.6) million in 1997, primarily due
to increased costs due to introduction of (TWS), a new transcription processing
system which was not fully utilized during the year. EDiX's gross margin
expressed as a percentage of sales remained consistent at (17.2%) in 1998 as
compared to (17.4%) in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $68.2 million in 1998 from $62.6 million in
1997, an increase of $5.7 million or 9.0%. As a percentage of total revenues,
selling, general and administrative expenses decreased to 19.5% in 1998 from
23.0% in 1997. The additional expenses incurred in 1998 were primarily due to an
increase in the Company's sales and marketing staff. EDiX's selling general and
administrative expenses decreased to $6.5 million in 1998 from $10.8 million in
1997, a decrease of $4.3 million or 39.8%. This decrease is due to the
write-down of goodwill recorded in 1997.
Page 25
RESEARCH AND DEVELOPMENT. Research and development expenses increased to $47.3
million in 1998 from $37.4 million in 1997, an increase of $9.9 million or
26.4%. As a percentage of total revenues, research and development expenses
remained consistent at 13.5% in 1998 and 13.7% in 1997. The increase was due to
the hiring of additional staff to support the development of additional products
and for the costs to address Year 2000 issues for the Company. EDiX's research
and development expenses decreased to $700 thousand in 1998 from $1.1 million in
1997, a decrease of $368 thousand or 34.0%.
MERGER AND RELATED COSTS. During the third quarter of 1997, the Company recorded
charges of $20.0 million related to the merger with PHAMIS. The charges were
comprised of transaction costs of $5.1 million, write-offs and adjustments of
$7.4 million of long-lived assets, principally capitalized software development
costs and equipment, attributable to the elimination of overlapping and obsolete
products and operations, employee termination and related costs of $2.7 million,
and other merger related costs of $4.8 million, principally related to
integration costs incurred during the year and the termination of leases and
other contractual obligations. At December 31, 1997, accounts payable and
accrued expenses included accrued costs of $3.1 million related to the
termination of employees, leases and other contractual obligations substantially
all of which were paid during 1998.
WRITE-OFF OF 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.
NET INCOME. Net income (loss) increased $24.8 million to net income of $16.8
million in 1998 as compared to a net loss of ($8.0) million in 1997. Net income
(loss) as a percentage of net sales was 4.8% in 1998 compared to (2.9%) in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1969, the Company principally has funded its operations,
working capital needs and capital expenditures primarily from operations. The
proceeds from its initial public offering were (i) distributed to stockholders
of the Company in connection with the Company's prior status as an S corporation
under the Internal Revenue Code of 1986, as amended, and (ii) used for general
corporate purposes, including working capital purposes as needed and strategic
transactions, including acquisitions of businesses, products and technologies.
Cash flows from operations are principally comprised of net income (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. In 1999, accounts
receivable from customers have been collected on average within 119 days. This
represents an increase of 13 days 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.
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 and in 1999 include
the purchase of two buildings located in South Burlington, Vermont for
additional office space. 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.
Page 26
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. During 1998 other financing activities related to the
recapitalization of the real estate affiliate from debt to equity.
Cash, cash equivalents and marketable securities at December 31, 1999 were $68.4
million, a decrease of $56.8 million from December 31, 1998. The decrease was
due to equipment and leasehold improvements of $28.0 million, payment of EDiX
Corporation's debt and other liabilities of approximately $14.0 million, two
building purchases in South Burlington, Vt., for approximately $7.5 million, the
purchase of an 80% interest in ChannelHealth for $6.5 million and cash used by
operating activities offset by proceeds related to the exercise of stock
options. The Company has a revolving line of credit with a bank allowing the
Company to borrow up to $5.0 million bearing interest at the prime rate which
will expire on June 30, 2000. There were no borrowings as of December 31, 1999
or 1998.
The Company expects that its requirements for office facilities and other office
equipment will grow as staffing requirements dictate. The Company's operating
lease commitments consist primarily of office leasing for the Company's
operating facilities. The Company plans to continue increasing the number of its
professional staff during 2000 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 is currently negotiating to acquire the Company's headquarters in
South Burlington, Vermont for approximately $15 million 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. Currently, the Company has made no material lease or
purchase commitments other than the purchase of the Company's headquarters
mentioned above.
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.
NEW ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee of the American
Institute (ACSEC) of Certified Public Accountants issued Statement of Position
("SOP") No. 97-2, "Software Revenue Recognition," which the Company adopted on
January 1, 1998. SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" deferred the effective date of certain
aspects of SOP 97-2. These statements supersede SOP 91-1, Software Revenue
Recognition, and provide guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions entered into in
fiscal years beginning after December 15, 1997. The adoption of SOP 97-2, as
amended by SOP 98-4, did not have a material impact on the Company's revenues
and results of operations.
The Company periodically enters into certain long-term contracts to which SOP
No. 81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" is applied. For these agreements, revenue is
recognized under a percentage of completion basis as appropriate measures of
completion for contract are achieved.
Page 27
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The Company
adopted SFAS No. 131 effective with the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about major customers, products and services and geographic areas. Operating
segments are identified as components of an enterprise about which separate
discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. The Company views its operations and
manages its business as three operating segments categorized as follows:
information systems and services, Internet services and content, and medical
transcription services. Substantially all of the Company's operations are in the
United States.
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 is presently analyzing the impact, if any, that
the adoption of SFAS No. 133 will have on its financial condition or results of
operations.
In December 1999. The Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements." The SAB
formalizes positions the staff has expressed in speeches and comment letters.
SAB 101 is effective no later than the second fiscal quarter of the fiscal year
beginning after December 15, 1999. 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.
BACKLOG
At December 31, 1999, the Company had total backlog of $340.6 million, including
$110.2 million attributable to systems sales and $230.4 million attributable to
services. Systems sales backlog consists of fees due under signed contracts
which have not yet been recognized as revenues. Service backlog represents
contracted software maintenance services, consulting services, remote computing
service fees and medical transcription service fees for a period of 12 months.
At December 31, 1998, the Company had total backlog of $299.3 million, including
$129.0 million attributable to systems sales and $170.3 million attributable to
services. Of the total 1999 backlog of $340.6 million, the Company expects that
$40.9 million will not be fulfilled in the current fiscal year.
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.
The Company expensed approximately $9.6 million during 1999 in connection with
remediating its systems. The total remaining project costs, approximately $2.1
million, relate to staffing for Year 2000 issues pursuant to contingency plans
and remediation efforts for internal systems and will be charged to expense as
incurred. 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.
Page 28
FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE
This Annual Report on Form 10-K 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 Annual 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:
- - delay in customers purchasing decisions due to a variety of factors such
as consolidation, management changes and regulatory developments;
- - market prices of competitors;
- - announcements of technological innovations, including Internet delivery of
information and use of alication service provider technology;
- - new product introductions by IDX or its competitors;
- - market conditions particularly in the computer software and Internet
industries; and
- - healthcare reform measures and healthcare regulation.
These fluctuations have had a significant impact on the market price of our
common stock, and may have a significant impact on the future market price of
our common stock.
These fluctuations may affect operating results as follows:
- - ability to transact stock acquisitions; and
- - 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 1995. In 1999, IDX generated a net loss of
approximately $7.9 million. If these negative trends continue, IDX will 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:
- - delay in customers purchasing decisions due to a variety of factors such
as consolidation and management changes;
- - delay in customers' purchasing decisions due to customers' year 2000
problems;
- - the volume and timing of systems sales and installations;
- - recognizing revenue at various points during the installation process;
- - the timing of new product and service introductions and product upgrade
releases; and
- - 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.
Page 29
IDX MAY NOT BE SUCCESSFUL IN IMPLEMENTING ITS ACQUISITION STRATEGY. IDX intends
to continue to grow in part through either acquisitions of complementary
products, technologies and businesses or alliances with complementary
businesses. IDX may not be successful in these acquisitions or alliances, or in
integrating any such acquired or aligned products, technologies or businesses
into its current business and operations. Factors which may affect IDX's ability
to expand successfully include:
- - the generation of sufficient financing to fund potential acquisitions
and alliances;
- - the successful identification and acquisition of products,
technologies or businesses;
- - effective integration and operation of the
acquired or aligned products, technologies or businesses despite
technical difficulties, geographic limitations and personnel issues; and
- - overcoming significant competition for acquisition and alliance
opportunities from companies that have significantly greater financial and
management resources.
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:
- - the continuing evolution of industry standards, for example, transaction
standards pursuant to the Health Insurance Portability and Accountability
Act of 1996 (HIPAA); and
- - 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.
Page 30
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 is forced to reduce its prices, its operating margins would
decrease. As the healthcare industry consolidates, competition for customers
will become more intense and the importance of acquiring each customer will
become greater.
THERE IS INTENSE COMPETITION IN THE MARKET FOR HEALTHCARE INFORMATION SYSTEMS
AND IF IDX FAILS TO COMPETE SUCCESSFULLY, 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.
Page 31
The Federal Anti-Kickback Law, among other things, prohibits the direct or
indirect payment or receipt of any remuneration for Medicare, Medicaid and
certain other Federal or state healthcare program patient referrals, or
arranging for or recommending referrals or other business paid for in whole or
in part by the federal health care programs. Violations of the Federal
Anti-Kickback Law may result in civil and criminal sanction and liability,
including the temporary or permanent exclusion of the violator from government
health programs, treble damages and imprisonment for up to five years for each
violation. If the activities of a customer of IDX or other entity with which IDX
has a business relationship were found to constitute a violation of the Federal
Anti-Kickback Law and IDX, as a result of the provision of products or services
to such customer or entity, was found to have knowingly participated in such
activities, IDX could be subject to sanction or liability under such laws,
including the exclusion of IDX from government health programs. As a result of
exclusion from government health programs, IDX customers would not be permitted
to make any payments to IDX.
The Federal Civil False Claims Act and the Medicare/Medicaid Civil Money
Penalties regulations prohibit, among other things, the filing of claims for
services that were not provided as claimed, which were for services that were
not medically necessary, or which were otherwise false or fraudulent. Violations
of these laws may result in civil damages, including treble and civil penalties
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 assists 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:
- - electronic data transactions;
- - computer system security; and
- - 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:
- - register and list its products with the FDA;
- - notify the FDA and demonstrate substantial equivalence to other products
on the market before marketing such products; or
- - obtain FDA approval by demonstrating safety and effectiveness before
marketing a product.
Depending on the intended use of a device, the FDA could require IDX to obtain
extensive data from clinical studies to demonstrate safety or effectiveness, or
substantial equivalence. If the FDA requires this data, IDX would be required to
obtain approval of an investigational device exemption before undertaking
clinical trials. Clinical trials can take extended periods of time to complete.
IDX cannot provide assurances that the FDA will approve or clear a device after
the completion of such trials. In addition, these products would be subject to
the Federal Food, Drug and Cosmetic Act's general controls, including those
relating to good manufacturing practices and adverse experience reporting.
Page 32
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 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 is currently negotiating to contract to purchase its headquarters facilities
in South Burlington, Vermont from a real estate entity owned by Richard E.
Tarrant and Robert H. Hoehl for a purchase price of approximately $15.0 million.
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.
Page 33
The following important factors affect our Internet services and content
business segement 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 technological and market trends may affect its business. The revenue and
income potential of ChannelHealth's business and market are unproven, and its
business model is emerging and unproven. ChannelHealth's business and prospects
must be considered in light of the risks and difficulties typically encountered
by businesses in their early stages of development, particularly those in new
and rapidly evolving markets such 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 ($3.5) million in the
fourth quarter of 1999 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.
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:
- - actual or perceived lack of security of information;
- - lack of access and ease of use;
- - congestion of Internet traffic or other usage delays;
- - inconsistent quality of service;
- - increase in access costs to the Internet;
- - evolving government regulation;
- - uncertainty regarding intellectual property ownership;
- - costs associated with the obsolescence of existing infrastructure; and
- - 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.
Page 34
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:
- - user privacy;
- - system security;
- - pricing;
- - content;
- - copyrights;
- - distribution; and
- - characteristics and quality of products and services.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Demand for
ChannelHealth's applications and services may be adversely affected by
additional regulation of the Internet.
IF CHANNELHEALTH SYSTEMS EXPERIENCE SECURITY BREACHES OR ARE OTHERWISE PERCEIVED
TO BE INSECURE, CHANNELHEALTH'S REPUTATION AND BUSINESS WILL SUFFER. A material
security breach could damage ChannelHealth's reputation, cause users to lose
confidence in ChannelHealth's systems or result in liability. ChannelHealth will
retain confidential customer and patient information in its processing centers.
ChannelHealth may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by
breaches. Any well-publicized compromise of Internet security could deter people
from using the Internet or from conducting transactions that involve
transmitting confidential information, including confidential healthcare
information. Therefore, it is critical that these facilities and infrastructure
remain secure and are perceived by the marketplace to be secure. Despite the
implementation of security measures, this infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors, attacks by third
parties or similar disruptive problems. Any damage to ChannelHealth's reputation
or loss of user confidence as a result of a security breach could reduce the
willingness of patients and physicians to use ChannelHealth's products and
services and as a result, adversely affect ChannelHealth's business.
CHANNELHEALTH DEPENDS UPON A SINGLE TRANSACTION SERVICE PROVIDER TO PROVIDE MOST
OF CHANNELHEALTH'S TRANSACTION SERVICES AND IF THAT PROVIDER IS UNABLE OR
UNWILLING TO PROVIDE SUCH SERVICES, CHANNELHEALTH MAY NOT BE ABLE TO PROVIDE
SERVICE TO ITS CUSTOMERS. ChannelHealth currently relies on ProxyMed for most of
its electronic transaction services. ChannelHealth's reliance on a single
provider of these services exposes ChannelHealth, and IDX as a reseller of
ChannelHealth's products and services, to a number of risks, including the loss
of customer goodwill and possible liability, if ProxyMed fails to provide
transaction services. If ProxyMed is unable or unwilling to provide such
services to ChannelHealth on a timely basis, ChannelHealth may be forced to
engage additional or replacement providers, which could result in additional
expenses and delays and disruptions in ChannelHealth's service.
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.
Page 35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IDX does not currently use derivative financial instruments. The Company
generally places its marketable security investments in high credit quality
instruments primarily U.S. Government and Federal Agency obligations, tax-exempt
municipal obligations and corporate obligations with contractual maturities of a
year or less. We do not expect any material loss from our marketable security
investments and therefore believe that our potential interest rate exposure is
not material.
Internationally, IDX invoices customers in United States currency. The Company
is not currently exposed to foreign exchange rate fluctuations and does not
enter into foreign currency hedge transactions. Through December 31, 1999,
foreign currency fluctuations have not had a material impact on our financial
position or results of operations.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities that have seen a decline in market value
due to changes in interest rates. A hypothetical 10% increase or decrease in
interest rates, however, would not have a material adverse effect on our
financial condition.
Interest income on the Company's investments is included in "Other income, net."
The Company accounts for cash equivalents and marketable securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115.
"Accounting for Certain Investments in Debt and Equity Securities." Cash
equivalents are short-term highly liquid investments with original maturity
dates of three months or less. Cash equivalents are carried at cost, which
approximates fair market value. The Company's marketable securities are
classified as available-for-sale and are recorded at fair value with any
unrealized gain or loss recorded as an element of stockholder's equity.
Page 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(in thousands, except for per share data)
December 31,
1999 1998
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 18,487 $ 11,558
Securities available-for-sale 49,872 113,574
Accounts receivable, less allowance of $3,300
in 1999 and $2,615 in 1998 for doubtful
accounts 110,759 102,179
Prepaid and other current assets 5,352 5,403
Deferred tax asset 7,691 4,720
----------------------
Total current assets 192,161 237,434
Property and equipment:
Equipment and leasehold improvements, net of
accumulated depreciation and
amortization 39,877 27,688
Real estate, net of accumulated depreciation 18,388 8,261
---------------------
58,265 35,949
Other:
Capitalized software costs, net 414 665
Other assets 17,107 12,868
Deferred tax asset 3,200 2,307
---------------------
Total assets $ 271,147 $289,223
=====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 15,782 $ 17,535
Accrued expenses 22,188 20,949
Federal and state taxes payable -- 5,429
Deferred revenue 17,459 18,239
Note payable and current portion of long-term debt -- 5,611
---------------------
Total current liabilities 55,429 67,763
Long-term debt, less current portion -- 2,261
Commitments and contingencies -- --
Minority interest 9,204 8,988
Stockholders' equity:
Preferred stock, par value $0.01 per share,
5,000 shares authorized, none issued
Common stock, par value $0.01 per share,
100,000 shares authorized, issued and
outstanding 27,813 shares and 27,393
shares in 1999 and 1998, respectively 278 274
Additional paid-in capital 179,640 175,035
Retained earnings 26,812 34,756
Cumulative unrealized gains (losses)
on securities available-for-sale (216) 146
--------------------
Total stockholders' equity 206,514 210,211
--------------------
Total liabilities and stockholders' equity $271,147 $289,223
====================
See accompanying notes.
Page 37
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
Year Ended December 31,
----------------------
1999 1998 1997
------------------------------------------
Revenues:
Systems sales $124,609 $178,555 $134,499
Maintenance and service fees 216,390 171,632 137,508
------------------------------------------
Total revenues 340,999 350,187 272,007
Operating expenses:
Cost of sales 216,554 196,480 154,605
Selling, general and
administrative 79,873 68,234 62,577
Research and development 53,176 47,278 37,395
Write-off of acquired
research and development costs - 3,201 2,290
Merger and related costs 4,045 - 20,030
-----------------------------------------
Total operating expenses 353,648 315,193 276,897
-----------------------------------------
Operating income (loss) (12,649) 34,994 (4,890)
Other (income) expense:
Interest income (4,113) (6,382) (6,322)
Interest expense 866 1,312 637
Loss on investment impairment 1,642 - -
Minority interest 1,129 1,070 539
-----------------------------------------
Total other income (476) (4,000) (5,146)
-----------------------------------------
Income (loss) before income taxes (12,173) 38,994 256
Income tax provision (benefit) (4,229) 22,160 8,238
------------------------------------------
Net income (loss) $ (7,944) $ 16,834 $(7,982)
=========================================
Basic net income (loss) per share $ (0.29) $ 0.62 $ (0.30)
=========================================
Basic weighted average shares
outstanding 27,723 27,345 26,672
=========================================
Diluted net income (loss) per share $ (0.29) $ 0.60 $ (0.30)
=========================================
Diluted weighted average shares
outstanding 27,723 28,170 26,672
=========================================
See accompanying notes.
Page 38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Unrealized
Gain
Common Stock (Loss) on
------------ Additional Securities Total
Par Paid In Retained Available- Stockholders'
Shares Value Capital Earnings for-Sale Equity
--------------------------------------------------------------
Balances at
December 31, 1996 25,867 $ 259 $133,015 $25,904 $ (7) $ 159,171
Comprehensive loss:
Net loss (7,982) (7,982)
Unrealized gains on
securities
available for sale 143 143
---
Comprehensive loss (7,839)
Stock issued upon
exercise of
nonqualified
stock options 73 1 1,153 1,154
Tax benefit related
to exercise of
nonqualified
stock options 3,059 3,059
Stock issued upon
exercise of
incentive stock
options 419 4 3,887 3,891
Stock issued
pursuant to
employee stock
purchase plan 54 1,408 1,408
Stock issued to
401(k) plan 21 437 437
Issuance of stock 340 4 16,570 16,574
--------------------------------------------------------------
Balances at
December 31, 1997 26,774 268 159,529 17,922 136 177,855
Comprehensive income:
Net income 16,834 16,834
Unrealized gains on
securities
available for sale 10 10
--
Comprehensive income 16,844
Stock issued upon
exercise of
nonqualified
stock options 137 1 3,971 3,972
Tax benefit
related to
exercise of
nonqualified
stock options 2,335 2,335
Stock issued upon
exercise of
incentive stock
options 293 3 4,277 4,280
Stock issued
pursuant to
employee stock
purchase plan 96 1 2,878 2,879
Stock issued to
401(k) plan 5 198 198
Issuance of stock 88 1 1,847 1,848
--------------------------------------------------------------
Balances at
December 31, 1998 27,393 274 175,035 34,756 146 210,211
Comprehensive loss:
Net loss (7,944) (7,944)
Unrealized losses
on securities
available for sale (362) (362)
-----
Comprehensive loss (8,306)
Stock issued
upon exercise
of nonqualified
stock options 38 145 145
Tax benefit
related to
exercise of
nonqualified
stock options 428 428
Stock issued upon
exercise of
incentive stock
options 87 1 777 778
Stock issued
pursuant to
employee stock
purchase plan 125 1 3,206 3,207
Stock issued
under IDX director
stock option plan 2 33 33
Stock issued to
401(k) plan 1 16 16
Issuance of stock 167 2 2
--------------------------------------------------------------
Balances at
December 31, 1999 27,813 $ 278 $179,640 $ 26,812 $ (216) $206,514
==============================================================
See accompanying notes.
Page 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 1998 1997
------------------------------------
OPERATING ACTIVITIES
Net income (loss) $(7,944) $16,834 $(7,982)
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Depreciation 13,965 13,733 9,652
Amortization 1,407 209 813
Deferred tax (benefit) provision,
net of business acquisitions (3,864) 2,937 (5,864)
Increase in allowance for doubtful
accounts 685 1,512 815
Minority interest 1,129 1,070 539
Loss on investment impairment 1,642 - -
Write-off of acquired in-process
research and development costs - 3,201 2,290
Write-off of goodwill - - 4,831
Write-off of capitalized software
costs and equipment - - 7,406
Changes in operating assets and
liabilities, net of business
acquisitions:
Accounts receivable (9,279) (34,283) (19,390)
Prepaid expenses and other assets 3,011 2,062 (2,636)
Accounts payable and accrued expenses (514) 2,535 11,261
Federal and state taxes payable (5,628) 5,429 (6,815)
Deferred revenue (780) (3,299) 4,805
-----------------------------------
Net cash (used in) provided by
operating activities (6,170) 11,940 (275)
INVESTING ACTIVITIES
Purchase of property and equipment, net (35,519) (16,962) (18,311)
Purchase of securities available-for-sale (194,027) (250,035) (151,537)
Proceeds from sale of securities available-
for-sale 257,366 238,297 150,919
Business acquisitions (6,500) (5,293) (6,762)
Other assets (4,058) (5,316) (1,649)
-----------------------------------
Net cash provided by (used in)
investing activities 17,262 (39,309) (27,340)
FINANCING ACTIVITIES
Proceeds from sale of common stock 4,181 13,178 23,401
Tax benefit related to exercise of
nonqualified stock options 428 2,335 3,059
Proceeds from debt issuances 3,501 12,332 3,123
Contributions to (distributions from)
affiliates, net (900) 6,000 (700)
Proceeds from note payable - - 3,350
Principal repayments of long-term debt (11,373) (9,659) (2,697)
-----------------------------------
Net cash (used in) provided by financing
activities (4,163) 24,186 29,536
-----------------------------------
Increase (decrease) in cash and cash
equivalents 6,929 (3,183) 1,921
Cash and cash equivalents at beginning
of year 11,558 14,741 12,820
-----------------------------------
Cash and cash equivalents at end of year $18,487 $11,558 $14,741
===================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 764 $ 1,274 $ 631
===================================
Cash paid for income taxes $5,266 $ 5,362 $17,382
===================================
NONCASH INVESTING ACTIVITIES:
Issuance of common stock related
to acquisitions - - $ 64
===================================
See accompanying notes.
Page 40
IDX SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
IDX Systems Corporation (IDX or the Company) provides healthcare information
systems and services to physician groups, management services, hospitals, and
large integrated healthcare delivery enterprises principally located in the
United States. Revenues are derived from the licensing of software, the
provision of maintenance and services related to systems sales, the provision of
medical dictation and transcription services, and Internet based services and
content.
In July 1997, IDX completed its merger ("Phamis Merger") with PHAMIS, Inc.
("PHAMIS") in a stock for stock transaction. The transaction, which was
accounted for as a pooling-of-interests, was effected through the exchange of
.73 shares of IDX common stock in exchange for each PHAMIS share outstanding.
Approximately 4.6 million shares of common stock were issued in connection with
the Phamis Merger. PHAMIS was a Seattle-based provider of enterprise-wide,
patient-centered healthcare information systems.
In April 1999, IDX completed its merger ("EDiX Merger") with EDiX Corporation
("EDiX") in a stock for stock transaction. The transaction, which was accounted
for as a pooling-of-interests, was effected through the exchange of .084 shares
of IDX common stock in exchange for each EDiX share outstanding. Approximately
1.0 million shares of common stock were issued in connection with the EDiX
Merger. EDiX is a provider of medical transcription services.
The consolidated financial statements for all periods prior to the Phamis Merger
and EDiX Merger have been restated to include the accounts and results of
operations of PHAMIS and EDiX. No adjustments were required to conform the
financial reporting policies of IDX, PHAMIS and EDiX for the periods presented.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
subsidiaries and a real estate trust. Investments in entities, representing an
ownership interest of less than 20%, are accounted for under the cost method.
The Company leases a substantial portion of its space, including its corporate
headquarters and certain sales and support offices, from real estate
partnerships and trusts owned by stockholders and certain key employees of the
Company. These real estate partnerships and trusts include 116 Huntington Avenue
Limited Partnership ("HLP"), BDP Realty Associates ("BDP") and other real estate
partnerships and trusts ("REPs"). The Company's consolidated financial
statements include the accounts of the Company and BDP, whose real estate is
leased exclusively by the Company and for which the Company is subject to
substantially all the risks of ownership. Real estate owned by HLP and REPs is
leased to the Company under operating leases. All transactions between the
Company and BDP are eliminated. Minority interest represents net income and
equity of BDP.
REVENUE RECOGNITION
In 1997, the Company recognized revenue in accordance with the provisions of
Statement of Position ("SOP") No. 91-1, "Software Revenue Recognition." In
October 1997 and December 1998, the American Institute of Certified Public
Accountants issued SOP No. 97-2, as amended by SOP No. 98-4, "Software Revenue
Recognition," and SOP 98-9 respectively which supersedes SOP 91-1. In 1998, the
Company adopted SOP No. 97-2, which generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of those elements. The fair value of
an element must be based on objective evidence that is specific to the vendor.
If the vendor does not have evidence of the fair value for all the elements in a
multiple-element arrangement, all revenue from the arrangement is deferred until
such evidence exists or until all elements are delivered. Additionally, the
Company periodically enters into certain long term contracts to which SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts," is applied. For these agreements, revenue is recognized under a
percentage of completion basis as appropriate measures of completion for each
contract are achieved. The Company also generates service revenues from the sale
of product maintenance contracts and consulting contracts.
Page 41
Accordingly, revenue from software licensing arrangements is principally
recognized upon delivery subject to specified milestones and dates. Revenue from
consulting services is recognized in the period in which services are performed.
Revenue from hardware sales is recognized upon delivery. Revenue from
maintenance contracts is recognized ratably over the term of the support period,
which is typically one year.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Software development
costs incurred after the establishment of technological feasibility and until
the product is available for general release are capitalized, provided
recoverability is reasonably assured. Technological feasibility is established
upon the completion of a working model. Software development costs, when
material, are stated at the lower of unamortized cost or net realizable value.
Net realizable value for each software product is assessed based on anticipated
profitability applicable to revenues of the related product in future periods.
Amortization of capitalized software costs begins when the related product is
available for general release to customers and is provided for each product
based on the greater of the amount computed using (i) the ratio of current
revenues to total current and anticipated future revenues for the related
software or (ii) the straight-line method over a three-year life or the
product's estimated economic life, if shorter. Capitalized software development
costs of $414,000 and $665,000 at December 31, 1999 and 1998, respectively, net
of accumulated amortization, are included in other assets in the accompanying
balance sheets. Amortization of capitalized software amounted to $251,000,
$203,000 and $806,000 in 1999, 1998 and 1997, respectively. In connection with
the Phamis Merger in 1997, the Company wrote-off $5.6 million of
capitalized software development costs attributable to the elimination of
overlapping and obsolete products.
CASH EQUIVALENTS
The Company considers highly liquid investments generally with a maturity of
three months or less when purchased, to be cash equivalents.
RISKS AND UNCERTAINTIES
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash and cash equivalents, securities
available-for-sale and trade receivables. The carrying value of these financial
instruments approximates fair value.
The Company invests excess cash primarily in money market mutual funds and tax
exempt municipal funds with high credit ratings, debt securities with highly
rated issuers and treasury notes and bonds issued by the United States
Government and the State of Vermont.
The Company's customers are substantially all large integrated healthcare
delivery enterprises principally located in the United States. To reduce credit
risk, the Company performs ongoing credit evaluations of the financial condition
of its customers and generally does not require collateral. Although the Company
is directly affected by the overall financial condition of the healthcare
industry, management does not believe significant credit risk exists at December
31, 1999. The Company's losses related to collection of trade accounts
receivables have consistently been within management's expectations.
SIGNIFICANT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates and assumptions by management
affect the Company's allowance for doubtful accounts, revenue recognition and
certain accrued expenses. Actual results could differ from those estimates.
Page 42
AVAILABLE-FOR-SALE SECURITIES
The Company accounts for investment securities based on SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
provides the accounting and reporting requirements for investments in securities
that have readily determinable fair values and for all investments in debt
securities. All of the Company's investments have been classified as
available-for-sale securities at December 31, 1999 and 1998. Available-for-sale
securities are carried at fair value with unrealized gains and losses reported
as a component of stockholders' equity.
PROPERTY AND EQUIPMENT
Real estate, which includes land, buildings and related improvements owned
directly by the Company and BDP, is stated at cost. Buildings and related
improvements are depreciated using the straight-line method over their estimated
useful lives of 30 to 40 years.
Equipment is stated at cost and is depreciated over its estimated useful life
using the straight-line method. Depreciation is generally computed based on
useful lives of two to five years for computer equipment and software and five
to ten years for furniture and fixtures. Leasehold improvements are amortized
using the straight-line method over the lesser of the term of the respective
lease or the estimated useful life of the asset.
The Company includes costs of developing and obtaining software for internal
use, following its adoption of SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed for Internal Use," in Property and Equipment.
LONG-LIVED ASSET IMPAIRMENT
In accordance with SFAS No. 121 "Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of," the Company recognizes impairment losses on
long-lived assets when indicators of impairment are present and future
undiscounted cash flows are insufficient to support the assets' recovery. The
amount of the impairment loss is recognized based on an analysis of discounted
cash flows estimated to be derived from the impaired asset.
INCOME TAXES
The Company accounts for income taxes using the liability method as required by
SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred income
taxes are recognized for the future tax consequences of differences between the
tax and financial accounting of assets and liabilities at each year end.
Deferred income taxes are based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. A valuation allowance is established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Income tax expense
is the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company grants stock options to employees for a fixed number of shares with
an exercise price equal to the fair value of the shares at the date of the
grant. The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. Stock options and other stock-based awards to non-employees are
accounted for based on the provisions of SFAS No. 123.
NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share." SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
which includes the dilutive effect of options, warrants and other convertible
securities, is similar to the previously reported fully diluted earnings per
share.
Page 43
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 is presently analyzing the impact, if any, that
the adoption of SFAS No. 133 will have on its financial condition or results of
operations.
In December 1999. The Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements." The SAB
formalizes positions the staff has expressed in speeches and comment letters.
SAB 101 is effective no later than the first fiscal quarter of the fiscal year
beginning after December 15, 1999. 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.
2. BUSINESS COMBINATIONS
In April 1999, the Company completed the EDiX 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 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 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.
The results of operations previously reported by the separate enterprises and
the consolidated amounts for the three months ended March 31, 1999 and the years
ended December 31, 1998 and 1997 are summarized below.
Three months ended, Year ended, Year ended,
March 31, 1999 December 31, 1998 December 31, 1997
------------------------------------------------------------
(in thousands)
Total revenues:
IDX $ 60,181 $ 321,676 $ 251,417
EDiX 9,469 28,511 20,590
-----------------------------------------------------------
Consolidated $ 69,650 $ 350,187 $ 272,007
============================================================
Net income (loss):
IDX $ (6,900) $ 30,228 $ 7,962
EDiX (1,678) (13,394) (15,944)
------------------------------------------------------------
Consolidated $ (8,578) $ 16,834 $ (7,982)
============================================================
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.
On June 23, 1999, the Company acquired all of the assets of DietSite.com, Inc.
for $1.5 million. DietSite.com is a website which includes disease-oriented
dietary information with extensive proprietary content on diets, vitamins,
herbals and nutritionals.
Page 44
On May 5, 1998, the Company acquired the net assets of Laureate Enterprises Inc.
a provider of project and process consulting services for cash of $1.3 million.
The acquisition was accounted for under the purchase method.
On February 23, 1998, the Company recorded charges of $3.2 million related to
the acquisition of contract management system technology from Trego Systems,
Inc. for cash of $4.0 million. The acquisition was accounted for under the
purchase method. The charges were expensed as in-process research and
development in connection with the Company's development of a healthcare
contract management system.
In February 1997, the Company acquired certain data model technology from
Medaphis Healthcare Information Technology Company for cash of $2.5 million. The
acquisition was accounted for under the purchase method. Approximately $2.3
million of the purchase price was expensed as in-process research and
development in connection with the Company's development of a healthcare data
model.
Had these acquisitions occurred as of the beginning of the years in which they
occurred, the pro forma operating results for 1999, 1998 and 1997 would not be
materially different than as reported in the accompanying consolidated financial
statements.
In July 1997, the Company completed the Phamis Merger with PHAMIS which became a
wholly owned subsidiary of the Company. The transaction was accounted for as a
pooling-of-interests and, accordingly, the accompanying financial statements
include the accounts of PHAMIS for all periods presented. In connection with the
Merger, the Company incurred approximately $20.0 million of merger and related
costs consisting principally of transaction costs of $5.1 million, write-offs
and adjustments of $7.4 million of long-lived assets, primarily capitalized
software development costs and equipment due to the elimination of overlapping
and obsolete products and operations, employee termination and related costs of
$2.7 million and other merger related costs of $4.8 million related to
integration costs incurred during the year and the termination of leases and
other contractual obligations.
Computerized Patient Record Services, Inc.
In June 1997, EDiX purchased all of the outstanding stock of Computerized
Patient Record Services, Inc. ("CPRS") for $250,000 cash and 15,900 shares of
Series A preferred stock valued at $63,600. Direct costs of the acquisition
totaled $63,177. Excess of purchase price over net assets acquired of $353,769
was recorded as a covenant not-to-compete and is being amortized over its useful
life of three years. The transaction was accounted for as a purchase;
accordingly, the results of operations of CPRS have been included in EDiX's
consolidated financial statements from the date of acquisition. In addition, the
purchase agreement includes the issuance ofup to 70,750 shares of EDiX Series A
convertible preferred stock valued at $283,000 contingent upon the achievement
of certain profitability based milestones.
In connection with the acquisition, EDiX entered into an employment agreement
with a former shareholder of CPRS whereby additional consideration may be earned
subject to certain revenue targets. These amounts will be recorded as additional
purchase price upon achievement of such targets.
Rocky Mountain Transcription
In February 1997, EDiX purchased all of the assets of Rocky Mountain
Transcription ("RMT") for $12,500 cash and note for $87,500, payable in seven
equal quarterly installments of $12,500 beginning July 1, 1997 and ending
January 1, 1999. The agreement includes a contingent payment of $25,000 based
on the execution of a contract with a certain customer. The transaction was
accounted for as a purchase. Excess of purchase price over net assets acquired
of $125,000 was recorded as a covenant not-to-compete and is being amortized
over its useful life of three years. In connection with the agreement, EDiX
entered into a three-year employment agreement with a principal of RMT.
Page 45
Health Information Associates, L.L.C.
In January 1997, EDiX purchased all of the membership interest of Health
Information Associates, L.L.C. ("HIA") for $3,895,294 cash. Direct costs of the
acquisition totaled $21,076. Net assets acquired were $945,738 resulting in
goodwill of $2,970,632 which was subsequently written off in 1997 based on the
Company's analysis that future cash flows were insufficient to support the value
of goodwill.
3. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company adopted SFAS No. 131 effective with the fiscal year ended December 31,
1998. SFAS No. 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
information for those segments to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also establishes standards for related
disclosures about major customers, products and services, and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. Up to and including the first quarter
of 1999, the Company has viewed its operations and managed its business as
principally one segment, healthcare information solutions that include software,
hardware and related services. During the second quarter of 1999, the Company
acquired two companies 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 1999
presentation.
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 , will offer 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 dictation and 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. 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, with the exception
of EDiX. During the year ended December 31, 1999 EDiX's revenues from one major
customer amounted to 11.0%. During the years ended December 31, 1998 and 1997,
no single customer represented more than 10% of total revenues.
Page 46
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in millions):
IDX Healthcare
Information
Systems and Channelhealth
Services Incorporated EDiX Total
-------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 1999
Net operating revenues $ 292,261 $ 1,865 $ 46,873 $ 340,999
Operating income (loss) (542) (7,930) (4,177) (12,649)
Identifiable operating
assets 242,773 11,744 16,630 271,147
FOR THE YEAR ENDED
DECEMBER 31, 1998
Net operating revenues $ 321,676 - $ 28,511 $ 350,187
Operating income (loss) 47,144 - (12,150) 34,994
Identifiable operating
assets 281,324 - 7,899 289,223
FOR THE YEAR ENDED
DECEMBER 31, 1997
Net operating revenues $ 251,417 - $ 20,590 $ 272,007
Operating income (loss) 10,614 - (15,504) (4,890)
Identifiable operating
assets 237,318 - 8,141 245,459
Corporate headquarters assets are included on IDX Healthcare Information Systems
and Services. Substantially all of the Company's operations are in the United
States. As a result, the financial information disclosed herein represents all
of the material financial information related to the Company's principal
operating segments.
4. SECURITIES AVAILABLE-FOR-SALE
The following is a summary of securities available-for-sale at December 31, 1999
and 1998:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- ---------- ---------
(in thousands)
DECEMBER 31, 1999
U.S. government securities $ 8,914 $ (79) $ 8,835
Other debt securities 2,520 (22) 2,498
--------- --------- ---------- ---------
Total debt securities 11,434 (101) 11,333
Tax-deferred municipal
funds 22,640 (115) 22,525
Money-market funds 16,014 16,014
---------- --------- --------- ---------
$ 50,088 $(216) $ 49,872
========== ========= ========= =========
DECEMBER 31, 1998
U.S. government securities $ 17,357 $ 49 $ 17,406
Other debt securities 23,762 51 23,813
-------- --------- --------- ---------
Total debt securities 41,119 100 41,219
Tax-deferred municipal 36,958 46 37,004
funds
Money-market funds 35,351 35,351
--------- --------- --------- ---------
$113,428 $ 146 $113,574
========= ========= ========= =========
Page 47
The net unrealized (loss) and net unrealized gain on securities available-for-
sale included as a separate component of stockholders' equity totaled ($216,000)
and $146,000 at December 31, 1999 and 1998, respectively.
The amortized cost and estimated fair value of securities available-for-sale
at December 31, 1999 by contractual maturity, are shown below.
Estimated Fair
Cost Value
---------- ---------
Due in one year or less $45,135 $44,996
Due after one year through three years 4,043 3,984
Due after three years 910 892
---------- ---------
$50,088 $49,872
========== =========
5. PROPERTY AND EQUIPMENT
Equipment and leasehold improvements consists of the following:
December 31,
1999 1998
---------- --------
(in thousands)
Computer equipment and software $66,727 $48,573
Furniture and fixtures 9,406 7,872
Leasehold improvements 12,219 7,380
---------- ---------
88,352 63,825
Less accumulated depreciation and
amortization 48,475 36,137
---------- ---------
$39,877 $27,688
========== =========
Real estate consists of the following:
December 31,
1999 1998
---------- --------
(in thousands)
Corporate headquarters $20,301 $ 9,903
Less accumulated depreciation 1,913 1,642
--------- --------
$18,388 $ 8,261
========= ========
Page 48
6. OTHER INVESTMENTS AND ADVANCES
In February 1996, PHAMIS signed a Distribution Agreement (the Agreement) with
Point-of-Care Systems Inc, a software developer of mobile computing solutions
for the home healthcare marketplace. In addition to the Agreement, PHAMIS
purchased a minority equity interest in the developer for approximately $950,000
in cash. During 1997 and 1998 an additional $600,000 was invested by the
Company. During 1999, the Company was informed that the legal entity, Point-of-
Care Systems Inc. would be dissolved. Accordingly, the investment was written
off in the first quarter of 1999 and changed to the IDX healthcare information
segment as a loss on investment impairment.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
1999 1998
-------- --------
(in thousands)
Employee compensation and benefits $ 8,188 $13,442
Accrued expenses 9,709 3,812
Other 4,291 3,695
-------- --------
$22,188 $20,949
======== ========
8. FINANCING ARRANGEMENTS
Under a line of credit arrangement with a bank, the Company may borrow up to
$5,000,000 on a demand basis subject to terms and conditions upon which the
Company and the bank may mutually agree. The line of credit arrangement expires
on June 30, 2000. At December 31, 1999 and for each of the three years in the
period then ended, there were no borrowings under this arrangement.
OPERATING LEASES
At December 31, 1999, future obligations due under the operating lease with REPs
and unrelated parties for sales and support offices are as follows:
REPs Unrelated Total
Year ending December 31: Parties
---------------------------------------
(in thousands)
2000 $ 498 $11,336 $11,834
2001 454 11,168 11,622
2002 206 10,545 10,751
2003 10,150 10,150
2004 7,701 7,701
Thereafter 35,121 35,121
----------------------------------------
$1,158 $86,021 $87,179
========================================
The Company leased approximately 47% of the office space in a commercial office
building owned by HLP (owned and controlled by stockholders and certain key
employees of the Company) until July 1999 when the building was sold to a
unrelated party. The building lease was assumed by the new owner of the building
and is disclosed as a lease obligation with an unrelated third party in 2000 and
beyond. Total rent expense amounted to $9,708,000, $7,971,000 and $6,906,000,
during 1999, 1998 and 1997, respectively. Total rent expense includes
$1,564,000, $2,898,000 and $3,024,000 in 1999, 1998 and 1997, respectively,
related to the lease with HLP. Total rent expense includes $546,000, $525,000
and $448,000 in 1999, 1998 and 1997, respectively, related to the leases with
REPs.
Page 49
9. INCOME TAXES
The provision for income taxes consists of the following:
Currently payable: 1999 1998 1997
------------------------------------
(in thousands)
Federal $ 100 $15,918 $11,282
State (486) 3,805 2,820
------------------------------------
(386) 19,723 14,102
Deferred (benefit),
principally federal (3,843) 2,437 (5,864)
------------------------------------
$(4,229) $22,160 $ 8,238
====================================
A reconciliation of the federal statutory rate to the effective income tax rate
during 1999, 1998 and 1997 is as follows:
1999 1998 1997
---------------------------------
Tax at federal statutory rate 35.0% 35.0% 34.0%
State taxes, net of federal
benefit 5.4% 5.4% 5.4%
Non-deductible costs of
acquisitions (8.0) - 783.0%
Change in valuation
allowance - 13.7% 2298.9
Other, net 2.3 2.7% 96.7%
---------------------------------
34.7% 56.8% 3218.0%
=================================
Significant components of the Company's deferred tax assets (liabilities) are as
follows:
1999 1998
--------------------
(in thousands)
Deferred tax assets:
Net Operating loss carry
forward $14,502 $14,502
Allowances and accruals 5,178 3,317
Depreciation 3,200 2,307
Deferred revenue 2,513 1,403
--------------------
Total deferred tax assets 25,393 21,529
Valuation allowance (14,502) (14,502)
--------------------
Net deferred tax assets 10,891 7,027
Less current portion 7,691 4,720
--------------------
$ 3,200 $ 2,307
====================
At December 31, 1999, the Company had net operating loss carry forward (NOLs)
of approximately $36.3 million generated by EDiX and available to offset the
Company's future taxable income subject to an annual limitation of $900,000.
These NOLs will expire, if not used, during the years 2009 and 2018.
Page 50
The Company believes that, based upon a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realization of
the deferred tax assets such that a valuation allowance has been recorded. The
Company will continue to assess the realization of the deferred tax assets based
on actual and forecasted operating results.
10. NET INCOME (LOSS) PER SHARE
The following sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
-----------------------------------------
Numerator:
Net income (loss) $(7,944) $16,834 $(7,982)
-----------------------------------------
Numerator for basic and diluted
earnings per share $(7,944) $16,834 $(7,982)
Denominator:
Denominator for basic
earnings per share
weighted-average shares 27,723 27,345 26,672
Effect of employee
stock options - 825 -
-----------------------------------------
Denominator for diluted
earnings per share 27,723 28,170 26,672
=========================================
Basic net income (loss)
per share $ (0.29) $ 0.62 $ (0.30)
=========================================
Diluted net income
(loss) per share $ (0.29) $ 0.60 $ (0.30)
=======================================
11. BENEFIT PLANS
RETIREMENT PLANS:
PROFIT SHARING RETIREMENT PLAN
The Company maintains a profit sharing retirement plan for all IDX employees
meeting age and service requirements.In 1998, PHAMIS employees were not eligible
for the profit sharing retirement plan due to their eligibility in the PHAMIS
401(k) plan described below. Effective January 1, 1999, PHAMIS employees were
eligible for profit sharing contributions when the former PHAMIS 401(k) plan was
merged into the new IDX Systems Corporation Retirement Income Plan.
Contributions to the plan are discretionary, as determined by the Board of
Directors. The Company expects to continue the plan indefinitely; however, IDX
has reserved the right to modify, amend or terminate the plan. For the years
ended December 31, 1999, 1998 and 1997, the Company has expensed $0, $4,184,000
and $4,316,000, respectively.
401(K) RETIREMENT SAVINGS PLAN
Effective January 1, 1999, the Company merged the PHAMIS 401(k) retirement
savings plan into the IDX Systems Corporation Retirement Income Plan which
covers all full-time employees eligible to participate. Under the IDX plan,
employees are eligible to participate in the plan on the first day of the month
following the date of employment. The Company matches participant contributions
up to 3%. Matching contributions to the IDX plan were $3,271,000 for the year
ended December 31, 1999.
Page 51
During 1997 and 1998, the Company maintained two 401(k) retirement savings plans
which covered all eligible employees. One plan, which covered former PHAMIS
employees, matched 50% of participant contributions up to a maximum contribution
of $1,500 per employee in company stock. The second plan, covering IDX employees
had no matching provision. The PHAMIS 401(k) retirement savings plan was amended
in July 1997 to provide for the Company match to be made in cash. Matching
contributions to the plan were $413,000 and $357,000 in the years ended December
31, 1998, and 1997 respectively. A total of 240,000 shares of Common Stock have
been reserved for issuance under the 401(k) retirement savings
STOCK PURCHASE PLAN
In September 1995, IDX's Board of Directors and stockholders approved the 1995
Employee Stock Purchase Plan, as amended in July 1997, (the "ESPP") under which
eligible employees may purchase Common Stock at a price per share equal to 85%
of the lower of the fair market value of the Common Stock at the beginning or
end of each offering period. Participation in the offering is limited to 10% of
an employee's compensation (not to exceed amounts allowed under Section 423 of
the Internal Revenue Code), may be terminated at any time by the employee and
automatically ends on termination of employment with the Company. A total of
1,400,000 shares of Common Stock have been reserved for issuance under the ESPP.
During the years ended December 31, 1999, 1998 and 1997, an aggregate of
approximately 125,000, 96,000, and 54,000 shares, respectively, were purchased
under the ESPP. Subsequent to the end of the year, the Company issued
approximately 100,000 shares of stock under the ESPP. The Company has
approximately 868,000 additional shares of common stock available for issuance
pursuant to the ESPP.
STOCK OPTION PLANS:
IDX OPTION PLANS
During 1985 and 1994, the Company established incentive stock option plans
providing for the grant of options for the issuance of 959,540 and 183,200
shares, respectively, of Common Stock. Options were granted at fair market value
at the time of grant and became immediately exercisable at the time of the
initial public offering. The options expire on the tenth anniversary of the date
of the grant or upon termination of employment. The 1994 Plan was terminated
upon the completion of the initial public offering. The 1985 Plan was terminated
for purposes of prospective eligibility in March 1995. At December 31, 1999,
options to purchase 53,350 and 73,476 shares of Common Stock were outstanding
and exercisable under the 1994 Plan and the 1985 Plan, respectively.
In September 1995, the Company's stockholders approved the 1995 Stock Option
Plan as amended in July 1997, (the "1995 Option Plan"). The 1995 Option Plan
provides for the grant of stock options to employees, officers and directors of,
and consultants or advisors to, the Company. Under the 1995 Option Plan, the
Company may grant options that are intended to qualify as incentive stock
options under provisions of the Internal Revenue Code or options not intended to
qualify as incentive stock options. The option grants, exercise price, vesting
and expiration are authorized by a compensation committee comprised of certain
of the Company's directors. A total of 4,500,000 shares of Common Stock may be
issued upon the exercise of options granted under the 1995 Option Plan. At
December 31, 1999, options to purchase 2,370,321 shares of Common Stock were
outstanding under the 1995 Option Plan, of which 923,759 were exercisable.
In September 1995, IDX's Board of Directors approved the 1995 Director Stock
Option Plan, as amended, in May and July 1997, (the "IDX Director Plan"), which
provides that each non-employee director of the Company be granted an option to
acquire 2,000 shares of Common Stock on the date that person becomes a director
but, in any event, not earlier than the effective date of the IDX Director Plan.
Options are granted at a price equal to the fair market value on the date of
grant. The option becomes exercisable on the first anniversary of the date of
grant, and the term of the option is ten years from the date of grant. The
Company has reserved 80,000 shares of Common Stock for issuance under the IDX
Page 52
Director Plan. At December 31, 1999, options to purchase 25,488 shares of Common
Stock were outstanding under the IDX Director Plan, of which 13,940 where
exercisable.
PHAMIS STOCK OPTION PLANS
Options to purchase shares of PHAMIS Common Stock under the PHAMIS, Inc. Amended
and Restated 1983 Combined Nonqualified and Incentive Stock Option Plan (the
"1983 Option Plan"), the PHAMIS, Inc. 1993 Combined Incentive and Nonqualified
Stock Option Plan (the "1993 Option Plan") and the PHAMIS, Inc. 1994
Non-employee Director Stock Option Plan (the "PHAMIS Director Plan") which were
outstanding at the effective date of the Merger were effectively assumed by IDX
based on the exchange ratio of .73 shares of IDX Common Stock for each share of
PHAMIS Common Stock. Pursuant to the terms of the aforementioned plans, all
unvested and unexercisable option grants were fully vested and became
exercisable immediately prior to the Merger. The aforementioned PHAMIS plans
were terminated for purposes of prospective eligibility at the effective time of
the Merger. At December 31, 1999, options to purchase 9,512, 80,089 and 3,650
shares of IDX Common Stock were outstanding and exercisable under the 1983
Option Plan, the 1993 Option Plan and the PHAMIS Director Plan, respectively.
EDIX STOCK OPTION PLANS
Options to purchase shares of EDiX Common Stock under the EDiX 1994 Combined
Incentive and Nonqualified Stock Option Plan (the "1994 Plan"), the EDiX 1996
Combined Incentive and Nonqualified Stock Option Plan (the "1996 Plan") and the
EDiX 1997 Stock Incentive Plan (the "1997 Plan") which were outstanding at the
effective date of the Merger were exchanged for IDX shares of common stock based
on the fair value of each option at the exchange ratio of .08 shares of IDX
Common Stock for each share of EDiX Common Stock. Pursuant to the terms of the
aforementioned plans, all unvested and unexercisable option grants were fully
vested and became exercisable immediately prior to the Merger. The
aforementioned EDiX plans were terminated for purposes of eligibility at the
effective time of the Merger.
STOCK BASED COMPENSATION
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options and shares issued pursuant to the ESPP
under the fair value method of that Statement. The fair value for these options
and shares issued pursuant to the ESPP were estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
Options ESPP
1999 1998 1997 1999 1998 1997
----------------------------------------------
Expected life (years) 4.0 6.4 6.3 .5 .5 .5
Interest rate 5.9% 5.7% 6.0% 5.7% 5.5% 6.1%
Volatility 74.6% 41.4% 42.7% 74.6% 41.4% 42.7%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Page 53
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except for net income (loss) per share
information):
1999 1998 1997
------------------------------------
Pro forma net income (loss) $(13,136) $12,296 $(15,477)
Pro forma net income (loss) per share $ (0.47) $ 0.46 $ (0.58)
The effects on 1997, 1998 and 1999 pro forma net income (loss) and net income
(loss) per share of expensing the estimated fair value of stock options and
shares issued pursuant to the ESPP are not necessarily representative of the
effects on reporting the results of operations for future years as the periods
presented include only stock options granted under the Company's plans
subsequent to the adoption of FASB 123 in 1996.
A summary of the Company's stock option activity, and related information for
the three years ended December 31 follows:
1999 1998 1997
-------- -------- --------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------------------------------------------
Outstanding at
beginning of year 1,889,019 $26.36 2,085,729 $24.95 1,955,221 $18.13
Granted 1,098,009 $14.33 289,710 $26.35 685,007 $31.23
Exercised (234,642)$ 5.75 (424,051)$19.03 (495,478) $12.47
Forfeited (146,500)$33.12 (62,369)$29.00 (59,021) $29.56
----------------------------------------------------------
Outstanding at end
of year 2,605,886 $22.77 1,889,019 $26.37 2,085,729 $23.46
==========================================================
Exercisable at end
of year 1,155,276 $23.00 743,697 $21.23 805,073 $16.73
==========================================================
Weighted-average
fair value of
options granted
during the year $ 8.53 $17.67 $16.56
Available for
future grants 1,477,453 2,435,276 2,553,424
==========================================================
Page 54
The following table presents weighted-average price and life information about
significant option groups outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------
$ 4.32 - $18.00 1,295,544 8.30 years $13.48 492,149 $12.56
$18.22 - $30.25 215,065 7.19 years $26.25 129,520 $26.80
$30.63 - $31.22 499,162 6.89 years $30.72 301,379 $30.70
$31.56 - $51.19 596,115 7.75 years $33.68 232,228 $33.13
--------- ---------
2,605,886 1,155,276
========= =========
12. COMMITMENTS AND CONTINGENCIES
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 of the Company.
13. SUBSEQUENT EVENTS
On January 10, 2000, Channelhealth Incorporated, a majority owned subsidiary
incorporated in Delaware announced that Pequot Private Equity invested $30
million in Channelhealth for an equity interest of approximately 9%.
On January 24, 2000, IDX and Channelhealth Incorporated announced a strategic
alliance with Healtheon/WebMD, and Channelhealth Incorporated announced an
investment in Healtheon/WebMD. The strategic alliance is contingent on the
acquisition by Channelhealth Incorporated of an interest in Healtheon/WebMD, in
exchange for approximately 3% of the common stock of Channelhealth Incorporated.
Channelhealth Incorporated's acquisition of an interest in Healtheon/WebMD is
subject to regulatory approval, and therefore the strategic alliance will not be
consummated without regulatory approval of the stock acquisition transaction.
On March 24, 2000 the Company received a request from the U. S. Department of
Justice for additional information and documents with respect to the proposed
transaction with Healtheon/WebMD. As a result, the regulatory review process may
continue for an extended period of time. There can be no assurance that the
proposed transaction with Healtheon/WebMD will receive regulatory approval or
will ever be implemented.
The interest in Healtheon/WebMD to be acquired by Channelhealth Incorporated is
valued at approximately $20 million, based on the closing price of the
Healtheon/WebMD common stock as of January 21, 2000. The Healtheon/WebMD common
stock to be acquired constitutes restricted securities.
Healtheon/WebMD will issue approximately 84,000 shares of common stock valued at
approximately $5 million as of January 21, 2000 to IDX in exchange for the
execution and delivery of the alliance agreement and the transfer to
Healtheon/WebMD of IDX's mailing services line of business which provides
patient statement printing and mailing services for customers. Upon consummation
of the transaction, the Company expects to recognize a one-time pre-tax gain on
the sale of these operations.
As a result of the proposed strategic alliance with Healtheon/WebMD, upon
regulatory approval Healtheon/WebMD would become the primary provider of content
and transactions for ChannelHealth.
Page 55
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. This asset impairment will be
written off during the first quarter of 2000 and will be reflected as a pre-tax
one-time loss on impairment of assets of approximately $5.5 million.
14. QUARTERLY INFORMATION (UNAUDITED)
A summary of operating results for the quarterly periods in the two years ended
December 31, 1999 is set forth below:
Quarter Ended
March 31 June 30 September 30 December 31 Total
-----------------------------------------------------------
(in thousands, except per share amounts)
YEAR ENDED
DECEMBER 31, 1999
Total revenues $ 69,650 $ 91,255 $92,218 $87,876 $340,999
Gross profit 20,847 34,960 35,776 32,862 124,445
Net income (loss) (8,578) (2,250) 1,178 1,706 (7,944)
Net income (loss)
per share-basic $ (0.31) $ (0.08) $ 0.04 $ 0.06 $ (0.29)
Net income (loss)
per share-diluted $ (0.31) $ (0.08) $ 0.04 $ 0.06 $ (0.29)
YEAR ENDED
DECEMBER 31, 1998
Total revenues $78,809 $ 86,162 $90,937 $94,279 $350,187
Gross profit 34,442 38,068 40,575 40,622 153,707
Net income 1,798 5,566 6,199 3,271 16,834
Net income per
share-basic $ 0.07 $ 0.20 $ 0.23 $ 0.12 $ 0.62
Net income per
share-diluted $ 0.06 $ 0.20 $ 0.22 $ 0.12 $ 0.60
The first quarter of 1999 and all quarters of 1998 amounts have been restated to
reflect the Merger with EDiX which was accounted for as a pooling-of-
interests.
Page 56
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged Charged Bad Debts Balance
Beginning to Costs to Written-Off at
of and Other Net End of
Description Period Expenses Accounts Collections Period
------------------------------------------------------------------------------
Year ended
December 31, 1999
Allowance for
doubtful accounts $2,615,000 $ 685,000 $3,300,000
Year ended
December 31, 1998
Allowance for
doubtful accounts $1,664,000 $1,512,000 $561,000 $2,615,000
Year ended
December 31, 1997
Allowance for
doubtful accounts $ 817,000 $ 815,000 $32,000 $1,664,000
Page 57
REPORT OF INDEPENDENT AUDITORS
Board of Directors
IDX Systems Corporation
We have audited the accompanying consolidated balance sheets of IDX Systems
Corporation, its subsidiaries and affiliate as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDX Systems
Corporation, its subsidiaries and affiliate at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 4, 2000
Page 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I hereof, and the remainder is contained in
the Company's 2000 Proxy Statement under the caption "Election of Directors" and
is incorporated herein by reference. Information relating to delinquent filings
of Forms 3, 4 and 5 of the Company is contained in the Company's 2000 Proxy
Statement under the caption "Compliance with Section 16 Reporting Requirements."
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in this Company's 2000 Proxy Statement
under the captions "Board of Directors Compensation" and "Compensation of
Executive Officers" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the Company's 2000 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the Company's 2000 Proxy Statement
under the captions "Compensation Committee Interlocks and Insider Participation"
and "Certain Relationships and Related Transactions" and is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of IDX Systems Corporation
are included in Item 8.
1. Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) for the Years Ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
2. The consolidated financial statement Schedule II is included in Item 8.
All other schedules are omitted as the information required is inapplicable.
3. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits
are filed as a part of this Annual Report on Form 10-K. (b) No Current Reports
on Form 8-K were filed by the Company during the last quarter of the period
covered by this report.
Page 59
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March, 2000.
IDX SYSTEMS CORPORATION
By: /s/ Richard E. Tarrant
----------------------------------
Richard E. Tarrant,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Richard E. Tarrant Chief Executive March 30, 2000
- ---------------------------- Officer and Director
Richard E. Tarrant Principal Executive Officer)
/s/ James H. Crook, Jr. President and Chief Operating March 30, 2000
- ----------------------------- Officer
James H. Crook, Jr.
/s/ John A. Kane Vice President, Finance March 30, 2000
- ----------------------------- and Administration, Chief
John A. Kane Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Henry M. Tufo Director March 30, 2000
- ----------------------------
Henry M. Tufo, M.D.
/s/ Robert H. Hoehl Director March 30, 2000
- ----------------------------
Robert H. Hoehl
/s/ Stuart H. Altman Director March 30, 2000
- ----------------------------
Stuart H. Altman, Ph.D.
/s/ Steven M. Lash Director March 30, 2000
- ----------------------------
Steven M. Lash
Page 60
/s/ Frank T. Sample Director March 30, 2000
- ----------------------------
Frank T. Sample
/s/ Mark F. Wheeler Director March 30, 2000
- ----------------------------
Mark F. Wheeler, M.D.
/s/ Allen Martin Director March 30, 2000
- ---------------------------
Allen Martin, Esq.
/s/ Peter VanEtten Director March 30, 2000
- ---------------------------
Peter VanEtten
Page 61
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K.
Exhibit No. Description
- ----------- -----------
3.1* Second Amended and Restated Articles of Incorporation.
3.2* Second Amended and Restated Bylaws.
4.1* Specimen Certificate for shares of Common Stock, $.01 par value,
of the Registrant.
10.1#* 1985 Incentive Stock Option Plan.
10.2#* 1994 Incentive Stock Option Plan.
10.3#* 1995 Stock Option Plan.
10.4#* 1995 Director Stock Option Plan.
10.5#* 1995 Employee Stock Purchase Plan.
10.6#* Description of Registrant's Executive Bonus Plan.
10.7* Agreement between Richard E. Tarrant, Robert H. Hoehl and Paul L.
Egerman dated as of June 24, 1994.
10.8* Agreement between the Registrant, Richard E. Tarrant, Robert H.
Hoehl and Paul L. Egerman dated as of September 18, 1995.
10.9#* Amended and Restated Consulting/Employment Agreement between the
Registrant and Henry M. Tufo, dated as of March 7, 1995, and
related Letter Agreement between Mr. Tufo and the Registrant
dated August 11, 1995.
10.10* Employment, Noncompetition and Nondisclosure Agreement between the
Registrant and Richard E. Tarrant.
10.11* Employment, Noncompetition and Nondisclosure Agreement between the
Registrant and Robert H. Hoehl.
10.12* Employment, Nondisclosure and Noncompetition Agreement between the
Registrant and Jeffrey M. Blanchard.
10.13* Employment, Noncompetition and Nondisclosure Agreement between the
Registrant and James H. Crook, Jr. dated September 19, 1995.
10.14* Agreement between the Registrant and Robert F. Galin dated
April 5, 1982.
10.15* Employment Agreement between the Registrant and John A. Kane dated
October 15, 1984.
10.16* Redemption Agreement between the Registrant, Richard E. Tarrant
and Robert H. Hoehl dated as of April 1, 1993.
Page 62
Exhibit No. Description
- ----------- -----------
10.17* First Amendment to Redemption Agreement between the Registrant,
Richard E. Tarrant and Robert H. Hoehl.
10.18* Amended and Restated Certificate and Agreement of Limited
Partnership of 4901 LBJ Limited Partnership between the Registrant
and Richard E. Tarrant, Robert H. Hoehl, Paul L. Egerman, John A.
Kane, Robert F. Galin and certain of the Registrant's employees
dated as of April 1, 1992, as amended on July 1, 1993.
10.19* Lease Agreement between the Registrant and 4901 LBJ Limited
Partnership dated as of April 7, 1992.
10.20* Indenture of Lease between the Registrant and IDS Realty Trust
dated as of December 1, 1981, as amended on June 29, 1995.
10.21* Lease Agreement between the Registrant and BDP Realty Associates
relating to 1500 Shelburne Road dated July 6, 1979.
10.22 Extensions of Lease Agreement between the Registrant and BDP
Realty Associates relating to 1500 Shelburne Road dated as of
August 16, 1995 and March 23, 1999.
10.23* Guaranty Modification Agreement relating to 1400 Shelburne Road
dated as of September 15, 1995.
10.24* Reimbursement Agreement among the Registrant, BDP Realty
Associates and State Street Bank and Trust Company dated as of
January 25, 1993.
10.25* Agreement of Lease between the Registrant and Huntington Avenue
Limited Partnership dated as of April 13, 1994, as amended through
January 1, 1995.
10.26* Guaranty Release Agreement relating to 116 Huntington Avenue.
10.27* Option Agreement between the Registrant and BDP Realty Associates.
10.28* Tax Indemnification Agreement between the Registrant and the
stockholders listed on Schedule A thereto.
10.29* Employment, Noncompetition and Nondisclosure Agreement between the
Registrant and Pamela J. Pure effective April 3, 1995.
10.30#* Letter Agreement between the Registrant and Pamela J. Pure dated
March 7, 1995.
10.31#* Letter Agreement between the Registrant and Pamela J. Pure dated
October 23, 1995.
10.32#* Nonqualified Stock Option Agreement dated as of September 1, 1991
between the Registrant and John A. Kane.
10.33#* Nonqualified Stock Option Agreement dated as of September 1, 1992
between the Registrant and John A. Kane.
Page 63
Exhibit No. Description
- ----------- ----------------
10.34# Letter Agreement between the Registrant and Jeffrey V. Sutherland,
Ph.D. dated August 16, 1996
10.35# Employment, Noncompetition and Nondisclosure Agreement between the
Registrant and Jeffrey V. Sutherland, Ph.D. dated September, 1996.
10.36+ Agreement and Plan of Merger dated as of March 25, 1997 by and
among the Registrant, Penguin Acquisition Corporation and
PHAMIS, Inc.
10.37#@ PHAMIS, Inc. Amended and Restated 1983 Combined Nonqualified and
Incentive Stock Option Plan
10.38#@ PHAMIS, Inc. 1993 Combined Incentive and Nonqualified Stock Option
Plan as amended through May 14, 1996
10.39#@ PHAMIS, Inc. 1994 Non-employee Director Stock Option Plan as
amended through January 1, 1996
10.40#@ PHAMIS, Inc. Salary Savings and Deferral Plan and Trust as amended
through February 22, 1996
10.41#@ Stock Option Agreement dated August 20, 1990 between PHAMIS, Inc.
and Michael Cain.
10.42# Amended and Restated Lease Agreement between BDP Realty Associates
and IDX Systems Corporation dated as of November 1, 1997
10.43# Amendment to Amended and Restated Consulting/Employment Agreement
between the Registrant and Henry M. Tufo, M. D. dated
February 16, 1999
10.44^ Specimens of Stock Option Agreements under the 1995 Stock Option
Plan
10.45^ Third Addendum to Lease Agreement between 4901 LBJ Limited
Partnership and IDX Systems Corporation dated as of
February 1, 1998.
23.1 Consent of Ernst & Young LLP
27.1 Restated Financial Data Schedule for each 12 Month Period
from 1997-1999
27.2 Restated Financial Data Schedule for First Three Quarters of 1998
27.3 Restated Financial Data Schedule for First Three Quarters of 1999
# Management contract or compensatory plan or arrangement filed as an exhibit to
or incorporated by reference into this Form pursuant to Items 14(a) and 14(c) of
Form 10-K.
* Incorporated herein by reference from the Company's Registration
Statement on Form S-1, as amended (File No. 33-97104).
+ Incorporated herein by
reference from the Company's Registration Statement on Form S-4, as amended
(File No. 333-2891).
@ Incorporated herein by reference from the Company's Registration
Statement on Form S-8, as amended (File No. 333-31045).
^ Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
Page 64
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-4 No. 333-67891 as amended as of March 22, 1999) and the
Registration Statements (Forms S-8 Nos. 33-1502, 333-31047) pertaining to the
1985 Incentive Stock Option Plan, the 1994 Incentive Stock Option Plan, the 1995
Director Stock Option Plan, the 1995 Employee Stock Purchase Plan, the 1995
Stock Option Plan and non-statutory stock options granted to directors and
officers of IDX Systems Corporation and in the Registration Statement (Form S-8
No. 333-31045) pertaining to the PHAMIS, Inc. Amended and Restated 1983 Combined
Nonqualified and Incentive Stock Option Plan, the PHAMIS, Inc. 1993 Combined
Incentive and Nonqualified Stock Option Plan as amended through May 14, 1996,
the PHAMIS Inc. 1994 Nonemployee Director Stock Option Plan as amended through
January 1, 1996, the PHAMIS, Inc. Salary Savings and Deferral Plan and Trust as
amended through February 22, 1996 and the PHAMIS, Inc. Cain Option Agreement, of
our report dated February 3, 2000, with respect to the consolidated financial
statements and schedule of IDX Systems Corporation included in this Annual
Report (Form 10-K) for the year ended December 31, 1999.
Ernst & Young LLP
Boston, Massachusetts
March 29, 2000