-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NX9pW+AGc9qCwAfytiP34KHAs7vbTKGrEeSAc2aiEOEMSw1IOrxb5U1D7uPYlkeU 4GSgppVBT/qH+84uXrcjEg== 0000927016-98-001324.txt : 19980401 0000927016-98-001324.hdr.sgml : 19980401 ACCESSION NUMBER: 0000927016-98-001324 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDX SYSTEMS CORP CENTRAL INDEX KEY: 0001001185 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 030222230 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26816 FILM NUMBER: 98583223 BUSINESS ADDRESS: STREET 1: 1400 SHELBURNE RD STREET 2: PO BOX 1070 CITY: SOUTH BURLINGTON STATE: VT ZIP: 05403 BUSINESS PHONE: 8028621022 MAIL ADDRESS: STREET 1: 1400 SHELBURNE RD STREET 2: PO BOX 1070 CITY: SOUTH BURLINGTON STATE: VT ZIP: 05403 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1997 Commission File No. 0-26816 -------------------------- IDX Systems Corporation (Exact Name of Registrant as Specified in its Charter) ------------------- Vermont 03-0222230 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization Identification No.) 1400 Shelburne Road, P.O. Box 1070, South Burlington, Vermont 05403 (Address of Principal Executive Offices) (Zip Code) ------------------- 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 ------------------- 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 --- --- 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 $541,864,449 based on the last reported sale price of the Common Stock on the Nasdaq consolidated transaction reporting system on March 16, 1998. Number of shares outstanding of the registrant's class of Common Stock as of March 16, 1998: 26,263,353. Documents incorporated by reference: Proxy Statement for the 1998 Annual Meeting of Stockholders--Part II and Part III PART I Item 1. Business IDX SYSTEMS CORPORATION Business Overview IDX is a leading provider of healthcare information solutions in the United States. IDX offers healthcare information solutions that include software, hardware, and related services required by physician groups, management services organizations (MSOs), health plans, hospitals and integrated delivery networks (IDNs). IDX solutions enable healthcare organizations to redesign patient care and other workflow processes in order to improve efficiency and quality. On July 10, 1997, IDX successfully completed the acquisition of PHAMIS, Inc (PHAMIS), a Seattle-based provider of patient-centered acute care clinical information systems, including the LastWord(R) system. The Company acquired PHAMIS by means of a merger (the "Merger") of a subsidiary of the Company with and into PHAMIS, with PHAMIS remaining as the surviving corporation and becoming a wholly owned subsidiary of the Company following the Merger. The Merger was accounted for as a pooling of interests in the quarter ended September 30, 1997. In September 1997, PHAMIS was merged with and into the Company. The LastWord system provides the depth of functionality required to manage the complex accute care setting, with special emphasis on the clinical process. The merger enhances the Company's competitive status by positioning the Company to deliver a complete information solution to healthcare delivery systems. The solution is packaged as the IDXtendR(TM) @ the Site Series, where the Site corresponds to settings across the care continuum: IDXtendR(TM) @ the Group practice, IDXtendR(TM) @ the MSO, IDXtendR(TM) @ the Health Plan, IDXtendR(TM) @ the Hospital, and IDXtendR(TM) @ IDN. The IDXtendR product line, which employs relational, scaleable, client/server architecture, combines the strengths of the IDX and LastWord applications to provide both ambulatory and hospital capabilities. As of February 28, 1998 IDX's systems were used by, or were under contract to be used by, more than 96,500 physicians and were installed at over 1,550 client sites, including approximately 230 large physician group practices, those generally with more than 75 physicians, more than 550 physician practices which have 75 or fewer physicians, over 260 hospitals and a growing number of IDNs. IDX was incorporated in Vermont on June 2, 1969. IDX's executive offices are located at 1400 Shelburne Road, South Burlington, Vermont 05403 and its telephone number is (802) 862-1022. Industry Background Healthcare costs in the United States have risen dramatically over the past two decades relative to the overall rate of inflation. Broad pressures to reduce costs without sacrificing the quality of care have caused significant changes in the healthcare industry. While reimbursement for healthcare has historically been based on a fee-for-service model of payment, managed care organizations and other payers are increasingly utilizing alternative reimbursement models, including fixed fee and capitation, that shift the financial risk of delivering healthcare from payers to both physicians and institutional providers. Pressures to control costs have also contributed to the movement of care from more expensive inpatient settings, such as hospitals, to ambulatory settings. Today, ambulatory care providers, particularly physician groups, deliver the majority of healthcare services, bear an increasing share of the financial risk, and control a substantial portion of total healthcare resources. In order to compete in the changing healthcare environment, individual physicians, physician groups and other ambulatory care providers are increasingly joining and affiliating with other physicians, managed care organizations, hospitals and other enterprises to form larger healthcare organizations known as IDNs. These organizations are designed to manage the continuum of healthcare services for population groups across both inpatient and ambulatory settings, while achieving improved quality and reduced costs for patients and members. In the emerging managed care environment, IDNs are increasingly entering into contracts that often define the terms under which care is administered and may fix the amount of payment for each covered life. One of the key 1 challenges facing IDNs and the market today is improving the quality of care while reducing the associated cost. To do this, IDNs must organize their businesses to efficiently manage patient care and other workflow processes that may extend across multiple care locations and business entities. Many health care organizations are working to control and influence the complete treatment during an episode (or entire lifetime) of care. The resulting risk-sharing arrangements associated with managed care are causing providers--physicians, group practices, clinics, and hospitals--to focus on the critical role that physicians play in determining the cost and quality of care. To compete under the constraints of managed care, while maintaining the quality of care, healthcare organizations have placed increasing demands on their information systems. Initially, these organizations required financially oriented systems which focused on reducing costs by automating certain financial and administrative functions. As it became necessary to manage patient flow processes and not just individual tasks, the need arose to exchange information stored in disparate systems through computer-to-computer interfaces. However, due to the limitations of such interfaces and the complexities of these larger organizations, IDNs and physician groups began to require fully-integrated systems that seamlessly integrate their enterprise. Such information systems must enable the implementation of enterprise-wide patient flow processes that create a longitudinal record of administrative, financial and clinical information from multiple entities, while focusing on the physician as the primary care giver. In addition, large healthcare organizations increasingly require information systems that can deliver high-performance computing in environments with thousands of concurrent computer users. To function as fully integrated delivery systems, IDNs need integrated clinical, financial, and administrative information systems. These systems support the organization's efforts to streamline patient flow, reduce costs and improve the quality of care. At the same time, information systems must provide the ability to access and analyze the information each organization needs to make the complex business and care decisions IDNs face today. The healthcare information systems market is highly fragmented, with over 1,300 vendors. It is estimated that the market, worth an estimated $11.6 billion in 1996, could grow to as much as $18.0 billion by the year 2000. Healthcare organizations are transitioning to new platforms and newer technologies in a migration over time toward the implementation of enterprise-wide, patient- centered computing systems leading to the computerized medical record. These organizations cannot afford significant downtime or re-education, or the risk of choosing a system which has not proven its ability to handle high-volume transaction processing with continuous dependability. IDX believes that successful vendors in this market will have a large existing client base and offer the high quality, fully integrated products and value-added services needed to expand and support clients throughout this evolution process. Strategy IDX seeks to maximize value for its clients by delivering information systems that are designed to improve the quality and reduce the cost of healthcare delivery. The IDX strategy is to build on its success as a leading ambulatory systems vendor and to build on the strength of the LastWord acute care clinical system to provide complete information systems solutions for IDNs and other healthcare organizations. The IDX solution anticipates evolutionary change in IDNs and provides the connectivity and information sharing functions that support evolutionary change. IDX systems also allow physician groups to share data with an IDN while at the same time maintaining an appropriate level of autonomy. This approach recognizes the real operational needs of hospitals, MSOs, group practices, and health plans while simultaneously achieving the critical physician link to the network. The combined strengths of the IDX and LastWord systems position IDX to provide depth of product function across administrative, financial, clinical, and analytical applications. The IDX strategy--which includes automating patient care and other workflow processes, web-access to patient data, and enterprise clinicals--provides benefits to IDNs looking to attract and maintain strong physician relationships. The Company's understanding of the significant role of the physician and the evolutionary nature of the IDN is the cornerstone of the IDX strategy. 2 Key elements of IDX's strategy are to: Increase Penetration of IDNs through Large Physician Group and Hospital Customer Relationships. IDX believes that its existing client base, including approximately 230 large group practices comprised of over 79,000 physicians and over 260 hospitals, as of February 28, 1998, will play a significant role in the formation and management of IDNs. As a result of the Company's relationships with these clients and the depth and breadth of the functions and service offerings available, IDX anticipates that significant opportunities will exist to sell its products and services to IDNs and their affiliated organizations. Capitalize on Growth of Group Practice Market. The number of physicians practicing medicine in a group setting has increased significantly in recent years. IDX believes the number and size of such groups will continue to grow as economic pressures drive physicians to affiliate with or form new, larger group practices. IDX believes its position as a leading provider of integrated information solutions to physician groups, particularly those with 75 or more physicians, and its proven ability to meet their needs will allow IDX to capitalize on the continued growth of the group practice market. Cross-Sell Products and Services into Existing Client Base. IDX believes significant opportunities exist to cross-sell current products and professional services as well as products under development to its existing client base at February 28, 1998, consisting of over 775 physician practices with 89,500 physicians and over 260 hospitals. IDX is marketing its LastWord system to IDNs associated with its ambulatory customers, and is marketing the IDX ambulatory solution to physician groups associated with the LastWord customer base. In addition to selling products that enhance currently installed ambulatory applications, IDX actively markets applications that complement currently installed IDX systems. Among those applications are the IDXtendRTM Clinical Management System--an ambulatory computerized patient record; Analyzer--an OLAP (online analytical processing) decision support tool; Electronic Data Interchange--for interactive eligibility and credit card processing; IDXrad--radiology information system; Enterprise Patient Management System--an enterprise master patient index system; and OutReach(TM)--a web-based companion application to IDX systems. Sell Solutions to Solve Customers' Business Needs. IDX believes it can be successful by combining its products and services to provide a complete solution to the information systems challenges of healthcare organizations. Solutions are configured as the IDXtendR @ the Site SeriesTM , which is comprised of IDXtendR @ the Group Practice (Series 2000); IDXtendR @ the MSO (Series 3000); IDXtendR @ the Health Plan (Series 4000); IDXtendR @ the Hospital (Series 5000); and IDXtendR @ the IDN (Series 6000). The @ the Site Series includes core applications, optional applications, and complementary products and services. Expand Professional and Technical Service Offerings. IDX seeks to leverage its healthcare information systems expertise providing professional and technical services such as information systems planning, contract programming, and project management to assist healthcare organizations. A specialized consulting organization within IDX, The Huntington Group, provides information technology solutions to healthcare organizations, including process redesign, organizational change management, outsourcing, and systems integration services to IDX customers. IDX has alliances with US Servis, Inc. for business office outsourcing, and Daou Systems, Inc. for network design and implementation. IDX markets professional and technical services primarily to organizations that currently use IDX's information systems products. Migrate Clients to Proven Technologies. To reduce risks of changing technologies and ensure that IDX customers have tools needed to operate in complex clinical and business office settings, IDX strives to utilize technology for performance by applying the new technologies as they prove themselves able to perform well in large-scale, transaction-driven environments. The technology for performance philosopy 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 IDX technical strategy is based on thin client architecture as the basis for World Wide Web access to applications to allow more convenient desktop device independence and reduce costs of training and equipment. To support standardized reporting and analysis, IDX strives to utilize SQL databases running under Microsoft Windows NT, and to support more natural product 3 integration. IDX also strives to develop component-based software oriented around business objects which contain logic of healthcare business processes. Establish Partnerships to Supplement IDX Offerings. IDX seeks to enhance its product offerings through strategic alliances with vendors developing complementary products. The complementary products and services currently offered include integrated credit card transaction processing, point-of-service access to eligibility, referral, and enrollment data, integrated patient communication systems, and billing office outsourcing. In addition to increasing the range of products and services available to IDX customers, these alliances provide recurring revenue opportunities for IDX. IDX Products Products IDX's software product solutions enable healthcare organizations to redesign patient care and other work flow processes by providing computer-based tools to capture, access and manage information within healthcare organizations and throughout IDNs. In January 1997, IDX introduced the IDXtendR(TM) product line. IDXtendR is packaged as the "IDXtendR @ the Site Series" consisting of nine configurations of IDX products packaged to meet the specific process requirements of healthcare organizations, including group practices, MSOs, health plans, hospitals, and IDNs. IDXtendR provides relational reporting and analysis capabilities as well as OutReach for web-browser access to patient data residing in an IDX database. Below is a description of IDX's products as of February 28, 1998. Key healthcare processes automated by the IDXtendR product line include: - - patient information access applications focusing on scheduling and patient registration processes - - financial management applications for billing and health plan management - - clinical information applications, including the LastWord(R) lifetime computerized patient record system, the Clinical Management System (CMS) for ambulatory clinical information, and IDXrad for radiology information and image management - - enterprise connectivity applications such as Enterprise-wide Scheduling, Enterprise Patient Management, OutReach, and EDI for connecting hospitals and other provider sites throughout the delivery network - - decision support applications such as Analyzer, Management Reporter, and Enterprise Perspective, providing comprehensive relational reporting tools to support effective decision-making across the care continuum Key functional areas within the applications of the IDXtendR @ the Site Series include: Patient Information Access Scheduling: - schedules patients, providers, and resources in small, mid-size, and large physician group settings - manages schedules and coordinates appointments in the acute care environment and is integrated with orders for procedure scheduling Registration: - stores patient demographics and insurance information - creates a single master database of patient information across multiple care settings - includes patient registration, charge entry, fee schedule, patient list, user registration, security and text messaging functions. Visit Management: - admission and discharge capabilities for outpatient centers, physician practices, and clinics - admission, discharge, and transfer capabilities for hospital inpatients and outpatients - reports information related to patient registration, visit, bed management, and insurance management - tracks every patient interaction to build the complete electronic medical record Charting - provides abstracting and encoding using ICD-9, CPT-4 and DRG codes. - streamlines chart completion activities for medical records personnel - streamlines all activities related to tracking physical medical records throughout a multi-site organization 4 - automates activities related to releasing patient record information to external requesters including tracking, billing and collection. Financial and Managed Care Billing and Accounts Receivable: - integrates billing and receivables management with comprehensive analysis and reporting for large group practices and MSOs - manages patient billing, collection and insurance management from initial registration through resolution of payment - streamlines hospital patient accounting activities and expedites reimbursement Managed Care Application maintains member registration, demographic, and financial data and automatically applies benefits as defined in the member's plan - provides a comprehensive referrals system with authorization tracking, concurrent review, pre-certification, length of stay assignment, and provider selection - provides case identification, care plan tracking, cost simulation, form letters, and linking of service records - adjudicates and processes claims and statistical encounters - provides billing for employer groups and self-pay members and manages receivables - provides flexible risk management (fund accounting), tracking, and reporting - provides issue tracking, responsibility assignment, workflow management with automatic ticklers, and letter production Transaction Editing System (TES): - captures, evaluates, and facilitates editing of charge and claim data - allows transactions to be edited for completeness and re-tested before they are entered into BAR and MCA applications Contract Reference: - manages capitated contracts across the enterprise Clinical Information Clinical Tools - manages the care process by providing a patient record, access to a structured medical knowledge database that supports protocols, and outcomes management - complete set of tools to aid clinician productivity and streamline workflow, including problem list, prescription pad, chart summary view, provider in-box and alerts, health maintenance alerts, patient list management, panel query and rounds report. - provides clinical results in easy to read flowsheet format. - provides automated support for nursing activities such as assessments, charting, and patient classification. Orders and Results Reporting - provides complete order management capabilities for inpatient and ambulatory settings. - provides complete results reporting for lab, ancillary, radiology, medications, and diagnosis results. Pharmacy - comprehensive inpatient pharmacy department support - comprehensive outpatient pharmacy department support Emergency Department - provides patient flow management and tracking support for the emergency department that is fully integrated with the inpatient system, making all care activities performed in the ED available as part of the patient's long-term record. Enterprise and Departmental Radiology - automates a radiology department's clinical, demographic, administrative, billing, scheduling, and film information - provides multiple-site, access to patient data, exam information, results, and corresponding digital images, thereby reducing instances of film loss and delays in reporting to physicians 5 - makes images and diagnostic reports available throughout the enterprise via imaging solutions including a modality manager (in development -- investigational device) - provides bi-directional link between IDXrad and diagnostic imaging equipment, allowing transfer of information between the modality and IDXrad (in development -- investigational device) Enterprise Connectivity Enterprise Patient Management System (EPMS): - a master person index used to track patient and member registration information and visit histories across multiple locations in a delivery network Enterprise Wide Scheduling (EWS): - provides enterprise-wide patient, provider, and resource scheduling OutReach: - provides web browser access to patient information residing in IDXtendR Electronic Data Interchange (EDI): - automates the computer-to-computer exchange of data such as claims submittals and remittances, health plan eligibility information, and integrated credit card processing Decision Support Analyzer: - provides relational reporting and analysis of IDXtendR data using Microsoft SQL Server and on-line analytical processing (OLAP) for multi-dimensional analysis in a graphical user environment Enterprise View: - provides a data repository for enterprise-wide information analysis using a relational database Business Partner Solutions Envoy: - provides point-of-service access to claims and receipts, interactive eligibility, enrollment, and referral services. - eliminates formatting challenges typically associated with electronic data interchange (EDI) HDX: - provides seamless access to eligibility information at the point of service - integrated with EDI to enable requesting, receiving, and updating eligibility information Imperial Technology Solutions: - provides credit card transaction processing services from the IDX desktop integrated with EDI for automatic approval and payment posting into the patient's account Picis: - PICIS Chart+ - critical care system used with the LastWord system Point-of-Care Systems (POC): - POC Pegasus(TM) - home care system used with the LastWord system SmartTalk: - provides an integrated patient communication solution based on Interactive Voice Response (IVR) technology - utilizes a sophisticated voice messaging engine to provide personalized appointment reminders and confirmation, schedule change notification, wellness and recall message delivery, around the clock test result delivery, and patient surveys - integrated with the Patient Scheduling (SCHED) application Services IDX maintains a client services organization to install, 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 6 implement information systems to support these processes. The services organization is experienced at installing and supporting systems in very large organizations with thousands of computer users across multiple departments. Installation Services. IDX's installation representatives work with clients to tailor and optimize IDX products to meet specific business needs. Services include project management, train-the-trainer programs, best practices comparison to other IDX clients and systems conversion and implementation assistance. Maintenance Services. IDX provides ongoing software support to all of its large clients and substantially all of its other clients under contracts that are typically for a term of one year. These contracts generally are renewable automatically unless terminated at the option of either the client or IDX. Software maintenance services consist of providing the client with certain new software releases and general support, including error corrections and telephone consultation. For all products, maintenance services are available either on a 24-hour-a-day basis or during normal business hours. Professional and Technical Services. IDX offers professional and technical services to assist clients in building an information infrastructure to operate in a complex and changing healthcare environment. The work performed by IDX includes information systems planning, process redesign, project management, contract programming, network design, education and training. These value-added services, combined with IDX's systems expertise, enable IDX to support its clients' efforts to develop consistent enterprise-wide systems and processes. Through these services, IDX believes it strengthens its relationship with clients, builds a knowledge base of best practices in the use of IDX's systems and gains information regarding future client needs. IDX has expanded the services provided by this group with the formation of The Huntington Group, a professional services organization devoted to providing information technology solutions to those organizations that use IDX's information systems products. The following sets forth a description of the key functional areas within the IDX consulting organization: IDX Professional Services The Huntington Group - process redesign, organizational change management, outsourcing, and systems integration Technical Consulting Services - performance and investment analysis and hardware upgrades, network review, systems operational analysis, and various utilities and tools including - IDX Address Corrector, IDXfax, and IDX Open Access 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 Technical Platforms and Hardware IDX designs its software to operate on a variety of technical platforms, including computer equipment from Digital Equipment Corporation ("DEC"), Tandem Computer, a Compaq Company, Hewlett Packard Company ("HP") and International Business Machines Corporation ("IBM"). The LastWord system operates on Tandem's NonStop computing platform, which is designed to support high-volume, mission- critical applications and can be expanded without adversely affecting system responsiveness or interrupting existing online users. The Tandem server supports large-scale, high-performance SQL database access and is designed for inter- operability with other computing systems. The IDX technology strategy is based on a technology for performance philosophy employing advanced technology and connectivity solutions to solve business problems. The fundamental components of our technical strategy include: - - Web-based, thin client architecture as the basis for access, enabling greater convenience for users, allowing desktop device independence and reducing costs for training and equipment 7 - - SQL databases running under Microsoft Windows NT, supporting a standardized approach to reporting and analysis - - Component-based software written as Business Objects (as defined below), resulting in more naturally integrated products because of the unique way in which Business Objects can represent real world concepts. Component-based software written as Business Objects 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 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, all IDX applications will 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 DEC, IBM, Tandem, and HP under renewable one-year reseller agreements. IDX does not maintain an inventory of hardware, but relies on suppliers' inventories to meet client delivery requirements. IDX believes that its relationships with vendors are good. Sales and Marketing IDX sells its products exclusively through its direct sales force. The majority of IDX's sales calls are in response to requests for proposals. IDX generates these requests and other sales primarily through referrals from clients and consultants. IDX also seeks to enhance market recognition through participation in industry seminars and trade shows, direct mail campaigns, telemarketing and advertisements in trade journals. IDX's direct sales force is organized into two divisions: Enterprise Systems ("ES"), which sells the ambulatory, inpatient and IDN products and the Radiology and Imaging Solutions Division ("RISD"), which sells IDXrad, IDXview and EMIMS. ES products typically have a three to 18 month sales cycle for new client sales. RISD products typically have six to 18 month sales cycles for new client sales. No single client accounted for more than 5% of IDX's annual revenues in fiscal 1995, 1996, or 1997. At December 31, 1997, the Company had total backlog of $203.1 million, including $101.5 million attributable to systems sales and $101.7 million attributable to services. Systems sales backlog consists of fees due under signed contracts which have not yet been recognized as revenues. Service backlog represents contracted software maintenance services, installation fees, and remote computing services fees for a period of 12 months. At December 31, 1996, the Company had total backlog of $212.8 million including $135.0 million attributable to systems sales and $77.8 million attributable to services for multiple years of services. Service backlog represents contracted software maintenance services, installation fees, and remote computing services fees for a period of 12 months or greater at December 31, 1996. Of the total 1997 backlog of $203.1 million, the Company expects that $22.5 million will not be fulfilled in the current fiscal year. Product Development To ensure that its products continue to meet the evolving needs of the healthcare industry, IDX allocates a significant portion of annual revenues to research and development. IDX's research and development expenses for the fiscal years 1995, 1996 and 1997 were $23.4 million, $29.8 million, and $36.3 million respectively. IDX's product development activities include enhancement of existing products and the development of new products, as well as the implementation of new technologies. IDX is devoting significant resources to integrating the LastWord and IDX products, developing a relational practice management solution, and expanding its web-based architecture. IDX is also currently migrating its products to client/server platforms with graphical user interfaces and 8 relational databases. IDX's development process is focused on building components for its integrated product rather than on stand-alone products. These components can be integrated and configured to address specific client needs. IDX utilizes client focus groups, user groups and industry experts, including physicians, nurses, healthcare administrators and consultants, for advice in developing and enhancing its products. Competition The market for healthcare information systems is highly competitive. IDX believes that the principal competitive factors in this market are the ability to effectively market, install, support and integrate systems, the resources to support ongoing research and development, financial stability and price. IDX believes it competes favorably with respect to these factors. Competitors vary in size, and in the scope and breadth of the products and services offered. IDX experiences competition from companies with strengths in various segments of the healthcare information systems market, such as physician group practice systems, hospital information systems, clinical information systems, ancillary departmental systems and systems integration. In addition, other entities not currently offering products and services similar to those offered by IDX, including claims processing organizations, hospitals, third-party administrators, insurers, healthcare organizations and others, may enter certain markets in which IDX competes. While IDX believes no vendor dominates the market for healthcare information systems, certain of IDX's competitors have greater financial, development, technical, marketing and sales resources than IDX and have a greater penetration into segments of the market in which IDX competes. In addition, as the markets for IDX's products and services develop, additional competitors may enter those markets and competition may intensify. Proprietary Rights and Licenses IDX depends upon a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions and technical measures to protect its proprietary rights in its products. IDX distributes its products under software license agreements which grant clients a nonexclusive, nontransferable license to use IDX's products and contain terms and conditions prohibiting the unauthorized reproduction or transfer of IDX's products. In addition, IDX attempts to protect its trade secrets and other proprietary information through agreements with employees and consultants. All current employees of IDX have signed a nondisclosure agreement, and all current employees involved in product development have signed an assignment of inventions agreement. There can be no assurance that the legal protections afforded to IDX or the precautions taken by IDX will be adequate to prevent misappropriation of IDX's technology. In addition, these protections do not prevent independent third-party development of functionally equivalent or superior technologies, products or services. Any infringement or misappropriation of IDX's proprietary software would disadvantage IDX in its efforts to retain and attract new clients in a highly competitive market and could cause IDX to lose revenues or incur substantial litigation expense. IDX believes that, due to the rapid pace of innovation within the software industry, factors such as the technological and creative skills of its personnel and ongoing reliable product maintenance and support are more important in establishing and maintaining a leadership position within the industry than are the various legal protections afforded to its technology. Although IDX believes that its products, trademarks and other proprietary rights do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against IDX in the future and that such claims will not have a material adverse effect on IDX's results of operations, financial condition or business. Government Regulation The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy for the regulation of certain computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act (the "FDC Act") and has indicated it may modify such draft policy or create a new policy. To the extent that computer software is a medical device under the policy, the manufacturers of such products could be required, depending on the product, to (i) register and list their products with FDA, (ii) notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products, or (iii) obtain FDA approval by demonstrating safety and effectiveness before marketing a product. Depending upon the intended use of a device, IDX could be required by the FDA to obtain extensive data from clinical studies to 9 demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires such 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 and there can be no assurance that the FDA will approve or clear a device after the completion of such trials. In addition, such software products would be subject to the FDC Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, IDX expects that, whether or not the draft is finalized or changed, the FDA is likely to become increasingly active in regulating computer software that is intended for use in healthcare settings. The FDA can impose extensive requirements governing pre- and post-market conditions such as device investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes. There can be no assurance that actions taken by the FDA to regulate computer software products will not have a material adverse effect on IDX's results of operations, financial condition or business. Employees At December 31, 1997, IDX employed 1,833 full-time employees. As of December 31, 1997, IDX's sales force was comprised of 194 employees responsible for the entire sales process. As of December 31, 1997, IDX's client services group consisted of 1,092 employees and IDX had 365 employees engaged primarily in program development, new technology adaption and quality assurance. No employees are covered by any collective bargaining agreements. IDX believes that its employee relations are good. Item 2. Properties The Company's principal corporate offices are located at 1400 Shelburne Road, South Burlington, Vermont 05403. The Company maintains sales, research and support facilities in South Burlington, Vermont, Boston, Massachusetts, and Seattle, Washington. The Company maintains regional sales and support offices in the greater metropolitan areas of Arlington, Virginia, Chicago, Illinois, Dallas, Texas, San Francisco, California and Atlanta, Georgia. The Company leases all of its facilities which, in the aggregate, constitute approximately 511,500 rentable square feet of office space, under leases expiring between February 28, 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. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders of the Company, through solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 1997. 10 EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth: (i) the name and age of each present 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............... 55 President, Chief Executive Officer, and Director Henry M. Tufo, M.D. ............. 57 Executive Vice President, Chief Operating Officer, and Director Robert W. Baker, Jr., Esq. ...... 49 Vice President, General Counsel, and Secretary Jeffrey M. Blanchard............. 41 Vice President, Client Services James H. Crook, Jr. ............. 41 Vice President Robert F. Galin.................. 53 Vice President, Sales John A. Kane..................... 45 Vice President, Finance and Administration, Chief Financial Officer, and Treasurer Pamela J. Pure................... 37 Vice President, Marketing Jeffrey V. Sutherland, Ph.D. .... 56 Senior Vice President, Engineering and Product Development
Mr. Tarrant co-founded the Company in 1969 and has served as the President and Chief Executive Officer of the Company and as a Director since that time. Mr. Tarrant served as a member of the Board of Trustees for the University Health Center (Vermont), an academic medical center, from July 1988 to December 1994 and as Chairman of the University Health Center (Vermont) from 1992 to 1994. Dr. Tufo has been Executive Vice President of the Company since September 1995. Dr. Tufo has served as a Director of the Company since November 1995. Dr. Tufo has served as Chief Operating Officer of the Company since September 1996. Dr. Tufo served as Vice President and Chief Medical Officer of the Company from August 1995 to September 1995. Dr. Tufo served as a consultant to the Company from February 1995 to August 1995. Dr. Tufo was the President and Chief Executive Officer of University Health Center (Vermont) from July 1989 to December 1994. Dr. Tufo is Professor of Medicine at the University of Vermont College of Medicine. Mr. Baker, who joined the Company in July 1989, has served as Vice President of the Company since April 1996. Mr. Baker has served as General Counsel and Secretary of the Company since July 1989. Mr. Blanchard, who joined the Company in August 1987, has served as Vice President, Client Services of the Company since March 1995. Prior to that time, Mr. Blanchard served the Company in various capacities, including most recently as Director, Customer Support from November 1992 to March 1995. Mr. Crook, who joined the Company in April 1981, has served as Vice President of the Company since June 1984. He served as a Director of the Company from July 1984 to June 1995. Mr. Galin has served as Vice President, Sales since August 1992. He served as Director of Sales from April 1982 to August 1992. Mr. Kane has served as the Vice President, Finance and Administration, Chief Financial Officer and Treasurer of the Company since joining the Company in October 1984. Mr. Kane is a C.P.A. 11 Ms. Pure has served as Vice President, Marketing since November 1995. Ms. Pure served as Director of Best Practices from March 1995 to November 1995. Prior to joining the Company, Ms. Pure was employed by Shared Medical Systems Corporation, a medical software company, from May 1983 until March 1995, most recently as Manager of Product Marketing and Communications. Dr. Sutherland has served as Senior Vice President, Engineering and Product Development since joining the Company in September 1996. Prior to joining the Company, he was Vice President, Engineering of Individual Inc., an Internet content provider company, from May to September 1996; Vice President, Object Technology of Vmark Software, a software development tools company, from June 1995 to May 1996; Vice President, Object Technology for Easel Corporation, a software development tools company, from July 1993 to June 1995; and President and founder of Object Databases (now known as Matisse Software) from October 1989 to June 1993. Each officer serves at the discretion of the Company's Board of Directors. There are no family relationship among the named officers. The portion of the response to this item relating to arrangements and understandings pursuant to which named executive officers were or are to be elected as officers of the Company is contained in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to be held on May 18, 1998 (the "1998 Proxy Statement") under the caption "Employment Agreements" and is incorporated herein by reference. 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 Systems Corporation is traded on the Nasdaq 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 ----------------------------------------------------- ------- ------- 1996 First Quarter 1996................................... $ 36.625 $ 27.25 (January 1, 1996 through March 31, 1996) Second Quarter 1996.................................. $ 44.25 $ 28.25 (April 1, 1996 through June 30, 1996) Third Quarter 1996................................... $ 40.50 $ 24.75 (July 1, 1996 through September 30, 1996) Fourth Quarter 1996.................................. $ 35.75 $ 22.50 (October 1, 1996 through December 31, 1996) 1997 First Quarter 1997................................... $ 36.50 $ 26.875 (January 1, 1997 through March 31, 1997) Second Quarter 1997.................................. $ 37.50 $ 23.0 (April 1, 1997 through June 30, 1997) Third Quarter 1997................................... $ 40.00 $ 31.5 (July 1, 1997 through September 30, 1997) Fourth Quarter 1997.................................. $ 38.00 $ 28.375 (October 1, 1997 through December 31, 1997)
12 On March 16, 1998, the Company had approximately 188 stockholders of record. (This number does not include stockholders for whom shares are held in a "nominee" or "street" name.) On March 16, 1998, the closing price of the Company's Common Stock on the Nasdaq National Market was $43.50. 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 June 18, 1997, the Company issued 300 shares of Common Stock to each of the three 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. (c) Use of Proceeds. The Company is furnishing the following information with respect to the use of proceeds from its initial public offering of Common Stock, $.01 per share, which closed on November 22, 1995. (1) The effective date of the Registration Statement on Form S-1 for the offering was November 16, 1995 and the commission file number of the Registration Statement is 33-97104. (2) The offering commenced on November 16, 1995. (3) Not applicable. (4) (i) The offering terminated on November 18, 1995 after all the shares were sold. (ii) The managing underwriters for the offering were BT Alex. Brown and Volpe, Welty & Company. (iii) The Company registered shares of the Company's Common Stock, $.01 par value per share, in the offering. (iv) Of the 4,634,500 shares of Common Stock registered in the offering, 4,604,500 shares were registered for the account of the Company, and 30,000 shares were registered for the account of a selling stockholder. All such shares registered for the account of the Company and for the account of the selling stockholder were sold in the offering on November 22, 1995. The aggregate offering prices of the shares registered and sold for the accounts of the Company and selling stockholder were $82,881,000 and $540,000, respectively. (v) From November 16, 1995 to December 31, 1997, the actual expenses incurred in connection with the offering, including underwriting discounts, commissions and other expenses, were (i) $39,926 paid to directors, officers, general partners of the Company and their associates, persons owning 10% or more of the equity securities of the Company and affiliates of the Company and (ii) $6,677,244 paid to others. (vi) The net offering proceeds to the Company after expenses were approximately $76,163,830. (vii) From November 16, 1995 to December 31, 1997, $36,657,330 of the offering proceeds were actually distributed to stockholders of the Company. This amount represented the Company's previously undistributed earnings as an S Corporation from July 1987 through October 1995 (the "S Corporation Distribution"). The S Corporation Distribution was paid in November 1995 and December 1995. $36,630,206 of the S Corporation Distribution was paid to directors, officers, general partners of the Company and their associates, persons owning 10% or more of the equity securities of the Company and affiliates of the Company and $27,124 of the S Corporation Distribution was paid to other stockholders of the Company. From November 16, 1995 to December 31, 1997, $39,506,500, the balance of the offering proceeds were used for general corporate purposes, including working capital purposes, the payment of current expenses and the acquisition of businesses. As of December 31, 1997, the offering proceeds had been fully applied by the Company. (viii) Not applicable. 13 Item 6. Selected Financial Data Financial Highlights Summary of Consolidated Financial Data
Year Ended December 31, ------------------------------------------------------ 1993 1994 1995 1996 1997 ------------------------------------------------------ (in thousands, except per share data) Statements of Income Data: Revenues.............................................. $ 117,710 $ 143,807 $ 175,285 $ 206,879 $ 251,417 Operating Income...................................... 4,745 9,348 19,038 22,626 10,614 Net Income............................................ 4,379 7,229 20,673 16,660 7,962 Net Income Per Share.................................. $ 0.64 $ 0.30 Pro Forma Net Income.................................. 4,854 13,915 Pro Forma Net Income Per Share........................ $ 0.24 $ 0.63 Balance Sheet Data: Cash and Investments.................................. $ 24,712 $ 30,786 $ 104,154 $ 113,392 $ 115,887 Working Capital....................................... 30,924 33,662 110,966 131,900 140,906 Total Assets.......................................... 81,052 96,013 169,517 202,322 237,318 Long-term Debt, less current portion.................. 8,502 7,070 3,059 2,651 2,508 Total Stockholders' Equity............................ $ 50,923 $ 60,899 $ 130,512 $ 158,550 $ 176,604
The consolidated financial data set forth above has been restated to include the results of operations and accounts of PHAMIS for all periods prior to its acquisition by IDX on July 10, 1997. The acquisition, as more fully described in Note 2 to the Consolidated Financial Statements, has been accounted for as a pooling of interests. Per share amounts represent diluted net income per share. The 1994 and 1995 pro forma net income per share and the 1996 net income per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, Earnings per Share, as more full described in Note 1 to the Consolidated Financial Statements. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General The acquisition of PHAMIS was completed on July 10, 1997, and has been accounted for as a pooling of interests. Therefore, the results of operations for all periods discussed below have been restated to include the financial results of PHAMIS. See Note 2 of Notes to Consolidated Financial Statements. Revenues of $251.4 million in 1997 grew 21.5% over 1996 revenues of $206.9 million. Systems sales grew 21.7% in 1997, and maintenance and service fees grew 21.3%. Operating income declined from $22.6 million in 1996 to $10.6 million in 1997, a decrease of $12.0 million or 53.1%. Excluding expenses related to the write-off of acquired research and development and merger and related costs, operating income grew from $22.9 million in 1996 to $32.9 million in 1997, an increase of $10.0 million or 43.7%. Net income declined from $16.7 million in 1996 to $8.0 million in 1997, a decrease of $8.7 million or 52.1%. Excluding the write-off of acquired research and development, and merger and related costs, net income grew from $16.7 million in 1996 to $23.1 million in 1997, an increase of $6.4 million or 38.3%. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results or those anticipated. The Company has identified by italics, or all capital letters, various sentences within this Annual Report which contain such forward-looking statements. In addition, words such as "believes," "may," "plans," "anticipates," "expects," "intends," and similar expressions are intended to identify forward-looking statements, but are not 14 the exclusive means of identifying such statements. In addition, the disclosures on page 19 under the caption "Factors Affecting Future Results," which are not italicized or capitalized for improved readability, consist principally of a discussion of risks which may affect future results and, are thus, in their entirety forward-looking in nature. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Year Ended December 31, 1997 and 1996 Revenues. The Company's total revenues increased to $251.4 million in 1997 from $206.9 million in 1996, an increase of $44.5 million or 21.5%. Revenues from systems sales increased to $134.5 million in 1997 (53.5% of total revenues) from $110.5 million (53.4% of total revenues) in 1996, an increase of $24.0 million or 21.7%. The increase was primarily due to an increase in installations of certain of the Company's IDXtend and LastWord systems. Revenues from maintenance and service fees increased to $116.9 million in 1997 (46.5% of total revenues) from $96.4 million (46.6% of total revenues) in 1996, an increase of $20.5 million or 21.3%. Approximately $11.1 million of the increase was due to additional maintenance revenue resulting from the continued growth in the Company's installed client base. Professional and technical services revenues increased to $20.4 million in 1997 (8.1% of total revenues) from $12.6 million in 1996 (6.1% of total revenues), an increase of $7.8 million as a result of the Company's increased marketing efforts in that area. Cost of Sales. The cost of sales and services increased to $130.4 million in 1997 from $108.3 million in 1996, an increase of $22.1 million or 20.4%. The gross profit margin on systems sales and services increased to 48.1% in 1997 from 47.7% in 1996. The increase in gross profit was due primarily to the increase of additional license revenues in the installations of certain of the Company's products from its IDXtend and LastWord systems. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $51.7 million in 1997 from $45.9 million in 1996, an increase of $5.8 million or 12.6%. As a percentage of total revenues, selling, general and administrative expenses decreased to 20.6% in 1997 from 22.2% in 1996. The additional expenses incurred in 1997 were primarily due to an increase in the Company's sales and marketing staff. Research and Development. Research and development expenses increased to $36.3 million in 1997 from $29.8 million in 1996, an increase of $6.5 million or 21.8%. The increase was due to the hiring of additional staff to support the development of additional products for the Company. As a percentage of total revenues, research and development expenses remained constant at 14.4% in 1997 and 1996. As described in Note 1 to the consolidated financial statements, software development costs incurred subsequent to the establishment of technological feasibility until general release of the related products are capitalized. Prior to the merger technological feasibility was determined differently by IDX and PHAMIS. Subsequent to the merger the Company's determination of technological feasibility for all product development is based on the completion of a working model which has been approved for beta site testing. Historically costs incurred during beta site testing have not been material. Although the Company presently expects costs to complete beta site testing in the future to be insignificant, as the Company develops products to operate using other technologies as well as more comprehensive clinical systems, the time and effort required to complete beta site testing may be significantly more extensive. Consequently, capitalized software development costs may become material in future reporting periods. Merger and Related Costs. During the third quarter of 1997, the Company recorded charges of $20.0 million related to the merger with PHAMIS. The charges were comprised of transaction costs of $5.1 million, write-offs and adjustments of $7.4 million of long-lived assets, principally capitalized software development costs and equipment, attributable to the elimination of overlapping 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 include accrued costs of $3.1 million related to the termination of employees, leases and other contractual obligations, substantially all of which will be paid within one year. The write-off of long- lived assets is not expected to materially affect amortization or depreciation of future reporting periods. In addition, the provision for termination of employees, leases and other contractual obligations is not expected to materially affect selling, general or administrative expenses or cash flows of future periods. Management does not expect to incur significant charges related to the merger in future reporting periods. 15 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. Year Ended December 31, 1996 and 1995. Revenues. The Company's total revenues increased to $206.9 million in 1996 from $175.3 million in 1995, an increase of $31.6 million or 18.0%. Revenues from systems sales increased to $110.5 million in 1996 (53.4% of total revenues) from $94.2 million (53.7% of total revenues) in 1995, an increase of $16.3 million or 17.3%. The increase was primarily due to an increase in installations of the Company's IDXtendR @ the Group Practice product, (formerly known as the IDXtend Ambulatory Suite). Revenues from maintenance and service fees increased to $96.4 million) in 1996 (46.6% of total revenues) from $81.1 million (46.3% of total revenues) in 1995, an increase of $15.3 million or 18.8%. Approximately $9.6 million of the increase was due to additional maintenance revenue resulting from the continued growth in the Company's installed client base. Professional and technical services revenues increased approximately $4.2 million in 1996 over 1995 as a result of the Company's increased marketing efforts in that area. Cost of Sales. The cost of sales and services increased to $108.3 million in 1996 from $96.8 million in 1995, an increase of $11.5 million or 11.9%. The gross profit margin on systems sales and services increased to 47.7% in 1996 from 44.8% in 1995. The increase in gross profit was due primarily to the increase in the installations of the Company's IDXtendR @ the Group Practice product, (formerly known as the IDXtend Ambulatory Suite). Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $45.9 million in 1996 from $36.1 million in 1995, an increase of $9.8 million or 27.1%. As a percentage of total revenues, selling, general and administrative expenses increased to 22.2% in 1996 from 20.6% in 1995. This percentage increase was largely attributable to costs incurred by PHAMIS in 1996 related to entry into the international market, corporate headquarters' relocation and a business acquisition. Additional expenses incurred in 1996 in addition to the PHAMIS related costs were primarily due to the increase in the Company's sales and marketing staff over the same period in 1995. Research and Development. Research and development expenses increased to $29.8 million in 1996 from $23.4 million in 1995, an increase of $6.4 million or 27.4%. The increase was due to the hiring of additional staff to support the development of additional products for the Company. As a percentage of total revenues, research and development expenses increased to 14.4% in 1996 from 13.4% in 1995. Liquidity and Capital Resources Since its inception in 1969, the Company has funded its operations, working capital needs and capital expenditures primarily from operations, except for real estate owned by certain partnerships and trusts financed through industrial development bonds. 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, payment of current expenses and strategic transactions, including acquisitions of businesses, products and technologies. Cash flows from operations are principally comprised of net income and depreciation and are primarily affected by the net effect of the change in accounts receivable, accounts payable and accrued expenses. Due to the nature of the Company's business, accounts receivable, deferred revenue and accounts payable fluctuate considerably due to, among other things, the length of the sales cycle and installation efforts which are dependent upon the size of the transaction, the changing business plans of the customer, the effectiveness of customers' management and general economic conditions. In general accounts receivable from customers have been collected consistently within 95 days. 16 Cash flows related to investing activities have principally been related to the purchase of computer and office equipment, leasehold improvements, and the purchase and sale of investment grade marketable securities. THE COMPANY EXPECTS THESE ACTIVITIES TO CONTINUE. INVESTING ACTIVITIES MAY ALSO INCLUDE PURCHASES OF INTERESTS IN AND ACQUISITIONS OF COMPLEMENTARY PRODUCTS, TECHNOLOGIES AND BUSINESSES. There can be no assurance that the Company will be able to successfully complete any such purchases or acquisitions in the future. Cash, cash equivalents and marketable securities at December 31, 1997 were $115.9 million, an increase of $2.5 million from December 31, 1996. The majority of the increase was due to the cash provided by operating activities and proceeds related to the exercise of stock options. The Company has a revolving line of credit with a bank allowing the Company to borrow up to $5.0 million bearing interest at the prime rate. There were no borrowings as of December 31, 1997 or 1996. 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 1998 TO MEET ANTICIPATED SALES VOLUME AND TO SUPPORT RESEARCH AND DEVELOPMENT EFFORTS. tO THE EXTENT NECESSARY TO SUPPORT INCREASES IN STAFFING, THE COMPANY INTENDS TO OBTAIN ADDITIONAL OFFICE SPACE. THE COMPANY BELIEVES THAT CURRENT OPERATING FUNDS WILL BE SUFFICIENT TO FINANCE ITS OPERATING REQUIREMENTS AT LEAST THROUGH DECEMBER 1998. To date, inflation has not had a material impact on the Company's revenues or income. Income Taxes From July 12, 1987 to November 1, 1995, the Company was treated for federal and certain state income tax purposes as an S Corporation under the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company's stockholders, rather than the Company, were required to pay federal and certain state income taxes based upon the Company's earnings whether or not the earnings were distributed to such stockholders. On November 1, 1995, the Company terminated its S Corporation status and, accordingly, has become subject to federal and state income taxes. For purposes of financial statement presentations, the Company's financial statements reflect comparative pro forma financial information for 1995 as if the Company had been fully taxed. The provision for income taxes for the year ended December 31, 1997 was provided for at the taxable income rate of approximately 50%, which is higher than the historical rate of 40%. This higher rate is due to a portion of the charges incurred in the merger with PHAMIS, principally transaction costs, which are non-deductible for income tax purposes. FOR 1998, THE COMPANY ANTICIPATES AN EFFECTIVE TAX RATE OF APPROXIMATELY 40% OF PRE-TAX INCOME. New Accounting Standards In October, 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, Software Revenue Recognition, revising certain aspects of SOP 91-1. The SOP is effective for transactions occurring in years beginning after December 15, 1997. THE COMPANY DOES NOT EXPECT THE sop WILL MATERIALLY AFFECT ITS REVENUE RECOGNITION POLICIES WITH RESPECT TO SOFTWARE LICENSE FEES WHICH ARE BASED UPON VENDOR-SPECIFIC OBJECTIVE INFORMATION AND RELATE PRINCIPALLY TO ITS PROPRIETARY SYSTEMS SOFTWARE WHICH GENERALLY REQUIRES NO SIGNIFICANT PRODUCTION, MODIFICATION OR CUSTOMIZATION. LICENSE REVENUE, ACCORDINGLY, IS DEFERRED AND RECOGNIZED AS CUSTOMER PAYMENTS BECOME DUE BASED UPON SPECIFIED MILESTONES AND DUE DATES INCLUDING DELIVERY, INSTALLATION AND FINAL SYSTEMS ACCEPTANCE. In 1998, the Company will be required to adopt Statements of Financial Accounting Standards (SFAs) No. 130 and No. 131, "Reporting Comprehensive Income" and "Disclosures About Segments of an Enterprise and Related Information." THE COMPANY BELIEVES THE ADOPTION OF THESE NEW ACCOUNTING STANDARDS WILL NOT HAVE A MATERIAL IMPACT ON THE COMPANY'S FINANCIAL STATEMENTS. 17 In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. Backlog At December 31, 1997, the Company had total backlog of $203.1 million, including $101.5 million attributable to systems sales and $101.7 million attributable to services. Systems sales backlog consists of fees due under signed contracts which have not yet been recognized as revenues. Service backlog represents contracted software maintenance services, installation fees, and remote computing services fees for a period of 12 months. At December 31, 1996, the Company had total backlog of $212.8 million including $135.0 million attributable to systems sales and $77.8 million attributable to services for multiple years of services. Service backlog represents contracted software maintenance services, installation fees, and remote computing services fees for a period of 12 months or greater at December 31, 1996. OF THE TOTAL 1997 BACKLOG OF $203.1 MILLION, THE COMPANY EXPECTS THAT $22.5 MILLION WILL NOT BE FULFILLED IN THE CURRENT FISCAL YEAR. Year 2000 THE COMPANY HAS ASSESSED ITS INTERNAL USE SYSTEMS AND ITS CURRENTLY SUPPORTED PRODUCTS FOR POSSIBLE PROBLEMS IN PROCESSING, REPORTING, DISPLAYING AND OTHERWISE HANDLING DATE DATA CONTAINING THE YEAR 2000 AND BEYOND. tHE cOMPANY BELIEVES IT HAS FORMULATED AND IS IN THE PROCESS OF IMPLEMENTING OR HAS COMPLETED ALL PLANS TO MAKE YEAR 2000 READY ALL OF ITS CRITICAL INTERNAL USE SYSTEMS AND ALL OF ITS CURRENTLY SUPPORTED PRODUCTS. AT DECEMBER 31, 1997, ALL OF THE CORE DATA BASES AND DATA PROCESSING FUNCTIONS OF THE COMPANY'S SIGNIFICANT PRODUCTS WERE YEAR 2000 READY. THE COMPANY EXPECTS THAT ELEMENTS OF THE COMPANY'S PRODUCTS OTHER THAN CORE DATABASES AND DATA PROCESSING FUNCTIONS, SUCH AS CERTAIN SCREENS AND REPORTS, WILL BE YEAR 2000 READY IN 1998. THE COMPANY HAS EXPENSED AMOUNTS INCURRED AS OF DECEMBER 31, 1997 TO MAKE SUCH PRODUCTS YEAR 2000 READY, AND SUCH AMOUNTS HAVE NOT BEEN MATERIAL. THE ADDITIONAL COSTS TO MAKE ALL SUCH REMAINING SYSTEMS YEAR 2000 READY BY THE END OF 1998 WILL BE EXPENSED AS INCURRED, ARE EXPECTED TO BE INCURRED IN 1998 AND ARE NOT EXPECTED TO BE MATERIAL. THE COMPANY UNDER ITS MAINTENANCE AGREEMENTS EXPECTS TO COMMENCE DELIVERY TO ITS INSTALLED CUSTOMERS OF YEAR 2000 READY VERSIONS OF ALL OF ITS SIGNIFICANT PRODUCTS IN 1998 AND TO COMPLETE MOST INSTALLATIONS OF SUCH VERSIONS BY MID 1999. THE COSTS TO INSTALL YEAR 2000 READY VERSIONS OF THE COMPANY'S PRODUCTS AT CUSTOMER SITES, AS WELL AS THE ABILITY OF THE COMPANY TO ASSIST CUSTOMERS IN THE INSTALLATION OF YEAR 2000 READY VERSIONS OF ITS PRODUCTS, WILL DEPEND IN PART ON THE READINESS, ABILITY AND COOPERATION OF CUSTOMERS TO INSTALL SUCH VERSIONS. ANY OF THE cOMPANY'S INTERNAL USE SYSTEMS AND ANY OF THE PRODUCTS SUPPLIED BY THE COMPANY TO ITS CUSTOMERS COULD FAIL TO ADEQUATELY OR PROPERLY PROCESS, DISPLAY, REPORT, OR OTHERWISE HANDLE DATE DATA CONTAINING THE YEAR 2000 AND BEYOND. ANY FAILURE OF A CUSTOMER TO BE READY OR ABLE TO TIMELY INSTALL yEAR 2000 READY VERSIONS OF THE COMPANY'S PRODUCTS COULD CAUSE SIGNIFICANT OPERATIONAL PROBLEMS FOR THE CUSTOMER. FURTHER, A FAILURE OF THE COMPANY TO TIMELY MAKE AVAILABLE YEAR 2000 READY VERSIONS OF ITS PRODUCTS, OR A FAILURE OF THE COMPANY TO TIMELY PROVIDE ADEQUATE RESOURCES TO ASSIST ITS CUSTOMERS IN INSTALLING YEAR 2000 READY VERSIONS OF ITS PRODUCTS, COULD RESULT IN CLAIMS BY CUSTOMERS, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON THE BUSINESS, OPERATIONS, AND FUTURE FINANCIAL RESULTS OF THE COMPANY. 18 Factors Affecting Future Results The Company's revenues and operating results can vary significantly from quarter to quarter as a result of a number of factors, including the volume and timing of systems sales and installations, and length of sales cycles and installation efforts. The timing of revenues from systems sales is difficult to forecast because the Company's sales cycle can vary depending upon factors such as the size of the transaction, the changing business plans of the customer, the effectiveness of customer's management, and general economic conditions. In addition, because revenue is recognized at various points during the installation process, the timing of revenue recognition varies considerably based on a number of factors, including availability of personnel, availability of the customer's resources and complexity of the needs of the customer's organization. The Company's initial contact with a potential customer depends in significant part on the customer's decision to replace, expand, or substantially modify its existing information systems, or modify or add business processes or lines of business. How and when to implement, replace, expand or substantially modify an information system or modify or add business processes or lines of business, are major decisions for healthcare organizations. Accordingly, the sales cycle for the Company's systems is typically three to eighteen months or more from contract execution to completion of installation. During the sales cycle and the installation cycle, the Company expends substantial time, effort and funds preparing contract proposals, negotiating the contract and implementing the system. Because a significant percentage of the Company's expenses are relatively fixed, a variation in the timing of systems sales and installation can cause significant variations in operating results from quarter to quarter. The Company's future operating results may fluctuate as a result of these and other factors, such as customer purchasing patterns, and the timing of new product and service introductions and product upgrade releases. The Company believes that quarterly results of operations will continue to be subject to significant fluctuations and that its results of operations for any particular quarter or fiscal year may not be indicative of results of operations for future periods. There can be no assurance that future period to period fluctuations will continue and will not have a material adverse effect on the Company's results of operations, financial condition or business. The Company intends to continue to grow in part through acquisitions of complementary products, technologies and businesses or alliances with complementary businesses. The Company's ability to expand successfully through acquisitions or alliances depends on many factors, including the successful identification and acquisition of products, technologies or businesses and management's ability to effectively integrate and operate the acquired or aligned products, technologies or businesses. There is significant competition for acquisition and alliance opportunities in the healthcare information systems industry, which may intensify due to consolidation in the industry, thereby increasing the costs of capitalizing on such opportunities. The Company competes for acquisition and alliance opportunities with other companies that have significantly greater financial and management resources. There can be no assurance that the Company will be successful in acquiring or aligning with any complementary products, technologies or businesses; or, if acquired or aligned with, that the Company will be able to successfully integrate any such products, technologies or businesses into its current business and operations. The failure to successfully integrate any significant products, technologies or businesses could have a material adverse effect on the Company's results of operations, financial condition or business. Integrating the operations and management of the Company and PHAMIS has been and will continue to be a time-consuming process, and will require the dedication of management resources, which has and may continue to temporarily distract attention from the day-to-day business of the combined Company. There can be no assurance that this integration will be completed smoothly or successfully, and the inability of management to successfully integrate the operations or management of the two companies could have a material adverse effect on the business, results of operations or financial condition of the combined Company. As previously discussed in the section "Merger and Related Costs" the Company has incurred significant merger and related costs. See also Note 2 to the Notes to Consolidated Financial Statements. Additional unanticipated expenses may be incurred in connection with the continued integration of the business of the Company and PHAMIS. 19 The stock market has, from time to time, experienced extreme price and volume fluctuations, particularly in the high technology and healthcare information technology sectors, which have often been unrelated to the operating performance of particular companies. The Company experiences fluctuations in its stock price related to these general market swings as well as announcements of technological innovations, new product introductions by the Company or its competitors, market conditions in the computer software or hardware industries and healthcare reform measures. These fluctuations could have a significant impact on the future market price of the Company's Common Stock. As a developer of information systems, the Company must anticipate and adapt to evolving industry standards and new technological developments. The market for the Company's products is characterized by continued and rapid technological advances in both hardware and software development, requiring ongoing expenditures for research and development and the timely introduction of new products and enhancements to existing products. The establishment of standards is largely a function of user acceptance. Therefore, such standards are subject to change. The Company's future success will depend in part upon its ability to enhance its existing products, to respond effectively to technology changes, to migrate its clients to new technologies, to sell additional products to its existing client base and to introduce new products and technologies to meet the evolving needs of its clients in the healthcare information systems market. The Company is currently devoting significant resources toward the development of enhancements to its existing products and the migration of existing products to new hardware and software platforms. There can be no assurance that the Company will successfully complete the development of these products or this migration in a timely fashion or that the Company's current or future products will satisfy the needs of the healthcare information systems market. Further, there can be no assurance that products or technologies developed by others will not adversely affect the Company's competitive position or render its products or technologies noncompetitive or obsolete. Any of the Company's internal use systems and any of the products supplied by the Company to its customers could fail to adequately or properly process, display, report, or otherwise handle date data containing the year 2000 and beyond. Any failure of a customer to be ready or able to timely install year 2000 ready versions of the Company's products could cause significant operational problems for the customer. Further, a failure of the Company to timely make available year 2000 ready versions of its products, or a failure of the Company to timely provide adequate resources to assist its customers in installing year 2000 ready versions of its products, could result in claims by customers, which may have a material adverse effect on the business, operations, and future financial results of the Company. The Company currently derives a significant percentage of its revenues from sales of financial and administrative healthcare information systems and related services. As a result, any factor adversely affecting sales of these products and services could have a material adverse effect on the Company's results of operations, financial condition or business. Although the Company has experienced increasing annual sales, revenues associated with existing products may decline as a result of several factors, including price competition. There can be no assurance that the Company will continue to be successful in marketing its current products or any new or enhanced products or maintaining the current pricing for its existing products. Certain of the Company's products provide applications that relate to patient medical histories and treatment plans. Any failure by the Company's products to provide accurate, secure and timely information could result in product liability claims against the Company by its clients or their affiliates or patients. The Company maintains insurance that it believes is adequate to protect against claims associated with the use of its products, but there can be no assurance that its insurance coverage would adequately cover any claim asserted against the Company. A successful claim brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's results of operations, financial condition or business. Even unsuccessful claims could result in the expenditure of funds in litigation, as well as diversion of management time and resources. There can be no assurance that the Company will not be subject to product liability claims, that such claims will not result in liability in excess of its insurance coverage or that the Company's insurance will cover such claims or that appropriate insurance will continue to be available to the Company in the future at commercially reasonable rates. 20 The success of the Company is dependent to a significant degree on its key management, sales and marketing, and technical personnel. The Company believes that its continued future success will also depend upon its ability to attract, motivate and retain highly skilled, managerial, sales and marketing, and technical personnel, including software programmers and systems architects skilled in the computer languages in which the Company's products operate. Competition for such personnel in the software and information services industries is intense. The loss of key personnel, or the inability to hire or retain qualified personnel, could have a material adverse effect on the Company's results of operations, financial condition or business. Although the Company has been successful to date in attracting and retaining skilled personnel, there can be no assurance that the Company will continue to be successful in attracting and retaining the personnel it requires to successfully develop new and enhanced products and to continue to grow and operate profitably. The healthcare industry in the United States is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare organizations. The Company's products are designed to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. During the past several years, the healthcare industry has been subject to increasing levels of governmental regulation of, among other things, reimbursement rates and certain capital expenditures. From time to time, certain proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may increase government involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for the Company's clients. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for the Company's products and services. The Company cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on its results of operations, financial condition or business. The U.S. Food and Drug Administration (the "FDA") has promulgated a draft policy for the regulation of certain computer software products as medical devices under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act (the "FDC Act") and has recently indicated it may modify such draft policy or create a new policy. To the extent that computer software is a medical device under the policy, the manufacturers of such products could be required, depending on the product, to (i) register and list their products with the FDA, (ii) notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products, or (iii) obtain FDA approval by demonstrating safety and effectiveness before marketing a product. Depending upon the intended use of a device, IDX could be required by the FDA to obtain extensive data from clinical studies to demonstrate safety or effectiveness, or substantial equivalence. If the FDA requires such 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 and there can be no assurance that the FDA will approve or clear a device after the completion of such trials. In addition, such products would be subject to FDC Act's general controls, including those relating to good manufacturing practices and adverse experience reporting. Although it is not possible to anticipate the final form of the FDA's policy with regard to computer software, the Company expects that, whether or not the draft is finalized or changed, the FDA is likely to become increasingly active in regulating computer software that is intended for use in healthcare settings. The FDA can impose extensive requirements governing pre- and post-market conditions such as service investigation, approval, labeling and manufacturing. In addition, the FDA can impose extensive requirements governing development controls and quality assurance processes. There can be no assurance that actions taken by the FDA to regulate computer software products will not have a material adverse effect on the Company's results of operations, financial condition or business. Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. 21 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We did not audit the 1996 and 1995 financial statements of PHAMIS, Inc., a wholly-owned subsidiary, which statements reflect total assets of $43,747,000 as of December 31, 1996 and total revenues of $49,300,000 and $47,165,000 for the years ended December 31, 1996 and 1995, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for PHAMIS, Inc., is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes s assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IDX Systems Corporation, its subsidiaries and affiliate at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Ernst & Young LLP Boston, Massachusetts February 3, 1998 22 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Shareholders PHAMIS, Inc.: We have audited the consolidated balance sheet of PHAMIS, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the two-year period ended December 31, 1996. The financial statements of PHAMIS, Inc. and subsidiaries are the responsibility of the Company's management. Our responsibility is to express an opinion on the PHAMIS, Inc. and subsidiaries' consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PHAMIS, Inc. and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Seattle, Washington January 31, 1997, except for note 14 to the PHAMIS, Inc. and subsidiaries' consolidated financial statements, which is as of March 25, 1997 23 Item 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS (in thousands, except for per share data)
December 31 1997 1996 --------------------- Assets Current assets: Cash and cash equivalents......................................................... $ 14,061 $ 12,327 Securities available-for-sale..................................................... 101,826 101,065 Accounts receivable, less allowance of $1,268 in 1997 and $787 in 1996 for doubtful accounts.............................................................. 66,587 49,115 Refundable income taxes........................................................... 6,080 Prepaid expenses.................................................................. 2,138 2,116 Other current assets.............................................................. 2,342 2,571 Deferred tax asset................................................................ 4,159 2,556 --------- --------- Total current assets......................................................... 197,193 169,750 Property and equipment: Equipment and leasehold improvements, net of accumulated depreciation and amortization................................................................... 20,905 18,078 Real estate, net of accumulated depreciation...................................... 7,372 4,155 --------- --------- 28,277 22,233 Other: Capitalized software costs, net................................................... 368 5,120 Other assets...................................................................... 6,175 2,984 Deferred tax asset................................................................ 5,305 2,235 --------- --------- 11,848 10,339 --------- --------- Total assets................................................................. $ 237,318 $ 202,322 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable.................................................................. $ 10,626 $ 10,380 Accrued expenses.................................................................. 20,536 9,892 Federal and state taxes payable................................................... 735 Deferred revenue.................................................................. 21,538 16,541 Note payable and current portion of long-term debt................................ 3,587 302 --------- --------- Total current liabilities.................................................... 56,287 37,850 Deferred income taxes 1,191 Long-term debt, less current portion................................................... 2,508 2,651 Commitments and contingencies.......................................................... Minority interest...................................................................... 1,919 2,080 Stockholders' equity: Preferred stock, par value $0.01 per share, 5,000 shares authorized, none issued Common stock, par value $0.01 per share, 100,000 shares authorized, issued and Outstanding 26,029 and 25,462 in 1997 and 1996, respectively.............. 260 255 Additional paid-in capital........................................................... 128,658 118,714 Retained earnings.................................................................... 47,550 39,588 --------- --------- 176,468 158,557 Cumulative unrealized gains (losses) on securities available-for-sale................ 136 (7) --------- --------- Total stockholders' equity................................................... 176,604 158,550 --------- --------- Total liabilities and stockholders' equity................................... $ 237,318 $ 202,322 ========= =========
See accompanying notes. 24 CONSOLIDATED STATEMENTS OF INCOME (in thousands, except for per share data)
Year Ended December 31 -------------------------------- 1997 1996 1995 -------- -------- -------- Revenues: Systems sales........................................ $ 134,499 $ 110,495 $ 94,163 Maintenance and service fees......................... 116,918 96,384 81,122 --------- --------- --------- Total revenues................................ 251,417 206,879 175,285 Operating expenses: Cost of sales........................................ 130,424 108,264 96,750 Selling, general and administrative.................. 51,747 45,929 36,072 Research and development............................. 36,312 29,768 23,425 Write-off of acquired research and development costs 2,290 -- -- Merger and related costs............................. 20,030 292 -- --------- --------- --------- Total operating expenses................. 240,803 184,253 156,247 --------- --------- --------- Operating income........................................ 10,614 22,626 19,038 Other (income) expense: Interest income...................................... (6,322) (5,532) (3,497) Interest expense..................................... 197 220 263 Minority interest.................................... 539 430 369 --------- --------- --------- (5,586) (4,882) (2,865) --------- --------- --------- Income before income taxes.............................. 16,200 27,508 21,903 Income tax provision (benefit): Current year operations.............................. 8,238 10,848 3,266 Change in tax status................................. (2,036) --------- --------- --------- 8,238 10,848 1,230 --------- --------- --------- Net income.............................................. $ 7,962 $ 16,660 $ 20,673 ========= ========= ========= Basic net income per share.............................. $ 0.31 $ 0.66 ========= ========= Basic weighted average shares outstanding............... 25,672 25,146 ========= ========= Diluted net income per share............................ $ 0.30 $ 0.64 ========= ========= Diluted weighted average shares outstanding............. 26,447 26,047 ========= ========= Pro forma information (unaudited): Historical income before income taxes................ $ 21,903 Pro forma income taxes............................... 7,988 --------- Pro forma net income................................. $ 13,915 ========= Pro forma basic net income per share................. $ 0.73 --------- Pro forma basic weighted average shares outstanding.. 19,135 ========= Pro forma diluted net income per share.............. $ 0.63 --------- Pro forma diluted weighted average shares outstanding 22,158 =========
See accompanying notes. 25 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
- ----------------------------------------------------------------------------------------------------------------------- Common Stock Treasury Stock - ----------------------------------------------------------------------------------------------------------------------- Unrealized Gain (Loss) on Additional Securities Total Par Paid-in Retained Available- Stockholders' Shares Value Capital Earnings Shares Cost for-Sale Equity - ----------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 18,369 $ 184 $ 20,324 $41,047 615 $ (393) $ (264) $ 60,898 - ----------------------------------------------------------------------------------------------------------------------- S Corporation distribution (38,792) (38,792) - ----------------------------------------------------------------------------------------------------------------------- Stock issued upon exercise 1,021 10 2,963 (615) 393 3,366 of nonqualified stock options - ----------------------------------------------------------------------------------------------------------------------- Tax benefit related to 956 956 exercise of nonqualified stock options - ----------------------------------------------------------------------------------------------------------------------- Stock issued upon exercise of 394 4 2,051 2,055 incentive stock options - ----------------------------------------------------------------------------------------------------------------------- Stock issued pursuant to 5 149 149 employee stock purchase plan - ----------------------------------------------------------------------------------------------------------------------- Stock issued to 401(k) plan 18 520 520 - ----------------------------------------------------------------------------------------------------------------------- Stock issued upon initial 4,886 49 80,292 80,341 public offerings, net of offering costs of $7,172 - ----------------------------------------------------------------------------------------------------------------------- Change in unrealized gain 345 345 (loss) on securities available-for-sale - ----------------------------------------------------------------------------------------------------------------------- Net income 20,673 20,673 - ----------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 24,693 247 107,255 22,928 0 0 81 130,511 - ----------------------------------------------------------------------------------------------------------------------- Stock issued upon exercise of 8 56 56 nonqualified stock options - ----------------------------------------------------------------------------------------------------------------------- Tax benefit related to 4,812 4,812 exercise of nonqualified stock options - ----------------------------------------------------------------------------------------------------------------------- Stock issued upon exercise of 569 6 3,037 3,043 incentive stock options - ----------------------------------------------------------------------------------------------------------------------- Stock issued pursuant to 171 2 3,090 3,092 employee stock purchase plan - ----------------------------------------------------------------------------------------------------------------------- Stock issued to 401(k) plan 21 464 464 - ----------------------------------------------------------------------------------------------------------------------- Change in unrealized gain (88) (88) (loss) on securities available-for-sale - ----------------------------------------------------------------------------------------------------------------------- Net income 16,660 16,660 - ----------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1996 25,462 255 118,714 39,588 0 0 (7) 158,550 - ----------------------------------------------------------------------------------------------------------------------- Stock issued upon exercise of 73 1 1,153 1,154 nonqualified stock options - ----------------------------------------------------------------------------------------------------------------------- Tax benefit related to 3,059 3,059 exercise of nonqualified stock options - ----------------------------------------------------------------------------------------------------------------------- Stock issued upon exercise of 419 4 3,887 3,891 incentive stock options - ----------------------------------------------------------------------------------------------------------------------- Stock issued pursuant to 54 1,408 1,408 employee stock purchase plan - ----------------------------------------------------------------------------------------------------------------------- Stock issued to 401(k) plan 21 437 437 - ----------------------------------------------------------------------------------------------------------------------- Change in unrealized gain (loss) on securities available-for-sale 143 143 - ----------------------------------------------------------------------------------------------------------------------- Net income 7,962 7,962 - ----------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1997 26,029 $ 260 $ 128,658 $47,550 0 $ 0 $ 136 $176,604 =======================================================================================================================
See accompanying notes. 26 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31 ------------------------------ 1997 1996 1995 -------- -------- -------- Operating Activities Net income................................................................ $ 7,962 $ 16,660 $ 20,673 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment............................... 8,066 5,990 5,875 Amortization of capitalized software................................. 806 1,337 943 Deferred tax benefit................................................. (5,864) (1,664) (1,679) Provision for doubtful accounts...................................... 593 360 387 Minority interest.................................................... 539 430 369 Write-off of acquired in-process research and development costs...... 2,290 Write-off of capitalized software costs and equipment in connection with merger........................................................ 7,406 Changes in operating assets and liabilities: Accounts receivable............................................. (18,065) (14,633) (11,718) Prepaid expenses and other assets............................... (2,984) (2,596) (570) Accounts payable................................................ 246 2,576 2,748 Accrued expenses................................................ 10,644 545 3,542 Federal and state taxes payable................................. (6,815) (71) 46 Deferred revenue................................................ 4,997 1,539 1,041 -------- -------- -------- Net cash provided by operating activities................................. 9,821 10,473 21,657 Investing Activities Purchase of property and equipment, net................................... (15,711) (8,891) (7,114) Purchase of securities available-for-sale................................. (151,537) (147,056) (102,382) Proceeds from sale of securities available-for-sale ...................... 150,919 112,297 56,989 Purchase of data model technology......................................... (2,500) Capitalized software development costs.................................... (1,649) (3,397) (2,796) -------- -------- -------- Net cash used in investing activities..................................... (20,478) (47,047) (55,303) Financing Activities Proceeds from sale of common stock........................................ 6,890 6,655 6,090 Tax benefit related to exercise of non qualified stock options............ 3,059 4,812 956 Proceeds from initial public offerings, net............................... 80,340 S Corporation distribution................................................ (38,792) Contributions to (distributions from) Affiliates.......................... (700) 467 (225) Proceeds from note payable................................................ 3,350 Repayment of notes receivable from related parties........................ 13,638 Proceeds from (repayment of) note payable to bank......................... (209) 109 Repayment of long-term debt............................................... (208) (574) (856) -------- -------- -------- Net cash provided by financing activities................................. 12,391 11,151 61,260 -------- -------- -------- Increase (decrease) in cash and cash equivalents.......................... 1,734 (25,423) 27,614 Cash and cash equivalents at beginning of year............................ 12,327 37,750 10,136 -------- -------- -------- Cash and cash equivalents at end of year.................................. $ 14,061 $ 12,327 $ 37,750 ======== ======== ======== Supplemental Cash Flow Information Cash paid for interest.................................................... $ 190 $ 158 $ 283 ======== ======== ======== Cash paid for income taxes................................................ $ 17,382 $ 8,321 $ 1,654 ======== ======== ========
See accompanying notes. 27 IDX SYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 1. Significant Accounting Policies Nature of Business IDX Systems Corporation (IDX or the Company) operates in one principal industry segment providing healthcare information systems and services principally in the United States. Revenues are derived from the licensing of software, maintenance and services related to systems sales. In July 1997, IDX completed its merger (Merger) with PHAMIS, Inc. (PHAMIS) in a stock for stock transaction. The transaction, which was accounted for as a pooling-of-interests, was effected through the exchange of .73 shares of IDX common stock in exchange for each PHAMIS share outstanding. Approximately 4.6 million shares of common stock were issued in connection with the Merger. PHAMIS was a Seattle-based provider of enterprise-wide, patient-centered healthcare information systems. The consolidated financial statements for all periods prior to the Merger have been restated to include the accounts and results of operations of PHAMIS. No adjustments were required to conform the financial reporting policies of IDX and PHAMIS for the periods presented. Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of the Company, its subsidiaries and a real estate trust. Investments in entities, representing an ownership interest of less than 20%, are accounted for under the cost method. The Company leases a substantial portion of its space, including its corporate headquarters and certain sales and support offices, from real estate partnerships and trusts owned by stockholders and certain key employees of the Company. These real estate partnerships and trusts include 116 Huntington Avenue Limited Partnership ("HLP"), BDP Realty Associates ("BDP") and other real estate partnerships and trusts ("REPs"). The Company's consolidated financial statements include the accounts of the Company and BDP whose real estate is leased exclusively by the Company and for which the Company is subject to substantially all the risks of ownership. Real estate owned by HLP and REPs are 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 Software License Fees The Company recognizes revenue in accordance with the provisions of AICPA Statement of Position No. 91-1 "Software Revenue Recognition" (SOP 91-1). Software license fees, which are based upon vendor-specific objective information, represent revenues derived from the license of the Company's proprietary systems software which generally requires no significant production, modification or customization. IDX license revenue is deferred and recognized as customer payments become due based upon specified milestones and due dates including delivery, installation and final systems acceptance. PHAMIS license revenues are principally recognized using the percentage-of-completion method as systems customization progresses. These revenues are measured primarily based on the ratio of labor incurred to total estimated labor to complete each contract, as prescribed by generally accepted accounting principles for long-term, fixed- price contracts. If the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is recognized in the period in which such loss is determined. 28 Hardware Sales Revenue from sale of computer equipment related to IDX contracts is recognized upon shipment, provided post-sale vendor obligations are insignificant and the sales value is based on vendor-specific objective information. If post-sale vendor obligations are significant, revenue is deferred until the obligations are fulfilled. Revenue from the sale of hardware related to PHAMIS contracts is principally recognized using the percentage-of- completion method as systems customization progresses. Revenue from the sale of PHAMIS hardware not included in a systems contract is recognized upon shipment. Maintenance and Services IDX installation service revenue related to systems sales, which is based on vendor-specific objective information, is recognized upon fulfillment of contractual obligations based upon achievement of specified milestones. PHAMIS installation service revenue is recognized using the percentage-of-completion method as systems customization progresses. Professional service revenue is recognized as the services are performed. Maintenance is recognized ratably over the term of the agreement. Due to the elimination of providing customized systems software, the Company is recognizing revenues derived from license fees, hardware sales and services related to PHAMIS system software contracts entered into after the Merger, on the same basis as IDX. Statement of Position 97-2 During 1997, the AICPA issued Statement of Position 97-2 "Software Revenue Recognition" (SOP 97-2). SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company does not expect adoption will materially affect its revenue recognition policies with respect to revenue derived from systems sales and services since each element of revenue is based upon vendor-specific objective information, systems software requires no significant production, modification or customization and revenues are recognized as customer payments become due based upon milestones and due dates including delivery, installation and final systems acceptance. Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning after December 15, 1997. The Company believes that the adoption of these new accounting standards will not have a material impact on the Company's financial statements. Research and Development Costs Research and development costs are expensed as incurred. Software development costs incurred after the establishment of technological feasibility and until the product is available for general release are capitalized, provided recoverability is reasonably assured. Technological feasibility is established upon the completion of a working model. Software development costs, when material, are stated at the lower of unamortized cost or net realizable value. Net realizable value for each software product is assessed based on anticipated profitability applicable to sales of the related product in future periods. Amortization of capitalized software costs begins when the related product is available for general release to customers and is provided for each product based on the greater of the amount computed using (i) the ratio of current gross revenues to total current and anticipated future gross revenues for the related software or (ii) the straight-line method over a three-year life or the product's estimated economic life, if shorter. Capitalized software development costs of $368,000 and $5,120,000 at December 31, 1997 and 1996, respectively, net of accumulated amortization, are included in other assets in the accompanying balance sheets. Amortization of capitalized software amounted to $806,000, $1,337,000 and $943,000 in 1997, 1996 and 1995, respectively. In connection with the Merger, the Company wrote-off $5.6 million of capitalized software development costs attributable to the elimination of overlapping products. 29 Cash Equivalents The Company considers highly liquid investments generally with a maturity of three months or less when purchased, to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. Risks and Uncertainties Concentration of Credit Risk Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, securities available-for-sale and trade receivables. 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. 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, 1997. The Company's losses related to collection of trade accounts receivables have consistently been within management's expectations. Significant Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions by management affect the Company's allowance for doubtful accounts, revenue recognition and certain accrued expenses. Actual results could differ from those estimates. Investment Securities The Company accounts for investment securities based on Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). 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, 1997 and 1996. 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 by BDP, is stated at cost. Buildings and related improvements are depreciated using the straight-line method over their estimated useful lives of 30 to 40 years. Equipment is stated at cost and is depreciated over its estimated useful life by using the straight-line method. Equipment under capital leases is stated at the lower of the present value of minimum lease payments discounted at the Company's incremental borrowing rate at the beginning of the lease term or fair value at the inception of the lease. Depreciation is generally computed based on useful lives of three 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. 30 Income Taxes On November 1, 1995, the Company terminated its status as an "S Corporation" under Section 1362 of the Internal Revenue Code, and thereafter has become subject to federal and state corporate income taxes. Prior to November 1, 1995, the Company was not liable for federal income taxes as income was taxed directly to the Company's stockholders. The Company had provided for income taxes in states in which it operated that did not recognize "S Corporation" status. This change in tax status resulted in the Company recognizing a $2,036,000 tax benefit in 1995. 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 Option Plans The Company grants stock options for a fixed number of shares to employees 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. Net Income Per Share In 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. All net income and pro forma net income per share amounts for all periods have been presented, and where appropriate restated, to conform to the SFAS No. 128 requirements. Pro Forma Information (Unaudited) Pro Forma Consolidated Statement of Income On November 1, 1995, the Company terminated its status as an S Corporation and thereafter became subject to federal and state corporate income taxes. Accordingly, for informational purposes, the accompanying consolidated statement of income for the year ended December 31, 1995 includes an unaudited pro forma adjustment for income taxes, based on the tax laws in effect at the time, which would have been recorded if the Company had not been an S Corporation. Total pro forma income tax expense is different from the amount which would be provided by applying the statutory federal rate to income before income taxes principally due to the effect of state income taxes and the reduction of the valuation allowance which had previously been provided due to the uncertainty of realization of certain tax benefits during the carryforward period. 31 Pro Forma Net Income Per Share Pro forma net income per share is computed using pro forma net income and the weighted average number of common and dilutive Common Stock equivalent shares. Common Stock equivalents are attributable to stock options using the treasury stock method and, for the nine-month period ended September 30, 1995, include the weighted average estimated number of shares which would be necessary to fund the payment of undistributed S Corporation earnings in excess of the previous twelve months net income. Common Stock and Common Stock equivalent shares issued during the twelve-month period prior to the effective date of the initial public offering previously required by the Securities and Exchange Commission (SEC) to be included in the earnings per share calculation have been excluded and pro forma net income per share restated in connection with the adoption of SFAS No. 128, pursuant to SEC Staff Accounting Bulletin 98, issued in February 1998. Reclassification Certain amounts in 1996 and 1995 have been reclassified to permit comparison. 2. Business Combinations In July 1997, the Company completed the Merger with PHAMIS which became a wholly-owned subsidiary of the Company. The transaction was accounted for as a pooling-of-interests and accordingly, the accompanying financial statements include the accounts of PHAMIS for all periods presented. In connection with the Merger, the Company incurred approximately $20 million of merger and related costs consisting principally of transaction costs of $5.1 million, write-offs and adjustments of $7.4 million of long-lived assets, primarily capitalized software development costs and equipment due to the elimination of overlapping 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. At December 31, 1997, accounts payable and accrued expenses include accrued costs of $3.1 million related to the termination of employees, leases and other contractual obligations, substantially all of which will be paid within one year. During 1997 cash paid and charged to the accrual established as of the date of the Merger related to employee terminations and termination of leases and other contractual obligations amounted to approximately $1.7 million. The write-off of long-lived assets is not expected to materially affect amortization and depreciation of future reporting periods. In addition, the provision for termination of employees, leases and other contractual obligations is not expected to materially affect selling, general and administrative expenses or cash flows of future periods. Management does not expect to incur significant charges related to the Merger in future reporting periods. The results of operations previously reported by the separate enterprises and the consolidated amounts for the years ended December 31, 1996 and 1995 and the six months ended June 30, 1997 are summarized below.
Six months ended Year ended December 31, June 30, 1997 1996 1995 --------------------------------------------------------------- (in thousands) Total revenues: IDX $ 92,606 $ 157,579 $ 128,120 PHAMIS 24,385 49,300 47,165 --------------------------------------------------------------- Consolidated $ 116,991 $ 206,879 $ 175,285 =============================================================== Net income (loss): IDX $ 8,417 $ 14,882 $ 16,365 PHAMIS (44) 1,778 4,308 --------------------------------------------------------------- Consolidated $ 8,373 $ 16,660 $ 20,673 ===============================================================
32 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 has been expensed as in-process research and development in connection with the Company's development of a healthcare data model. In March 1996, PHAMIS completed its merger with DataBreeze, Inc. (DataBreeze) in a stock for stock transaction. Approximately 154,000 shares of Common Stock were issued in connection with the DataBreeze merger, which was accounted for as a pooling-of-interests. DataBreeze is a Florida based provider of information systems for the physician practice management marketplace. The restatement of the consolidated financial statements of PHAMIS to include the accounts and results of operations of DataBreeze for periods prior to the merger did not materially affect the Company's consolidated financial statements. 3. Securities Available-for-Sale The following is a summary of securities available-for-sale at December 31, 1997 and 1996:
Gross Gross Estimated ----- ----- --------- Unrealized Unrealized Fair ---------- ---------- ---- Cost Gains Losses Value ------------- ----- ------ ----- (in thousands) December 31, 1997 U.S. government securities..... $ 31,292 $ 75 $ (8) $ 31,359 Other debt securities.......... 10,995 33 (6) 11,022 -------------------------------------------------- Total debt securities..... 42,287 108 (14) 42,381 Tax-deferred municipal funds... 25,181 46 (4) 25,223 Money market fund.............. 34,222 34,222 -------------------------------------------------- $101,690 $154 $(18) $101,826 ================================================== December 31, 1996 U.S. government securities..... $ 56,887 $ 60 $(57) $ 56,890 Other debt securities.......... 1,563 1 (11) 1,553 -------------------------------------------------- Total debt securities..... 58,450 61 (68) 58,443 Tax-deferred municipal funds... 8,500 8,500 Tax-free investment fund....... 34,122 34,122 -------------------------------------------------- $101,072 $ 61 $(68) $101,065 ==================================================
The net unrealized gain (loss) on securities available-for-sale included as a separate component of stockholders' equity totaled $136,000 and $(7,000) at December 31, 1997 and 1996, respectively. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Estimated --------- Cost Fair Value -------- ---------- (in thousands) Due in one year or less................... $25,626 $25,641 Due after one year through three years.... 11,447 11,534 Due after three years..................... 5,214 5,206 --------------------------- $42,287 $42,381 =========================== 33 4. Advances to Related Parties Prior to 1996, the Company advanced $2,670,000 to HLP which was used in connection with the construction of leasehold improvements to be owned by the Company. At December 31, 1995, leasehold improvements of $1,509,000 were capitalized by the Company and the balance of the advance of $1,161,000 was remitted to the Company. 5. Equipment and Leasehold Improvements Equipment and leasehold improvements consists of the following: December 31 -------------- 1997 1996 ------- -------- (in thousands) Computer equipment and software..................... $32,954 $26,692 Furniture and fixtures.............................. 6,567 6,025 Leasehold improvements.............................. 7,334 7,176 ----- ----- 46,855 39,893 Less accumulated depreciation and amortization...... 25,950 21,815 ------ ------ $20,905 $18,078 ======= ======= 6. Other Investments and Advances In February 1996, PHAMIS signed a Distribution Agreement (the Agreement) with a California-based software developer of mobile computing solutions for the home healthcare marketplace. The Agreement allows PHAMIS to distribute the home healthcare solutions throughout its direct sales network. In addition to the Agreement, PHAMIS purchased a minority equity interest in the developer for approximately $950,000 in cash. The equity interest is accounted for under the cost method of accounting. In December 1995, PHAMIS purchased an equity interest in a critical care information systems developer based in Europe for approximately $1,082,000 in cash. The equity interest is accounted for under the cost method of accounting. In addition to the equity interest, PHAMIS entered into an OEM Distribution Agreement (the OEM Agreement) to distribute the critical care system throughout its customer base. In connection with the OEM Agreement, PHAMIS paid certain costs for advance license fees, which are recorded as prepaid expenses. During 1996, PHAMIS invested an additional $225,000 in connection with an additional round of equity financing by the developer. 7. Accrued Expenses Accrued expenses consist of the following: December 31, 1997 1996 ------------------------------------- (in thousands) Employee compensation and benefits $12,653 $6,761 Merger related costs 3,098 Other 4,785 3,131 ------------------------------------- $20,536 $9,892 ===================================== 34 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 May 31, 1998. At December 31, 1997 and for each of the three years in the period then ended, there were no borrowings under this arrangement. BDP had a $4,000,000 demand line of credit agreement with a bank, under which borrowings of $3,350,000, bearing interest of 7.4%, were outstanding at December 31, 1997. These borrowings were repaid in January 1998. The carrying amount approximates fair value due to the short-term maturity of the agreement. PHAMIS had an unsecured $5,000,000 revolving line of credit agreement with a bank which was canceled in connection with the Merger. There were no amounts outstanding at December 31, 1996. Long-term debt, principally related to certain real estate described below, is as follows: December 31 ----------- 1997 1996 ---- ---- (in thousands) Obligation under industrial revenue bond, principal installments of $200, interest at a floating variable rate (4.45% at December 31, 1997), secured by real estate owned by BDP............... $2,700 $2,800 Other.............................................. 45 153 ------------------- 2,745 2,953 Less current portion............................... 237 302 ------------------- Long-term debt..................................... $2,508 $2,651 =================== The industrial revenue bond and related mortgage notes payable are collateralized by land and buildings consisting of the Company's corporate headquarters owned by BDP whose real estate was leased exclusively by the Company and for which the Company is subject to substantially all the risks of ownership. These obligations require BDP to maintain certain financial ratios and comply with certain covenants. These borrowings were repaid in February 1998. The carrying amount of long-term debt approximates fair value due to the variable rate of interest. At December 31, 1997 and 1996, real estate owned by BDP and financed by the obligation indicated above consisted of the following: December 31 ----------- 1997 1996 ------ ------ (in thousands) Corporate headquarters........ $8,794 $5,438 Accumulated depreciation...... 1,422 1,283 ------ ------ $7,372 $4,155 ====== ====== 35 Operating Leases The Company leases approximately 47% of the office space in a commercial office building owned by HLP (see Note 4). HLP is owned and controlled by stockholders and certain key employees of the Company. At December 31, 1997, future obligations due under the operating lease with HLP, REPs and unrelated parties for sales and support offices are as follows:
Unrelated HLP REPs Sub Total Parties Total ------- ------ --------- ------- ----- (in thousands) Year ending December 31: 1998..................... $ 2,710 $ 295 $ 3,005 $ 5,025 $ 8,030 1999..................... 2,710 251 2,961 4,354 7,315 2000..................... 2,920 251 3,171 3,632 6,803 2001..................... 2,920 251 3,171 3,612 6,783 2002..................... 2,920 105 3,025 3,391 6,416 Thereafter............... 33,870 33,870 12,707 46,577 --------------------------------------------------- $48,050 $1,153 $49,203 $32,721 $81,924 ===================================================
Total rent expense amounted to $6,906,000, $5,563,000 and $5,278,000, during 1997, 1996 and 1995, respectively. Total rent expense includes $3,024,000, $2,621,000 and $2,571,000 in 1997, 1996 and 1995, respectively, related to the lease with HLP. Total rent expense includes $448,000, $381,000 and $915,000 in 1997, 1996 and 1995, respectively, related to the leases with REPs. 9. Income Taxes The provision for income taxes consists of the following: 1997 1996 1995 ---------- --------- --------- (in thousands) Currently payable: Federal..................... $11,282 $10,317 $2,497 State....................... 2,820 2,195 412 ------- ------- ------ 14,102 12,512 2,909 Deferred, principally Federal.... (5,864) (1,664) (1,679) ------- ------- ------ $ 8,238 $10,848 $1,230 ======= ======= ====== A reconciliation of the federal statutory rate to the effective income tax rate during 1997, 1996 and 1995 is as follows: 1997 1996 1995 -------- -------- -------- Tax at federal statutory rate........ 35.0% 35.0% 35.0% State taxes, net of federal benefit. 5.5 5.2 5.2 Non-deductible costs of merger....... 10.4 (.2) Change in tax status................. (34.6) Other, net........................... (.6) ------------------------------- 50.9% 39.4% 5.6% =============================== 36 Significant components of the Company's deferred tax assets (liabilities) are as follows:
1997 1996 ---------------------- (In thousands) Deferred tax assets: Allowances and accruals $6,248 $ 1,628 Depreciation 2,049 2,235 Research and development tax credit 244 Loss carryforwards and other tax credits 600 1,121 Deferred revenue 1,314 937 Other 68 ---------------------- Total deferred tax assets 10,211 6,233 ---------------------- Deferred tax liabilities: Capitalized software costs, net of accumulated amortization 147 1,888 Other 145 ---------------------- Total deferred tax liabilities 147 2,033 ---------------------- Net deferred tax asset 10,064 4,200 Less valuation allowance 600 600 ---------------------- $9,464 $ 3,600 ---------------------- Deferred income taxes are included in accompanying balance sheets under the following captions: Current assets $4,159 $ 2,556 Noncurrent assets 5,305 2,235 Noncurrent liabilities (1,191) ---------------------- $9,464 $ 3,600 ======================
10. Net Income Per Share The following sets forth the computation of basic and diluted earnings per share:
1997 1996 ------------------------- Numerator: Net income $ 7,962 $16,660 ------------------------- Numerator for basic and diluted earnings per share $ 7,962 $16,660 Denominator: Denominator for basic earnings per share-- weighted-average share 25,672 25,146 Effect of employee stock options 775 901 ------------------------- Denominator for diluted earnings per share 26,447 26,047 ========================= Basic earnings per share $ 0.31 $ 0.66 ========================= Diluted earnings per share $ 0.30 $ 0.64 =========================
11. Recapitalization and Initial Public Offerings In July 1997, IDX's Board of Directors and stockholders approved an amendment to its charter to increase the number of authorized shares of Common Stock to 100,000,000. 37 In November 1995, IDX completed its initial public offering in which 4,604,500 shares of Common Stock were sold at a per share price of $18. Net proceeds, after deduction of $6,717,000 for underwriters' fees and other offering costs, amounted to $76,164,000. In September 1995, IDX's Board of Directors and stockholders approved a four-for-one stock split of its Common Stock, effective September 27, 1995. All shares and option information in the accompanying consolidated financial statements have been retroactively adjusted to reflect the stock split. In September 1995, IDX's Board of Directors and stockholders approved an amendment to its charter to authorize 5,000,000 shares of undesignated preferred stock, and increase the number of authorized shares of Common Stock to 50,000,000. These amendments became effective on November 17, 1995. In January 1995, 281,000 shares of PHAMIS Common Stock were issued to cover underwriters' overallotments made in connection with its IPO completed in 1994. Net proceeds, after deduction of $455,400 for underwriters' fees and other offering costs, amounted to $4,177,000. 12. 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. PHAMIS employees are not eligible for the profit sharing retirement plan due to their eligibility in the PHAMIS 401(k) plan described below. The contributions to the plan are discretionary, as determined by the Board of Directors. The Company expects to continue the plan indefinitely; however, IDX has reserved the right to modify, amend or terminate the plan. For the years ended December 31, 1997, 1996 and 1995, the Company has expensed $4,316,000, $2,840,000 and $2,400,000, respectively. 401(k) Retirement Savings Plan The Company maintains a 401(k) retirement savings plan for which all PHAMIS full-time employees are eligible to participate. Participants become eligible for the employer-matching contribution on the first day of the calendar quarter immediately following the completion of one year of service. Prior to the Merger, the Company matched 50% of participant contributions up to a maximum contribution of $1,500 per employee in company stock. The 401(k) retirement savings plan was amended in July 1997 to provide for the Company match to be made in cash. Matching contributions to the plan were $357,000, $320,000 and $165,000 in the years ended December 31, 1997, 1996 and 1995, respectively. A total of 240,000 shares of Common Stock have been reserved for issuance under the 401(k) retirement savings plan. Stock Purchase Plans In September 1995, IDX's Board of Directors and stockholders approved the 1995 Employee Stock Purchase Plan, as amended in July 1997, (the "ESPP") under which eligible employees may purchase Common Stock at a price per share equal to 85% of the lower of the fair market value of the Common Stock at the beginning or end of each offering period. Participation in the offering is limited to 10% of an employee's compensation (not to exceed amounts allowed under Section 423 of the Internal Revenue Code), may be terminated at any time by the employee and automatically ends on termination of employment with the Company. A total of 1,400,000 shares of Common Stock have been reserved for issuance under this plan. PHAMIS maintained an employee stock purchase plan prior to the Merger whereby eligible employees could purchase PHAMIS Common Stock at 85% of the lower of the fair market value of the Common Stock at the beginning or end of each offering period. The employee stock purchase plan was terminated in connection with the Merger. 38 During the years ended December 31, 1997, 1996 and 1995, an aggregate of approximately 54,000, 171,000 and 5,000 shares, respectively, were purchased under these stock purchase plans. Stock Option Plans IDX Option Plans During 1985 and 1994, the Company established incentive stock option plans providing for the grant of options for the issuance of 959,640 and 696,460 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, 1997, options to purchase 70,600 and 211,845 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, 1997, options to purchase 1,515,064 shares of Common Stock were outstanding under the 1995 Option Plan, of which 246,604 were exercisable. Prior to adoption of the 1995 Option Plan, nonqualified stock options were granted under separate option agreements at a minimum of the fair market value at the date of grant, and generally vested over five years or immediately in the event of a merger of the Company when the Company is not the surviving entity. At December 31, 1997, there were no options outstanding under such agreements. In September 1995, IDX's Board of Directors approved the 1995 Director Stock Option Plan as amended in May and July 1997, (the "IDX Director Plan"), which provides that each non-employee director of the Company be granted an option to acquire 2,000 shares of Common Stock on the date that person becomes a director but, in any event, not earlier than the effective date of the IDX Director Plan. Options are granted at a price equal to the fair market value on the date of grant. The option becomes exercisable on the first anniversary of the date of grant, and the term of the option is ten years from the date of grant. The Company has reserved 80,000 shares of Common Stock for issuance under the IDX Director Plan. At December 31, 1997, options to purchase 17,394 shares of Common Stock were outstanding under the IDX Director Plan of which 12,000 where exercisable. PHAMIS Stock Option Plans Options to purchase shares of PHAMIS Common Stock under the PHAMIS, Inc. Amended and Restated 1983 Combined Nonqualified and Incentive Stock Option Plan (the "1983 Option Plan"), the PHAMIS, Inc. 1993 Combined Incentive and Nonqualified Stock Option Plan (the "1993 Option Plan") and the PHAMIS, Inc. 1994 Nonemployee Director Stock Option Plan (the "PHAMIS Director Plan") which were outstanding at the effective date of the Merger were effectively assumed by IDX based on the exchange 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, 1997, options to purchase 45,542, 214,832 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. 39 Stock Based Compensation Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options and shares issued pursuant to the ESPP under the fair value method of that Statement. The fair value for these options and shares issued pursuant to the ESPP were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Options ESPP ------- ---- 1997 1996 1995 1997 1996 1995 ----- ------ ---- ------ ---- ---- Expected life (years).... 6.3 6.3 3.3 .5 .55 .3 Interest rate............ 6.0% 6.4% 6.1% 6.1% 6.3% 5.7% Volatility............... 42.7% 43.3% 29.3% 42.7% 40.4% 62.5% Dividend yield........... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except for net income per share information): 1997 1996 1995 ----- ---- ---- Pro forma net income............... $ 467 $14,285 $13,360 Pro forma net income per share..... $ 0.02 $ 0.55 $ 0.60 Pro forma net income and net income per share in 1997 includes the effect of accelerated vesting of all outstanding options of PHAMIS as of the merger. The effect of accelerated vesting was to reduce pro forma net income from $3,812,000 to $467,000 and to reduce pro forma net income per share from $0.15 to $0.02. The effects on 1995, 1996 and 1997 pro forma net income and net income per share of expensing the estimated fair value of stock options and shares issued pursuant to the ESPP are not necessarily representative of the effects on reporting the results of operations for future years as the periods presented include only one, two and three years of option grants under the Company's plans. 40 Stock Based Compensation (continued) A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
1997 1996 1995 ---- ---- ---- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding at beginning of year 1,950,916 $17.88 1,702,936 $8.18 3,119,780 $3.49 Granted 679,129 $30.78 873,906 $28.54 618,432 $13.20 Exercised (494,706) $12.28 (579,130) $5.16 (2,030,896) $2.51 Forfeited (56,412) $25.18 (46,796) $21.54 (4,380) $6.33 ------------ ------------ -------------- Outstanding at end of year 2,078,927 $24.73 1,950,916 $17.88 1,702,936 $8.18 ============ ============ ============== Exercisable at end of year 805,073 $16.73 777,732 $7.22 ============ ============ Weighted-average fair value of options granted during the year $16.56 $14.94 Available for future grants 2,553,424 821,578 ============ ============
The following table presents weighted-average price and life information about significant option groups outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------------------ --------------------- Weighted- Weighted- Weighted -------- -------- -------- Average Average Average ------- ------- ------- Range of Number Remaining Exercise Number Exercise -------- ------ --------- -------- ------ -------- Exercise Prices Outstanding Contractual Life Price Exercisable Price --------------- ----------- ---------------- ----- ----------- ----- $3.97 - $5.14 174,200 6.25 years $ 4.67 174,200 $ 4.67 $5.18 - $6.58 154,291 4.17 years $ 6.25 154,291 $ 6.25 $7.82 - $17.29 41,315 3.88 years $ 8.46 41,315 $ 8.46 $18.00 - $25.63 306,695 7.95 years $ 18.93 161,194 $ 19.41 $26.03 - 38.87 1,402,426 9.09 years $ 31.00 274,073 $ 29.95 --------- ------- 2,078,927 805,073 ========= =======
41 13. Quarterly Information (Unaudited) A summary of operating results and pro forma net income (loss) per share for the quarterly periods in the two years ended December 31, 1997 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, 1997 Total revenues.................. $59,559 $57,432 $64,598 $69,828 $251,417 Gross profit.................... 29,595 26,371 30,986 34,041 120,993 Net income (loss)............... 4,498 3,875 (7,355) 6,944 7,962 Net income (loss) per share - basic......................... $0.18 $0.15 $( 0.29) $0.27 $0.31 Net income (loss) per share - diluted....................... $0.17 $0.15 $ (0.28) $0.26 $0.30 Year ended December 31, 1996 Total revenues.................. $49,460 $51,242 $51,402 $54,775 $206,879 Gross profit.................... 23,069 25,027 24,240 26,280 98,616 Net income...................... 3,708 4,323 4,100 4,529 16,660 Net income per share - basic.... $0.15 $0.17 $0.16 $0.18 $0.66 Net income per share - diluted. $0.14 $0.17 $0.16 $0.17 $0.64
The 1996 and first three quarters of 1997 net income (loss) per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, Earnings per Share, and to reflect the Merger with PHAMIS which was accounted for as a pooling of inetrests.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS - -------------------------------------------------------------------------------------------------------------------- Balance at Charged to Charged to Bad Debts Balance at Beginning Costs and Other Written Off Net End of Description of Period Expenses Accounts of Collections Period - ----------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997: - ----------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $787,000 $593,000 $112,000 $1,268,000 - ----------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1996: - ----------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $592,000 $360,000 $165,000 $ 787,000 - ----------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1995: - ----------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts $480,000 $387,000 $275,000 $ 592,000 - -----------------------------------------------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with the Company's accountants on accounting or financial disclosure during the two most recent fiscal years or any subsequent interim period. PART III Item 10. Directors and Officers of the Registrant The response to this item is contained in part under the caption "Executive Officers of the Registrant" in Part I hereof, and the remainder is contained in the Company's 1998 Proxy Statement under the caption "Election of Directors" and is incorporated herein by reference. 42 Item 11. Executive Compensation The response to this item is contained in this Company's 1998 Proxy Statement under the captions "Board of Directors Compensation" and "Compensation of Executive Officers" 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 1998 Proxy Statement under the caption "Compliance with Section 16 Reporting Requirements." Item 12. Security Ownership of Certain Beneficial Owners and Management The response to this item is contained in the Company's 1998 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 1998 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
Page ---- (a) The following consolidated financial statements of IDX Systems Corporation are included in Item 8. 1. Consolidated Balance Sheets at December 31, 1997 and 1996.................. 24 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.............................................................. 25 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995........................................... 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1994........................................................ 27 Notes to the Consolidated Financial Statements............................. 28 Report of Independent Auditors on Financial Statements..................... 22 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. 43 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 25th day of March, 1998. IDX SYSTEMS CORPORATION By: /s/ Richard E. Tarrant ---------------------------------- Richard E. Tarrant, President and 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 President, Chief. March 25, 1998 - ----------------------------- Executive Officer and Richard E. Tarrant Director (Principal Executive Officer) /s/ John A. Kane Vice President, Finance March 25, 1998 - ----------------------------- and Administration, Chief John A. Kane Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Paul L. Egerman Director March 23,1998 - ----------------------------- Paul L. Egerman /s/ Henry M. Tufo Director March 25, 1998 - ---------------------------- Henry M. Tufo, M.D. /s/ Robert H. Hoehl Director March 27, 1998 - ---------------------------- Robert H. Hoehl /s/ Stuart H. Altman Director March 23, 1998 - ---------------------------- Stuart H. Altman, Ph.D.
44 /s/ Steven M. Lash Director March 21, 1998 - ------------------------------- Steven M. Lash /s/ Frank T. Sample Director March 23, 1998 - ------------------------------- Frank T. Sample /s/ Malcolm A. Gleser Director March 27, 1998 - ------------------------------- Malcolm A. Gleser, M.D., Ph.D.
45 Exhibit Index The following exhibits are filed as part of this Annual Report on Form 10-K. Exhibit No. Description Page - ----------- ----------- ---- 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 dated in 1987. 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. 10.17* First Amendment to Redemption Agreement between the Registrant, Richard E. Tarrant and Robert H. Hoehl. 1 Exhibit No. Description Page - ----------- ----------- ---- 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* Extension of Lease Agreement between the Registrant and BDP Realty Associates relating to 1500 Shelburne Road dated as of August 16, 1995. 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. 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. 2 Exhibit No. Description Page - ----------- ----------- ---- 10.37#@ PHAMIS, Inc. Amended and Restated 1983 Combined Nonqualified and Incentive Stock Option Plan 10.38#@ PHAMIS, Inc. 1993 Combined Incentive and Nonqualified Stock Option Plan as amended through May 14, 1996 10.39#@ PHAMIS, Inc. 1994 Nonemployee Director Stock Option Plan as amended through January 1, 1996 10.40#@ PHAMIS, Inc. Salary Savings and Deferral Plan and Trust as amended through February 22, 1996 10.41#@ Stock Option Agreement dated August 20, 1990 between PHAMIS, Inc. and Michael Cain. 10.42 Amended and Restated Lease Agreement between BDP Realty Associates and IDX Systems Corporation dated as of November 1, 1997 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule for each 12 Month Period from 1995-1997 27.3 Restated Financial Data Schedule for First Three Quarters of 1996 27.4 Restated Financial Data Schedule for First Three Quarters of 1997 # 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). EX-10.42 2 AMENDED AND RESTATED LEASE AGREEMENT ________________________________________________________________________________ ________________________________________________________________________________ EXHIBIT A AMENDED AND RESTATED LEASE AGREEMENT BETWEEN BDP REALTY ASSOCIATES AND IDX SYSTEMS CORPORATION DATED AS OF NOVEMBER 1, 1997 ________________________________________________________________________________ ________________________________________________________________________________ TABLE OF CONTENTS
Page - ------------------------------------------------------------------- Section 1. MERGER OF PRIOR AGREEMENTS...................... 1 Section 2. LEASE OF PREMISES............................... 1 Section 3. TERM OF LEASE................................... 2 Section 4. TENANT'S OPTION TO RENEW........................ 2 Section 5. USE OF PREMISES................................. 2 Section 6. MINIMUM RENT FOR PHASE 1 PREMISES............... 2 Section 7. MINIMUM RENT FOR PHASE 2 PREMISES............... 3 Section 8. MINIMUM RENT FOR RENEWAL TERMS.................. 3 Section 9. FIT-UP FOR PHASE 2 PREMISES..................... 4 Section 10. RENOVATIONS AND ALTERATIONS.................... 4 Section 11. REAL ESTATE TAXES AND UTILITIES................ 5 Section 12. CASUALTY INSURANCE............................. 5 Section 13. LIABILITY INSURANCE............................ 5 Section 14. TENANT TO COMPLY WITH LAWS, ETC............... 5 Section 15. NO WAIVER; NO ACCORD AND SATISFACTION.......... 6 Section 16. LANDLORD'S RIGHT OF ACCESS..................... 6 Section 17. PRIORITY OF MORTGAGES.......................... 6 Section 18. REPAIRS, REPLACEMENTS AND MAINTENANCE.......... 6 Section 19. ASSIGNMENT, SUBLETTING......................... 7 Section 20. DAMAGE OR DESTRUCTION.......................... 8 Section 21. INDEMNITY...................................... 8 Section 22. EMINENT DOMAIN................................. 9 Section 23. EVENTS OF DEFAULT, REMEDIES, DAMAGES........... 10
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Page - ------------------------------------------------------------------- Section 24. LEASE NOT TO BE RECORDED....................... 12 Section 25. LANDLORD'S COVENANTS........................... 12 Section 26. QUIET ENJOYMENT................................ 12 Section 27. NOTICES........................................ 12 Section 28. SUCCESSORS AND ASSIGNS......................... 13 Section 29. RIGHT OF FIRST OFFER........................... 13 Section 30. PERSONAL PROPERTY.............................. 14 Section 31. PAST DUE RENT AND ADDITIONAL RENT.............. 14 Section 32. HOLDING OVER................................... 14 Section 33. WAIVER OF SUBROGATION.......................... 14 Section 34. WAIVER OF RULE OF CONSTRUCTION................. 14 Section 35. FORCE MAJEURE.................................. 14 Section 36. ENVIRONMENTAL COVENANTS........................ 15 Section 37. SIGNS.......................................... 15 Section 38. ESTOPPEL CERTIFICATES.......................... 15 Section 39. AUTHORIZATION AND BINDING EFFECT OF AGREEMENT.. 15 Section 40. ENTIRE AGREEMENT; AMENDMENT.................... 15 Section 41. CAPTIONS; HEADINGS............................. 16 Section 42. PARTIAL INVALIDITY............................. 16 Section 43. GOVERNING LAW.................................. 16
-ii- AMENDED AND RESTATED LEASE AGREEMENT This Amended and Restated Lease Agreement (the "Lease" or "Lease Agreement") is by and between BDP REALTY ASSOCIATES, a Vermont partnership with a place of business in South Burlington, Vermont ("Landlord") and IDX SYSTEMS CORPORATION (f/k/a IDX Corporation), a Vermont corporation with a place of business in South Burlington, County of Chittenden and State of Vermont ("Tenant"). Background ---------- 1. Landlord and Tenant entered into a Standard Form Commercial Lease dated March 1, 1989 for 60,000 square feet of gross floor space in an office building located at 1400 Shelburne Road in South Burlington, Vermont, as amended by Amendment dated December 19, 1989 and recorded in Volume 290 at Page 542 of the City of South Burlington Land Records (the "Original Lease"). 2. The premises leased by Tenant in the Original Lease (the "Phase 1 Premises") are depicted as "Proposed Office Building - Phase 1" on a plan entitled "IDS Interpretative Data Systems, South Burlington, Vermont, Master Plan," Sheet SP-1, prepared by Richard P. Trudell, dated December 16, 1986 and last revised March 16, 1988 (the "Plan"), a copy of which is attached hereto as Exhibit "A." 3. Landlord has constructed a three story 60,000 square foot addition to the building located at 1400 Shelburne Road, which addition is depicted as "Proposed Office Building - Phase 2" on the Plan (the "Phase 2 Premises"). 4. Landlord and Tenant wish to amend and restate the terms and conditions of the Original Lease to modify the terms and conditions relating to the Phase 1 Premises and to include terms and conditions for Tenant's leasing of the Phase 2 Premises. N O W , T H E R E F O R E , In consideration of the premises and the mutual covenants and agreements herein set forth, and in reliance on the representations and warranties contained herein, Landlord and Tenant agree as follows: Section 1. MERGER OF PRIOR AGREEMENTS. All prior agreements, covenants -------------------------- and representations with respect to the Phase 1 Premises and the Phase 2 Premises, including, but not limited to the Original Lease, are merged and included herein. Section 2. LEASE OF PREMISES. Landlord hereby leases and rents to ----------------- Tenant, and Tenant hereby takes from Landlord, the following described lands and premises (hereinafter referred to as the "Premises" or "Leased Premises"): Being the entire building located at 1400 Shelburne Road, South Burlington, Vermont, which building contains 120,000 square feet of gross floor space and consists of the Phase 1 Premises and the Phase 2 Premises depicted on the Plan, the land upon which the same stands, and the fixtures, furnishings, equipment and other items of personal property belonging to Landlord and located on the Premises. The Premises are more particularly described on Exhibit "B" attached hereto. The Premises include the right of Tenant, its agents, invitees, licensees, business visitors, and guests, in common with Landlord and others: (i) to cross and recross adjacent property belonging to Landlord for the purpose of ingress and egress from and to Shelburne Road; (ii) to use the parking areas, roadways and walkways which are located on "Lot B" as depicted on the Plan, without additional charge from Landlord, to the extent reasonably required for the uses specified herein, subject to requirements of applicable laws and ordinances; and (iii) to use the existing sign on Shelburne Road, subject to requirements of applicable laws and ordinances. Landlord shall retain the right to relocate such parking areas, roadways or walkways, and to establish rules and regulations for their use, but no such relocation, rule or regulation will materially adversely affect Tenant's ability to use and enjoy the Leased Premises for the purposes hereinafter specified. The Premises are leased subject to: (i) all covenants, conditions, easements and permits set forth in Exhibit "B" and other matters of record; and (ii) all zoning regulations and ordinances, and building restrictions of any municipal, county, state or federal department having jurisdiction over the Premises. Section 3. TERM OF LEASE. The term of this Lease (the "Initial Term") ------------- shall be ten (10) years and shall commence on November 1, 1997 (the "Commencement Date") and shall expire on October 31, 2007, unless sooner terminated, renewed or extended as hereinafter provided. Section 4. TENANT'S OPTION TO RENEW. Provided that this Lease is in full ------------------------ force and effect and Tenant shall have complied in all material respects with the terms and conditions of this Lease, Tenant shall have the option to renew this Lease for two (2) consecutive terms of five (5) years each (the "Renewal Terms"). Each Renewal Term which is properly exercised shall be deemed to commence on the termination date of the then-existing term of this Lease, and shall be upon the same terms and conditions as those contained in this Lease, except that the rents payable to Landlord shall be adjusted as provided herein in Section 8 and there shall be no further renewal options other than as specified herein. Tenant shall exercise each renewal, if at all, by providing Landlord with written notice as provided in Section 27 of this Lease not less than one hundred twenty days (120) days before the expiration of the then- existing term of this Lease. Section 5. USE OF PREMISES. The Premises shall be used exclusively for --------------- the operation of an office building in conjunction with Tenant's trade or business, and for no other, different or additional purpose unless the prior written consent of Landlord is obtained, which consent shall not be unreasonably withheld or delayed. Section 6. MINIMUM RENT FOR PHASE 1 PREMISES. During the Initial Term, --------------------------------- Tenant agrees to pay to Landlord, without demand or set off, in lawful money of the United States, at the address specified in Section 27 or at such other location as Landlord may hereafter designate in writing, guaranteed Minimum Rent (the "Minimum Rent") which shall be the product computed by multiplying the area of the Phase 1 Premises in square feet (e.g., 60,000 square feet) by the sums set forth in the following schedule: (a) From the Commencement Date to October 31, 1999, the sum of $8.61 per square foot per year, for a sum total of Five Hundred Sixteen Thousand Six Hundred Dollars ($516,600.00) per annum. (b) From November 1, 1999 to October 31, 2000, the sum of $9.40 per square foot per year, for a sum total of Five Hundred Sixty Four Thousand Dollars ($564,000.00) per annum. -2- (c) From November 1, 2000 to October 31, 2001, the sum of $10.30 per square foot per year, for a sum total of Six Hundred Eighteen Thousand Dollars ($618,000.00) per annum. (d) From November 1, 2001 to October 31, 2002, the sum of $11.00 per square foot per year, for a sum total of Six Hundred Sixty Thousand Dollars ($660,000.00) per annum. (e) From November 1, 2002 to October 31, 2007, the sum of $11.55 per square foot per year, for a sum total of Six Hundred Ninety Three Thousand Dollars ($693,000.00) per annum. For the convenience of the Landlord, the Minimum Rent shall be paid in twelve (12) equal monthly installments. Each installment of Minimum Rent and Additional Rent (as hereinafter described in Sections 11, 12, and 18) for the Phase 1 Premises, shall be due and payable in advance, on the first day of each month. The first payment of Minimum Rent for the Phase 1 Premises shall be due on the Commencement Date. Tenant acknowledges and agrees that the prompt payment of all rents payable to Landlord hereunder is of the essence of this Lease. Section 7. MINIMUM RENT FOR PHASE 2 PREMISES. During the Initial Term, --------------------------------- Tenant agrees to pay to Landlord, without demand or set off, in lawful money of the United States, at the address specified in Section 27 or at such other location as Landlord may hereafter designate in writing, guaranteed Minimum Rent for the Phase 2 Premises which shall be the product computed by multiplying the area of the Phase 2 Premises in square feet (e.g., 60,000 square feet) by the sums set forth in the following schedule: (a) From the Commencement Date to October 31, 2002, the sum of $11.00 per square foot per year, for a sum total of Six Hundred Sixty Thousand Dollars ($660,000.00) per annum (except as otherwise modified during the first year of the Initial Term according to the occupancy schedule set forth below). (b) From November 1, 2002 to October 31, 2007, the sum of $11.55 per square foot per year, for a sum total of Six Hundred Ninety Three Thousand Dollars ($693,000.00) per annum. For the convenience of the Landlord, the Rent shall be paid in twelve (12) equal monthly installments. Each installment of Minimum Rent and Additional Rent (as hereinafter defined) for the Phase 2 Premises, shall be due and payable in advance, on the first day of each month. The first payment of Minimum Rent for the Phase 2 Premises shall be due and payable according to the following schedule: The first monthly payment of Minimum Rent in the amount of Thirty-Six Thousand Six Hundred Sixty-Six and 67/100 Dollars ($36,666.67) shall be due and payable for the second and third floors of the Phase 2 Premises (which consists of 40,000 square feet) on November 1, 1997. The first monthly payment of Minimum Rent in the amount of Eighteen Thousand Three Hundred Thirty Three and 34/100 Dollars ($18,333.34) shall be due and payable for the first floor of the Phase 2 Premises (which consists of 20,000 square feet) on December 1, 1997. Section 8. MINIMUM RENT FOR RENEWAL TERMS. During each Renewal Term of ------------------------------ this Lease, the Minimum Rent shall be increased to ninety five percent (95%) of the then current fair market rental value of -3- the Premises, as determined by agreement of the parties. However, in no event shall the Minimum Rent for the Premises during either Renewal Term be less than $11.55 per square foot per annum. The parties shall enter into good faith negotiations regarding the Minimum Rent for each Renewal Term promptly after the exercise of each renewal option. If the parties are unable to agree on the amount of Minimum Rent due for a Renewal Term within thirty (30) days of the exercise of a renewal option, the parties shall each retain a real estate professional (an "Appraiser") to express such professional's opinion as to the fair market rental value of the Premises. Each party shall pay the fees assessed by their respective Appraisers. If within fifteen (15) days after receipt of the opinions from the Appraisers the parties are still unable to agree on the Minimum Rent for a Renewal Term, an additional Appraiser shall be selected by the parties' Appraisers (the "Additional Appraiser"). The fees for the Additional Appraiser shall be divided equally between the parties. The Additional Appraiser shall complete the necessary research and render an opinion promptly. Once the opinion of the Additional Appraiser is available to the parties, the two closest opinions shall be averaged, and such average amount shall be binding and shall establish the fair market rental value of the Premises for the Renewal Term. If either party shall fail to retain an Appraiser, the opinion of the single Appraiser retained shall be binding and shall establish the fair market rental value of the Premises for the Renewal Term. For purposes of this subsection, the term "Appraiser" shall mean any individual who, on the date selected, has been a real estate broker, agent, real estate developer or property manager dealing primarily with commercial real estate in Chittenden County, Vermont, for no less than ten (10) years; provided, however, that the term "Appraiser" shall not include any individual who, at the time of such appointment or within the three (3) years immediately preceding the appointment, has been an officer, director, employee, or agent for Landlord or Tenant. Section 9. FIT-UP FOR PHASE 2 PREMISES. Landlord and Tenant hereby --------------------------- acknowledge that the construction for the Phase 2 Premises has not been completed. Landlord shall promptly complete the construction and fit-up of the Phase 2 Premises to provide occupancy according to the schedule set forth above in Section 7. The construction details for the completion of the Phase 2 construction and fit-up are attached hereto as Exhibit "C." Landlord shall provide Tenant with a fit-up allowance for the Phase 2 Premises at the rate of Twenty Dollars ($20.00) per square foot (the "Fit-Up Allowance"), which amount shall be paid by Landlord directly to the contractors and suppliers performing the fit-up for the Phase 2 Premises. Landlord shall complete the construction and fit-up of the Phase 2 Premises in a workmanlike manner in accordance with the construction details described in Exhibit "C," and will provide Tenant with the benefit of all warranties made by Landlord's contractors and suppliers ("Contractors") for the construction and fit-up of the Phase 2 Premises (the "Warranties"). Tenant shall be responsible for paying, at its sole cost and expense, any fit-up charges or expenses in excess of the Fit-Up Allowance. Section 10. RENOVATIONS AND ALTERATIONS. Tenant has been afforded full --------------------------- opportunity to examine and inspect the Premises. Tenant hereby acknowledges that Tenant is leasing the Premises on an "as is" basis and except for the fit- up requirements set forth above in Section 9, Landlord has made no promises or representations that the said Premises shall be renovated, repaired or improved in any manner prior to or after the execution of this Lease. Tenant shall not make any alterations to the Premises without the express prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Any trade fixtures, furniture or equipment installed during the term of this Lease by and at the expense of Tenant shall remain the sole property of Tenant and shall be removed by Tenant upon the termination of this Lease and any damage to the Premises caused by such removal shall be repaired by Tenant at Tenant's expense. -4- Section 11. REAL ESTATE TAXES AND UTILITIES. Tenant shall operate the ------------------------------- Leased Premises and each and every part thereof and the facilities, machinery and equipment therein contained at its own cost and expense and, beginning on the Commencement Date, shall pay or cause to be paid as Additional Rent all real estate taxes and other municipal charges assessed against the Leased Premises, and all charges for water, sewer, gas, electricity, light, heat, power, telephone and other service used, rendered or supplied upon or in connection with the Leased Premises and each and every part thereof, and shall indemnify and save harmless Landlord on such account. Landlord shall not be responsible for the failure of water supply, gas, heat, power, electric current, telephone or other service, or for any damage to property occasioned by the breakage, leakage or obstruction of any pipes or other leakage in or about the Leased Premises. It is understood and agreed that, except as otherwise expressly provided in this Lease Agreement, the rent to be paid to Landlord by Tenant under the Lease shall be absolutely net to Landlord, and the Lease shall be interpreted and construed to that effect. Section 12. CASUALTY INSURANCE. Landlord shall insure the Leased ------------------ Premises and all of Landlord's personal property therein against loss by fire, in such amounts as Landlord may consider reasonable, by policies which shall include standard extended coverage endorsements. The cost of the premiums for such insurance shall be paid by Tenant as Additional Rent within twenty (20) days after Landlord provides Tenant with premium invoices for said insurance. Tenant shall be responsible for maintaining any and all insurance upon Tenant's property in and upon the Leased Premises, by policies which shall name Landlord as an additional insured, as Landlord's interests may appear, and Landlord shall not be held responsible for any damage thereto. Neither Tenant nor Landlord, nor their respective agents, employees or guests, shall be liable to the others for any loss or damage to the Leased Premises by fire or any other cause within the scope of such fire and extended coverage insurance, it being understood that the parties shall look solely to the insurer for reimbursement for such loss or damage. Section 13. LIABILITY INSURANCE. Tenant, at Tenant's own cost and ------------------- expense, shall maintain a policy or policies of liability insurance insuring Landlord and Tenant against all claims or demands for personal injuries to or death of any person, and damage to or destruction or loss of property, which may or may be claimed to have occurred on the Leased Premises or in the vicinity of the same. Such policies shall cover such risks and be in such amounts as Landlord from time to time may reasonably request, but in any event in an amount not less than Five Million Dollars ($5,000,000.00) for injury to or death of any one person, and not less than Five Million Dollars ($5,000,000.00) for damage to or destruction or loss of property. Tenant shall deliver to Landlord certificates of such insurance coverage upon demand by Landlord. Section 14. TENANT TO COMPLY WITH LAWS, ETC. Tenant, at its own cost --------------------------------- and expense, shall comply with any and all requirements imposed by any present and future statutes, laws, ordinances, acts, rules, regulations, orders and requirements of permits and approvals of every kind and nature, affecting the Premises or Tenant's use and occupancy thereof (excluding, however, any violations existing, entered or filed against or noticed with respect to the Leased Premises on or before the Commencement Date of the Original Lease), whether the same or any of them relate to structural or other changes or requirements to, in or about the Leased Premises or any part thereof or to changes or requirements incidental to or the result of any use or occupation thereof or otherwise. Tenant will further at all times during the term of this Lease, at Tenant's own cost and expense indemnify and save harmless Landlord against and from and shall pay in full upon demand by Landlord any and each loss incurred, or penalty, claim or damage suffered, imposed, made or recovered by reason of the failure or neglect of Tenant or its agents, contractors, employ ees or representatives to observe and comply with such laws, ordinances, rules, regulations and requirements of permits and approvals. -5- Section 15. NO WAIVER; NO ACCORD AND SATISFACTION. The waiver by ------------------------------------- Landlord of a breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition, or of any subsequent breach of the same or any other term, covenant or condition. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No covenant, term or condition of this Lease shall be deemed to have been waived or modified by Landlord, unless such waiver or modification is in writing and executed on behalf of Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy available at law or as set forth in this Lease. Section 16. LANDLORD'S RIGHT OF ACCESS. Landlord or Landlord's agents -------------------------- shall have the right to enter the Premises in a reasonable manner and at all reasonable times to examine the same, and to show them to prospective purchasers, mortgagees or lessees. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever for the care, supervision or repair of the Premises or any part thereof, other than as herein expressly provided. Section 17. PRIORITY OF MORTGAGES. This instrument automatically and --------------------- without further act or deed shall be and remain subject and subordinate to any existing mortgage and any mortgage or mortgages that may hereafter be placed against the Premises by the Landlord, and to all renewals, modifications, consoli dations, replacements and extensions thereof; provided, however, that such subordination shall apply only with respect to mortgages in which the mortgagee expressly agrees, upon Tenant's written request, that, so long as Tenant is not in default in the payment of rent or in the performance of any of the Lease terms to be performed by it, Tenant's possession of the Leased Premises and Tenant's rights and privileges under the Lease (including any renewal thereof), shall not be interfered with or diminished by or on behalf of such mortgagee. The recording of any such mortgage or mortgages shall have preference to and shall be superior and prior in lien to this Lease, irrespective of any recording of this Lease or any notice thereof. This clause shall be self- operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall execute promptly any reasonable and accurate certificate that Landlord may request. Landlord and Tenant further agree to execute and deliver to any lending institution requiring same, an amendment of lease incorporating such modifications of the terms and provisions of this Lease as such lending institution shall require as a condition precedent to their granting of a loan or a commitment secured by a mortgage entitled to priority as provided in this Section. Notwithstanding the foregoing, neither Landlord nor Tenant shall be required to execute any amendment of lease which shall modify the provisions of this Lease relating to the rent, the obligation on Tenant's part to pay taxes and other charges, the size and location of the Premises, the duration of the term, the Commencement Date, or any other material term. Section 18. REPAIRS, REPLACEMENTS AND MAINTENANCE. Except as provided ------------------------------------- below, Tenant shall make all non-structural repairs and replacements to the Leased Premises and its systems as may be reasonably required to place, keep and maintain the same in good order and state of repair, including repairs to the roof and replacement of any glass which may become broken. Tenant shall have no obligation to make any repairs -6- to the extent that such repairs should be provided by the Contractors under the Warranties (the "Warranty Repairs"). Landlord agrees to enforce the Warranties, but should they not be timely enforced, Tenant shall have the option to make Warranty Repairs and shall receive credit against rent or other payments of Tenant under this Lease for the cost of Warranty Repairs. Landlord shall promptly disclose to Tenant all contracts and warranties involved in the construction of the Phase 2 Premises and shall otherwise cooperate with Tenant in any matters involving claims under such contracts and warranties. Tenant shall perform or cause to be performed regular periodic and preventative maintenance on the heating, air conditioning, plumbing and similar systems and on all machinery and equipment located on the Leased Premises, and shall at all times keep the Leased Premises and such systems, machinery and equipment clean and in good order and repair. Tenant shall also keep in good repair all surface roadways, walks, loading and unloading areas, lawns, landscaping, water and sewage lines located within and serving the Premises, and shall keep such roadways, walks, and areas in use (including the roof of the building on the Premises) free of snow and ice, and shall keep the exterior of the Premises clean and neat. All repairs and replacements are to be of the same kind, quality and description as are used in the original construction of the building. Landlord will have the right to cause its agents to inspect the Leased Premises in a reason able manner and at all reasonable times to assure that Tenant is complying with its duties to repair, replace and maintain hereunder. Any defect or deficiency noted as a result of such inspection shall be reported to Tenant and, provided such defect or deficiency is Tenant's responsibility as specified herein, unless the same is corrected and remedied forthwith by Tenant, Landlord shall have the right to correct and remedy the same, at Tenant's expense, and the costs of doing so shall immediately be paid by Tenant to Landlord, as Additional Rent. Section 19. ASSIGNMENT, SUBLETTING. Without the prior written consent of ---------------------- Landlord (which consent Landlord shall not unreasonably withhold or delay, due consideration being given to the financial stature and ability to conduct the business contemplated by the permitted use of the Premises of such proposed assignee or subtenant), neither Tenant nor Tenant's legal representatives or successors in interest shall assign or, except as set forth in the final paragraph of this Section, mortgage this Lease, by operation of law or otherwise, or sublet the whole or any part of the Premises. Any consent by Landlord to any act of assignment or subletting shall be held to apply only to the specific transaction thereby authorized. Such consent shall not be construed as a waiver of the duty of Tenant, or the legal representatives or assigns of Tenant, to obtain from Landlord consent to any other or subsequent assignment or subletting, or as modifying or limiting the rights of Landlord under the foregoing covenant by Tenant not to assign or sublet without such consent. Any violation of any provision of this Lease, whether by act or omission, by any assignee, subtenant or under-tenant or occupant, shall be deemed a violation of such provision by Tenant, it being the intention and meaning of the parties hereto that Tenant shall assume and be liable to Landlord for any and all acts and omissions of any and all assignees, subtenants, under- tenants and occupants. If this Lease is assigned, Landlord may and is hereby empowered to collect rent from the assignee; if the Premises or any part thereof be underlet or occupied by any person other than Tenant, Landlord, in the event of Tenant's default, may, and is hereby empowered to, collect rent from the under-tenant or occupant; in either of such events, if Landlord collects such rent from such assignee, subtenants, under-tenant or occupant, Landlord shall apply the net amount actually received by it to the rent due hereunder, but no such collection shall be deemed a waiver of the covenant herein against assignment and underletting, or the acceptance of the assignee, subtenant, under-tenant or occupant as tenant, nor as a release of Tenant from the further performance of the covenants herein contained on the part of Tenant. The term "assign," as used herein, shall include: (a) an assignment of a part interest in this Lease, as well as any assignment from one co-tenant to another; and (b) as to any tenant other than an individual or individuals, any merger, consolidation or transfer (singly or in combination) of shares constituting more than -7- one-third of the total shares outstanding or any other transaction the effect of which is directly or indirectly to transfer to any third party the benefits of this Lease. Landlord consents to Tenant's assignment of its rights under this Lease as collateral security in favor of any bank or other financial institution to secure any loan or other financial accommodation provided by such bank or institution to Tenant, but no such assignment shall limit or waive the requirement of consent for any other assignment. Section 20. DAMAGE OR DESTRUCTION. If the Premises are damaged by fire --------------------- or by any other cause, the following provisions shall apply: (a) If the damage is to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed fifty percent (50%) of the then fair market value of the Premises on the date the damage is incurred, or if less than six months remains on the existing Term of this Lease, Landlord or Tenant may, not later than the sixtieth (60th) day following the damage, give the other a notice stating that it elects to terminate this Lease. If such notice shall be given: (i) this Lease shall terminate on the thirtieth (30th) day after the giving of said notice; (ii) Tenant shall surrender possession of the Premises promptly thereafter; and (iii) all rent shall be apportioned as of the date of such surrender and any rent paid for any period beyond said date shall be repaid to Tenant. (b) If the cost of restoration, as reasonably estimated by Landlord, shall amount to less than fifty percent (50%) of the then market value of the Premises on the date the damage is incurred, or if, despite the cost of restoration, either Landlord or Tenant do not give notice of an election to terminate in accordance with Subsection 20(a), above, Landlord shall restore the Premises with reasonable promptness, subject to delays beyond Landlord's control and delays in making of insurance adjustments by Landlord, and Tenant shall not have the right to terminate this Lease on account of such damage. Landlord need not restore fixtures, improvements or other property of Tenant in connection with the restoration of the Premises. In any case in which the use of the Premises is affected by any such damage, there shall be either an abatement or a reduction in rent during the period for which the Premises are not reasonably usable for the purposes specified in Section 5, the amount of such abatement or reduction to fairly and appropriately reflect the degree to which Tenant is thereby prevented from using the Premises for such purposes. The words "restoration" and "restore" as used in this Section shall include repairs. Section 21. INDEMNITY. --------- (a) Tenant shall and will indemnify and save harmless Landlord from and against and shall pay in full on demand of Landlord any and all liability, claims, demands, damages, expenses, fees (including reasonable attorneys' fees), fines, penalties, suits, proceedings, actions and causes of action of every kind and nature suffered or incurred as a result of any breach by Tenant, its agents, servants, employees, visitors or licensees of any covenant or condition of this -8- Lease, or as a result of Tenant's use or occupancy of the Premises, or the carelessness, negligence or improper conduct of Tenant, or Tenant's agents, servants, employees, visitors or licensees; provided, however, that it is understood and agreed that the obligations of Tenant hereunder shall not extend to the negligence or willful misconduct of Landlord, its agents or representatives. Tenant's obligation to indemnify Landlord under this provision shall survive the termination of this Lease by expiration or otherwise. (b) Landlord shall and will indemnify and save harmless Tenant from and against and shall pay in full on demand of Tenant any and all liability, claims, demands, damages, expenses, fees (including reasonable attorneys' fees), fines, penalties, suits, proceedings, actions and causes of action of every kind and nature, suffered or incurred as a result of any breach by Landlord, its agents, servants, or employees of any covenant or condition of the Lease, or the carelessness, negligence or improper conduct of Landlord, its agents, servants, or employees; provided, however, that it is understood and agreed that the obligations of Landlord hereunder shall not extend to the negligence or willful misconduct of Tenant, its employees, agents, representatives, visitors or licensees. Landlord's obligation to indemnify Tenant under this provision shall survive the termination of this Lease by expiration or otherwise. Section 22. EMINENT DOMAIN. If, at any time during the term of this -------------- Lease Agreement, title to a substantial portion of the Premises (meaning thereby so much as shall render the remaining portion sub stantially unusable by the Tenant for the purposes set forth in Section 5) shall be taken by exercise of the right to condemnation or eminent domain or by agreement between Landlord and those authorized to exercise such right (all such proceedings being collectively referred to as a "Taking"), this Lease shall terminate and expire on the date of such Taking and rent shall be apportioned and paid to the date of such Taking. Except as expressly set forth below, any award for the value of the Premises, land, buildings and improvements, and loss of rent from Tenant, shall belong to Landlord, and Tenant shall not be entitled to share in any such award. Tenant shall have the right to claim and recover from the condemning authority, but not from the Landlord, such compensation as may be separately awarded or recoverable by the Tenant in Tenant's own right on account of any and all damage to Tenant's business by reason of any condemnation, for and on account of any cost or loss to which Tenant might be put in relocating its business or removing Tenant's merchandise, furniture, fixtures and equipment from the Premises, or for any cost or loss to Tenant's improvements. Tenant also shall be entitled to present a claim for compensation for loss of the value, if any, of Tenant's leasehold interest at the time of the Taking, subject to the following requirements and conditions. The amount of any claim by or award to the Tenant for the value of Tenant's leasehold interest in no event shall exceed the Maximum Claim or Award (defined below), determined (i) by calculating the Net Present Value of the income stream of the Minimum Rent payments due under this Lease from and after the Taking to the expiration of the term of the Lease as then constituted, exclusive of any renewal options not exercised before the date on which Landlord first receives notice of the intent of the condemning authority to take the Premises (the "Remaining Rent Stream"); (ii) by then calculating the Net Present Value of the net rental income stream that the Landlord could reasonably expect to receive from or on account of the Premises for and during such remaining term if the Landlord were free to lease the Premises free and clear of this Lease and the Taking (the "Unencumbered Rent Stream"); and (iii) by then calculating the amount, if any, by which the Net Present Value of the Unencumbered Rent Stream exceeds the Net Present Value of the Remaining Rent Stream (the "Maximum Claim or Award"). Net Present Value shall be computed using the then-current prime rate quoted in the Wall Street Journal, Money Rates column plus two percent (2%). If not otherwise agreed by Landlord and Tenant, the Unencumbered Rent Stream shall be determined by an independent appraiser selected and -9- retained by Landlord, and the cost and expense of such determination shall be paid one-half by Tenant and one-half by Landlord. If the title to less than a "substantial portion" of the Premises shall be taken in condemnation so that the business conducted on said Premises can be continued without material diminution, this Lease shall continue in full force and effect. If the Taking does not amount to a substantial portion but does materially adversely affect the Tenant's ability to conduct its business, the rent from and after the date of the vesting of title in the condemnor shall be equitably adjusted to reflect the diminished value of the Premises to the Tenant as a direct result of the condemnation. Section 23. EVENTS OF DEFAULT, REMEDIES, DAMAGES. ------------------------------------ (a) Each of the following shall constitute an Event of Default: (i) Tenant shall fail to pay when and as due any Minimum Rent or Additional Rent payable under this Lease Agreement, and such default shall continue for a period of ten (10) days after written notice of such default from Landlord to Tenant; or (ii) Tenant shall fail to perform or comply with any of the agreements, terms, covenants or conditions of this Lease Agreement, other than those referred to in Subsection 23(a)(i), for a period of thirty (30) days after notice from Landlord to Tenant specifying the items in default, or in the case of a default or contingency which cannot with due diligence be cured within said thirty (30) day period, Tenant shall fail to commence within said thirty (30) day period the steps neces sary to cure the same and thereafter to prosecute the curing of such default with due diligence (it being understood that the time of Tenant within which to cure shall be extended for such period as may be necessary to complete the same with all due diligence); or (iii) Tenant shall file a voluntary petition in bankruptcy or shall be adjudicated a bankrupt or insolvent, or a receiver or trustee shall be appointed of all or substantially all of the property of Tenant or Tenant shall make any assignment for the benefit of Tenant's creditors, or Tenant shall vacate the premises. (b) For so long as an Event of Default shall exist and be continuing, Landlord may give written notice to Tenant specifying the Event of Default and stating that Tenant's rights to the possession, use and occupancy of the Premises under this Lease Agreement shall expire and terminate on the date specified in such notice, which date shall be at least thirty (30) days after the giving of notice, and upon the date so specified, all rights of Tenant under this Lease Agreement shall so expire and terminate. (c) Upon termination of Tenant's rights to possession, use and occupancy of the Premises under this Lease Agreement in accordance with the provisions of Subsection 23, above, Landlord shall by prompt written notice to Tenant elect to receive from Tenant either the damages specified below in Subsection 23(c)(i) or Subsection 23(c)(ii). (i) Tenant shall pay Landlord an amount equal to: (x) any Minimum Rent, Additional Rent and any damages which shall have been due or sustained prior to such -10- termination, all reasonable costs, fees and expenses (including, but not limited to, reasonable attorneys' fees) incurred by Landlord in pursuit of its remedies hereunder; plus an additional amount equal to (y) the present worth (as of the date of such termination) of the Minimum Rent and Additional Rent which, but for such termination of this Lease Agreement, would have become due during the remainder of the term as then constituted; less (z) the fair rental value of the Premises as of the date of such termination, as determined by an independent real estate appraiser selected by Landlord. Such damages shall be payable to Landlord in one lump sum on demand and shall bear interest at the rate set forth below in Section 31 until paid. For purposes of this clause, "present worth" shall be computed by discounting such Minimum Rent and Additional Rent to present worth at a discount rate equal to one percentage point above the discount rate then in effect at the Federal Reserve Bank of Boston; or (ii) Tenant shall pay Landlord an amount equal to: (x) any Minimum Rent, Additional Rent and any damages which shall have been due or sustained prior to such termination, all reasonable costs, fees and expenses (including, but not limited to, reasonable attorneys' fees) incurred by Landlord in pursuit of its remedies hereunder or in thereafter renting the Premises to others from time to time (which costs may include preparing the Premises for re-letting and of re-letting the Premises); plus (y) an amount equal to the Minimum Rent and Additional Rent which, but for such termination would have become due during the remainder of the term as then constituted, less the amount of Minimum Rent and Additional Rent, if any, which Landlord shall receive during such period from others to whom the Premises may be rented (other than any Additional Rent received by Landlord as a result of any failure of such other person to perform any of its obligations to Landlord). Any payments due under clause (x) of this Subsection 23(c)(ii) shall be immediately due and payable. Payments due under clause (y) of this Subsection 23(c)(ii) shall be due and payable in monthly installments, in advance, on the first day of each calendar month following termination of the Lease Agreement and continuing until the date on which the term would have expired but for such termination, provided, however, that in the event Tenant fails to pay such installments as and when due then the entire amount of such installments shall become immediately due and payable in full, at the option of Landlord. The failure by Landlord to provide such notice shall constitute an election by Landlord to receive the damages specified in Subsection 23(c)(i). Upon any termination of this Lease Agreement, Tenant shall immediately vacate the Premises and surrender the same to Landlord in the same condition as received, reasonable wear and tear excepted. In the event Tenant fails to so vacate and surrender the premises, Tenant shall pay all costs reasonably incurred by Landlord in requiring Tenant to vacate, including reasonable attorneys' fees and disbursements and, further, will pay Landlord a daily occupancy charge equal to one hundred twenty-five percent (125%) of the average daily rental payable by Tenant during the most recent Lease Agreement year until Tenant vacates the Premises as provided in the terms of this Lease Agreement. - Tenant expressly agrees that, in the event Tenant shall fail to cure an Event of Default within the time period set forth above in Subsection 23(b), Landlord shall have the right to immediately regain possession of the Premises and to exclude Tenant from further use, occupancy -11- and enjoyment thereof, and Tenant waives any and all claims which it may have against Landlord, regardless of when the same arise, on account of such regaining of possession by Landlord or such exclusion. Upon the termination of this Lease Agreement, Tenant will remove all goods and effects not the property of Landlord, at Tenant's expense. Any damage thereby caused to the Premises shall be promptly repaired by Tenant, at Tenant's expense. At Landlord's option, any goods and effects not so removed shall be deemed abandoned by Tenant and thereupon shall become the sole property of Landlord. In the event Tenant shall fail or refuse to vacate the Premises without breach of the peace after termination, Landlord may obtain a court order for the payment of rent into court in accordance with the terms of 12 V.S.A. (S) 4853a. Landlord shall also have all other rights and remedies as may be available under applicable law at the time of the occurrence of the Event of Default. Section 24. LEASE NOT TO BE RECORDED. If this Lease shall be recorded by ------------------------ or on behalf of Tenant, except at the express request of Landlord, this Lease, at the option of Landlord, thereupon shall be and become null, void and of no further force or effect, and all further rights of Tenant hereunder shall cease; provided, however, that the parties expressly agree that a short-form notice of lease may be recorded by either Landlord or Tenant. Section 25. LANDLORD'S COVENANTS. Landlord warrants that, except as -------------------- otherwise specifically set forth herein or in any Exhibit attached hereto, Landlord has good right to lease said Premises in manner aforesaid and the same are free from liens and encumbrances other than as specified in this Lease. Landlord warrants that Landlord has no knowledge of any undisclosed present material defect or deficiency in the state of repair or operating condition of the Premises or the machinery, equipment and personal property of Landlord now therein and thereon. Tenant acknowledges that Tenant and Tenant's agents have fully inspected the same. Landlord warrants that it has received no notice of any violation or claimed violation of any fire, health, safety, wiring or plumbing code with respect to the Premises, except to the extent such violations or claimed violations have heretofore been remedied in full, and, to the best of Landlord's information, knowledge and belief, at the date hereof, the Premises are in full compliance with such codes insofar as the same affect the use of the Premises for the purposes specified in this Lease. Section 26. QUIET ENJOYMENT. Landlord covenants that Tenant, on paying --------------- all rent required to be paid by Tenant and performing the other covenants and undertakings by Tenant to be performed hereunder, shall and may peaceably have and enjoy said Premises for the term aforesaid in accordance with the terms of this Lease. Section 27. NOTICES. Any notice or other communication to be given ------- hereunder shall be in writing and shall be deemed duly given or made if delievered in person or if sent by U.S. certified mail, return receipt requested, postage prepaid, to the address set forth below: If to Landlord: BDP Realty Associates c/o Mr. Ronald L. Roberts 55 Eagle Drive Bedford, NH 03110-4413 Telephone: (603) 472-5513 Fax: (603) 472-6934 -12- With a copy to: William G. Post, Jr., Esq. Gravel and Shea P.O. Box 369 Burlington, VT 05402-0369 Telephone: (802) 658-0220 Fax: (802) 658-0220 If to Tenant: Mr. John A. Kane, Vice President IDX Systems Corporation 1400 Shelburne Road South Burlington, VT 05403 Telephone: (802) 864-1758 Ext. 6077 Fax: (802) 865-3681 With a copy to: Robert W. Baker, Jr. Vice President & General Counsel IDX Systems Corporation 1400 Shelburne Road South Burlington, VT 05403 Telephone: (802) 864-1758 Ext. 6179 Fax: (802) 862-6351 or to such other person or address as specified by a party entitled to such notice or other communication shall have specified by notice to the other party given in accordance with the provisions of this Section. Section 28. SUCCESSORS AND ASSIGNS. All rights and liabilities herein ---------------------- given to, or imposed upon, the respective parties hereto shall extend to and bind the several respective heirs, executors and administra tors and successors and assigns of the said parties (subject to the provisions of Section 19) and if there shall be more than one Tenant, they shall be bound jointly and severally by the terms, covenants, and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing as provided in Section 19 hereof. Section 29. RIGHT OF FIRST OFFER. In the event (and on each occasion) -------------------- that Landlord shall decide to offer for sale, directly or indirectly, all or any portion of the Leased Premises during the term of this Lease Agreement, and so long as no Event of Default under this Lease Agreement then exists and is continuing, Landlord shall give to Tenant written notice by registered or certified mail (the "Offer Notice") of such decision, describing the property to be offered, the price and the general terms upon which Landlord has decided to offer the same. Tenant shall have fifteen (15) days from the date on which Landlord shall give the written Offer Notice (the "Offer Acceptance Date") to agree to purchase the offered property for the price and upon the terms specified in the Offer Notice, by executing and delivering by registered or certified mail an agreement to purchase in substantially the form attached to the Offer Notice. If Tenant shall not execute and deliver the agreement to purchase as aforesaid (or, having executed and delivered the same, shall fail to comply with its terms), Landlord shall have nine (9) months from and after the expiration of the fifteen (15) day period commencing on the date of the Offer Notice to sell all or any portion of the offered property, at a price which is no lower than ninety percent (90%) of the price specified in the Offer Notice and upon general terms no more favorable to the purchasers thereof than specified in the -13- Offer Notice. To the extent Landlord has not sold the offered property within said nine-month period, Landlord will not thereafter offer or sell any portion of such offered property remaining unsold at the expiration of such period without first offering the same to Tenant so that it may have an opportunity to purchase any such unsold property in the manner provided by the foregoing provisions of this Section 29. Section 30. PERSONAL PROPERTY. Tenant is solely responsible for all ----------------- personal property placed upon the Premises during the term of this Lease, which responsibility includes, by way of illustration and not by way of limitation, payment of all taxes and fees assessed against such personal property and insurance for all personal property. Further, at the expiration or earlier termination of this Lease, Tenant shall remove its personal property from the Premises exercising due care not to damage the Premises by such removal. Tenant shall repair any and all damage done to the Premises by the removal of said personal property. Section 31. PAST DUE RENT AND ADDITIONAL RENT. If Tenant fails to pay, --------------------------------- when the same is due and payable, any Minimum Rent or any Additional Rent due hereunder, such unpaid amounts shall bear interest from the due date thereof to the date of payment at the prime commercial lending rate specified in the money rates column of the Wall Street Journal Eastern Edition from time to time, plus ------------------- three (3) percentage points; provided, however, that if such rate is higher than the maximum rate of interest allowed under applicable law, the interest shall be the maximum rate allowed. Section 32. HOLDING OVER. Any holding over after the expiration of the ------------ term hereof shall be construed to be a tenancy from day to day only, at the rate of one hundred twenty-five percent (125%) of the rent in effect immediately prior to such expiration (prorated on a daily basis) and otherwise on the terms and conditions herein specified so far as applicable. Section 33. WAIVER OF SUBROGATION. Landlord and Tenant hereby release --------------------- the other and their officers, directors, shareholders, agents and employees from any and all liability or responsibility (to the other or anyone claiming through or under them by way of subrogation or otherwise) for any loss or damage to property caused by any of the perils which are actually insured against under standard policies of fire and casualty insurance (including extended coverage) in effect at the time of the casualty occurrence or loss, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible. Each party shall request its insurer to issue policies of insurance which include such a waiver of subrogation. If such policies shall not be obtainable, this Section shall have no effect. If such policies shall at any time be unobtainable, but shall be subsequently obtainable, neither party shall be subsequently liable for a failure to obtain such insurance until a reasonable time after notification thereof by the other. Section 34. WAIVER OF RULE OF CONSTRUCTION. The parties waive the ------------------------------ benefit of any rule that this Lease is to be construed against one party or the other. Section 35. FORCE MAJEURE. In the event that Landlord or Tenant shall be ------------- delayed, hindered in or prevented from the performance of any act required hereunder, by reason of strikes, lock-outs, labor troubles, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrection, the act, failure to act or default of the other party, war or other reason beyond its control, then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. -14- Section 36. ENVIRONMENTAL COVENANTS. Tenant shall comply with all ----------------------- environmental laws, rules, regulations, statutes and ordinances, including, without limitation, those applicable to "hazardous substances." Tenant shall unconditionally, absolutely and irrevocably agree to indemnify, defend and hold harmless Landlord and its officers, employees, agents, and contractors, from and against and to pay in full on demand by Landlord all loss, cost and expense (including, without limitation, attorneys' fees and disbursements and fees of other professionals advising Landlord) of whatever nature suffered or incurred by Landlord on account of the existence on the Leased Premises, or the release or discharge from the Leased Premises, of "hazardous substances," including, without limitation, any claims, costs, losses, liabilities and expenses arising from the violation (or claimed violation) of any environmental laws or the institution of any action by any party against Tenant, Landlord or the Leased Premises based upon nuisance, negligence or other tort theory alleging liability due to the improper generation, storage, disposal, removal, transportation or treatment of hazardous substances or the imposition of a lien on any part of the Leased Premises under the Comprehensive Environmental Response Compensation and Liability Act of 1980, 42 U.S.C. 9601, et seq., as amended ("CERCLA"), and the Vermont Waste Management Statutes, Vt. Stat. Ann. Title 10, Ch. 159, or any other laws pursuant to which a lien or liability may be imposed on Landlord due to the existence of hazardous substances, caused by Tenant or its employees, agents, licensees and subcontractors. Tenant's obligations to indemnify Landlord under this provision shall survive the terminatinon of this Lease by expiration or otherwise. Landlord covenants that to the best of its knowledge and belief, the Leased Premises are free from all hazardous substances and that there are no underground storage tanks on the Leased Premises. Section 37. SIGNS. Tenant shall not install or display any new sign, ----- logo or advertising medium on the inside of the Premises which is visible from the outside of the Premises, or install any new sign, display or advertising medium on the outside of the Premises, unless Tenant shall have obtained from such others including government authorities and agencies with or claiming jurisdiction over the Premises all necessary permits and approvals for the proposed sign, display or advertising medium. Tenant shall maintain all signs and displays which Tenant is permitted to install under this Section, in and about the Premises. Section 38. ESTOPPEL CERTIFICATES. From time to time, during the term of --------------------- this Lease, Tenant and Landlord shall make, execute and deliver to the other such certificates regarding the status of this Lease as the other may reasonably request including, but not limited to, certifications that the Lease is in full force and effect, the date through which rent, including Minimum Rent and Additional Rent are paid, and the term of the Lease; the party's knowledge regarding events of default or matters which may constitute a default. The Certificates described in this Section shall be executed and delivered by the party to whom the request was made, within ten (10) days of the request. Section 39. AUTHORIZATION AND BINDING EFFECT OF AGREEMENT. The --------------------------------------------- execution, delivery and performance of this Lease and each other document or instrument required to be delivered pursuant hereto by the Tenant have been duly authorized by its Board of Directors and by its shareholders, and this Lease and each other document or instrument required to be delivered pursuant hereto is the legal, valid and binding obligation of the Tenant and is enforceable against the Tenant in accordance with its respective terms; subject, as to enforcement only, to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability of the rights of creditors generally. Section 40. ENTIRE AGREEMENT; AMENDMENT. This Lease embodies the entire --------------------------- agreement and understanding between the parties relating to the subject matter hereof and there are no covenants, promises, agreements, conditions or understandings, oral or written, except as herein set forth. This Lease may not be -15- amended, waived or discharged except by an instrument in writing executed by the party against whom such amendment, waiver or discharge is to be enforced. Section 41. CAPTIONS; HEADINGS. The captions and section numbers ------------------ appearing in this Lease are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of such sections, nor in any way affect this Lease or have any substantive effect. Section 42. PARTIAL INVALIDITY. If any term, covenant or condition of ------------------ this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. Section 43. GOVERNING LAW. This Lease shall be governed by and construed ------------- in accordance with the laws of the State of Vermont, without giving effect to such jurisdiction's principles of conflicts of laws. IN WITNESS WHEREOF, the parties have executed this Agreement, in duplicate originals, as of the 22nd day of January, 1998. IN PRESENCE OF: BDP REALTY ASSOCIATES /s/ Eric S. Phaneuf /s/ Ronald L. Roberts ___________________________________ By:_____________________________________ Witness Duly Authorized Agent IDX SYSTEMS CORPORATION /s/ Maria Cassarino /s/ John A. Kane ___________________________________ By:_____________________________________ Witness Duly Authorized Agent STATE OF VERMONT COUNTY OF CHITTENDEN, SS. At Burlington in said County and State, this 22nd day of January, 1998, personally appeared Ronald L. Roberts, Duly Authorized Agent of BDP REALTY ASSOCIATES, and he acknowledged this instrument, by him signed, to be his free act and deed and the free act and deed of BDP REALTY ASSOCIATES. /s/ Eric S. Phaneuf Before me,____________________________________ Notary Public Notary commission issued in Chittenden County My commission expires: 2/10/99 -16- STATE OF VERMONT COUNTY OF CHITTENDEN, SS. At Burlington, in said County and State, this 22nd day of January, 1998, personally appeared Jack Kane, Duly Authorized Agent of IDX SYSTEMS CORPORATION, and he acknowledged this instrument, by him signed, to be his free act and deed and the free act and deed of IDX SYSTEMS CORPORATION. /s/ Eric S. Phaneuf Before me,____________________________________ Notary Public Notary commission issued in Chittenden County My commission expires: 2/10/99 -17- EXHIBIT "A" ----------- Property Site Plan ------------------ -18- EXHIBIT "B" ----------- Description of the Premises --------------------------- Being a piece or parcel of land with all improvements thereon or to be constructed thereon and all appurtenances thereto located easterly of Shelburne Road, in the City of South Burlington, Vermont, and more particularly described with reference to a survey captioned "National Life Insurance Company, Shelburne Road, South Burlington, VT," prepared by Webster-Martin, Inc., dated June 12, 1973, recorded June 15, 1973, in Volume 105 at Page 21 of the South Burlington Land Records as follows: To reach the point of beginning, proceed S 7122'04" E a distance of 40 feet from the point of intersection of the common boundary of the within- described land and lands now or formerly of Thomas Farrell with the easterly sideline of said Shelburne Road; Thence from said point of beginning continue S 7122'04" E a distance of 820.02 feet to a point; Thence turn to the right and proceed S 1901'00" W a distance of 514.81 feet to a point; Thence turn to the right and proceed N 7340'08" W a distance of 290.96 feet to a point; Thence continue N 7340'08" W a distance of 530.00 feet to a point; Thence turn to the right and proceed N 1901'00" E parallel to and 40 feet westerly of the westerly sideline of said Shelburne Road a distance of 549.38 feet to the point or place of beginning. Being all and the same lands and premises conveyed to Hatco Associates by Warranty Deed of the National Life Insurance Company dated January 18, 1979, and of record in Volume 146 at Page 454 of the South Burlington Land Records and subsequently conveyed by Hatco Associates to BDP Realty Associates by its Quit Claim Deed dated July 5, 1979, and recorded in Volume 141 at Page 233 of the South Burlington Land Records, excepting therefrom the lands and premises conveyed to the City of South Burlington by Irrevocable Offer of Dedication (of Holmes Road Extension) dated April 26, 1988 and recorded in Volume 261 at Page 125 of the City of South Burlington Land Records. There is included herein, without any warranties of title whatsoever, the entire right, title and interest, if any, of BDP Realty Associates in and to a strip of land approximately forty (40) feet in width acquired by Deed of the City of South Burlington dated September 9, 1991 and recorded in Volume 317 at Pages 210-211 at the City of South Burlington Land Records, which strip of land is bounded on the west by the east line of the right of way of Shelburne Road, on the north by lands now or formerly of Thomas Farrell, on the east by the above- described premises and on the south by other lands of BDP Realty Associates. Together with easements for passage by all manner of conveyance and by pedestrians, and for the installation, construction, maintenance, repair, placement and removal of all manner of utilities, over, under, and through those portions of the adjacent parcel of land owned by BDP Realty Associates and acquired by it by deed of National Life Insurance Company dated January 18, 1979 and recorded in Volume 146, Page 459 of the South Burlington Land Records ("LOT A"), such easements to be located substantially as shown on a Site Plan captioned "Site Plan, Interpretive Data Systems, South Burlington" prepared by Trudell Consulting Engineers, Inc., dated October 6, 1986 (the "Site Plan"), but subject to such modifications in the location thereof as do -19- not materially interfere with the use and enjoyment of LOT A, nor materially adversely affect the availability of adequate access and utility services from and to the above-described premises. The Premises are subject to all easements, rights of way and restrictions of record, including, without limitation: 1. The rights of the public in those portions of the above-described property lying within the highway rights-of-way. 2. An easement for utilities conveyed to Green Mountain Power Corporation by an Easement Deed of National Life Insurance Company dated September 21, 1961, recorded in Volume 63 at Page 90 of the South Burlington Land Records. 3. The easements for roads described in a deed of National Life Insurance Company to the City of South Burlington dated January 6, 1976, recorded in Volume 126 at Page 289 of the South Burlington Land Records. 4. An easement conveyed to Green Mountain Power Corporation by instrument dated April 8, 1974, and recorded in Volume 109 at Page 518 of the South Burlington Land Records. 5. Spring rights described in a deed of Fortis H. Abbot and Sadie M. Abbot to Vermont Agricultural College, dated January 30, 1952, of record in Volume 30 at Page 286 as modified by an agreement recorded in Volume 22 at Page 393 of the South Burlington Land Records. 6. Terms and conditions of State of Vermont Land Use Permit No. 4CO391 as amended from time to time, including, without limitation, Land Use Permit Amendment No. 4C0391-7 dated November 12, 1991 and recorded in Volume 312 at Pages 640-644 of the City of South Burlington Land Records. 7. An easement in favor of LOT A for passage by all manner of conveyance and by pedestrians, and for the installation, construction, maintenance, repair, replacement, and removal of all manner of utilities, over, under, and through the above-described premises, such easements to be located substantially as shown on the Site Plan, but subject to such modifications in the location thereof as do not materially interfere with the use and enjoyment of the above-described premises, nor materially adversely affect the availability adequate access and utility services from and to LOT A. 8. Utility easement conveyed to Vermont Gas Systems, Inc. by instrument dated August 28, 1987 and recorded in Volume 251 at Page 64 of the South Burlington Land Records. 9. Terms and conditions of an Agreement between Dennis L. Blodgett, Gerald C. Milot and BDP Realty Associates dated November 15, 1988 and recorded in Volume 272 at Page 194 of the South Burlington Land Records. 10. The rights created by the terms of an Irrevocable Offer of Dedication by BDP Realty to City of South Burlington dated April 26, 1988 of record in Volume 261 at Page 125 of the South Burlington Land Records. -20- 11. Utility easement and right of way conveyed to Dennis L. Blodgett and Plaza Investments by Easement Deed dated February 16, 1989 and recorded in Volume 275 at Page 583 of the South Burlington Land Records. 12. Easement and right of way for motor vehicles and pedestrian travel conveyed to Dennis L. Blodgett and Plaza Investments conveyed by Easement Deed dated February 16, 1989 and recorded in Volume 275 at Page 580 of the South Burlington Land Records. 13. The Property has the benefit of an easement and right of way for motor vehicles and pedestrian travel conveyed by Easement Deed of Dennis L. Blodgett and Plaza Investments dated February 6, 1989 and recorded in Volume 276 at Page 221 of the South Burlington Land Records. 14. Utility easement conveyed by I.D.X. Corporation (sic) to Green Mountain Power Corporation and New England Telephone and Telegraph Company by instrument dated June 24, 1988 and recorded in Volume 270 at Page 348 of the South Burlington Land Records. 15. The terms and conditions of an Assignment of Leases and Rents by BDP Realty Associates to Benjamin F. Schweyer as Trustee for Irving Trust Company and Vermont Industrial Development Authority recorded February 26, 1990 of record in Volume 290 at Pages 483-93 of the South Burlington Land Records, and amended by Amendment to Lease, Lease Agreement and Estoppel Agreement dated January 25, 1993 and recorded in Volume 338 at Page 440 of the South Burlington Land Records. 16. The Terms and conditions of an Agreement of Estoppel Subordination Attornment and Non-Disturbance recorded February 26, 1990 of record in Volume 290 at Pages 494-502 of the South Burlington Land Records, and Amended and Restated Agreement of Estoppel, Subordination, Attornment and Non-Disturbance recorded February 26, 1990 and recorded in Volume 290 at Pages 503 of the South Burlington Land Records, and amended by Amendment to Lease, Lease Agreement and Estoppel Agreement dated January 25, 1993 and recorded in Volume 338 at Page 440 of the South Burlington Land Records. -21- EXHIBIT "C" Fit-Up Requirements ------------------- -22- EX-23.1 3 CONSENT OF ERNST & YOUNG Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos. 333-1502, 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, 1998, 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, 1997. Ernst & Young LLP Boston, Massachusetts March 30, 1998 EX-23.2 4 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- The Board of Directors PHAMIS, Inc.: We consent to the incorporation by reference in the registration statements (Nos. 333-31047, 333-31045, 333-1502) on Form S-8 of IDX Systems Corporation of our report dated January 31, 1997, except for note 14 which is as of March 25, 1997, relating to the consolidated balance sheet of PHAMIS, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the two- year period ended December 31, 1996, which report appears in the December 31, 1997 annual report Form 10-K of IDX Systems Corporation. KPMG Peat Marwick LLP Seattle, Washington March 30, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 14,061 12,327 101,826 101,065 67,855 49,902 (1,268) (787) 0 0 197,193 169,750 55,649 45,331 27,372 23,098 237,318 202,322 56,287 37,850 2,500 2,600 0 0 0 0 260 255 176,344 158,295 237,318 202,322 55,242 48,513 251,417 206,879 40,422 36,401 240,803 184,253 0 0 481 430 197 220 16,200 27,508 8,238 10,848 7,962 16,660 0 0 0 0 0 0 7,962 16,660 0.31 0.66 0.30 0.64
EX-27.2 6 RESTATED FINANCIAL DATA SCHEDULE FOR EACH 12 MONTH WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 JAN-01-1997 JAN-01-1996 JAN-01-1995 DEC-31-1997 DEC-31-1996 DEC-31-1996 14,061 12,327 37,750 101,826 101,065 66,404 67,855 49,902 34,758 (1,268) (787) (592) 0 0 0 197,193 169,750 145,064 55,649 45,331 37,238 27,372 23,098 18,079 237,318 202,322 169,517 56,287 37,850 34,098 2,500 2,600 2,907 0 0 0 0 0 0 260 255 247 176,344 158,295 130,264 237,318 202,322 169,517 55,242 48,513 71,646 251,417 206,879 175,285 40,422 36,401 46,743 240,803 184,253 141,818 0 0 14,429 481 430 369 197 220 292 16,200 27,508 21,903 8,238 10,848 1,230 7,962 16,660 20,673 0 0 0 0 0 0 0 0 0 7,962 16,660 20,673 0.31 0.66 0.73 0.30 0.64 0.63
EX-27.3 7 RESTATED FINANCIAL DATA SCHEDULE FOR FIRST 3
5 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 22,355 17,457 13,930 75,401 88,590 99,905 43,898 40,977 45,013 (638) (645) (751) 0 0 0 149,016 153,648 166,320 39,615 42,177 39,339 19,439 20,189 18,249 175,994 182,938 195,742 34,747 30,483 383,323 2,907 2,700 2,700 0 0 0 0 0 0 216 220 224 135,385 146,408 151,019 175,994 182,938 195,742 20,252 39,950 36,158 49,460 100,702 152,104 13,612 26,622 27,426 39,668 80,132 135,542 0 9,417 0 25 51 95 46 88 122 6,248 13,342 20,039 2,540 5,311 7,908 3,708 8,031 12,131 0 0 0 0 0 0 0 0 0 3,708 8,031 12,131 0.15 0.17 0.16 0.14 0.17 0.16
EX-27.4 8 RESTATED FINANCIAL DATA SCHEDULE FOR FIRST
5 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 11,493 16,389 19,930 102,542 104,259 101,017 55,244 57,354 55,252 (949) (1,197) (1,209) 0 0 0 180,532 190,805 181,759 47,543 51,928 51,863 23,733 26,014 25,219 215,719 224,205 215,677 45,492 47,010 44,727 2,600 2,500 2,500 0 0 0 0 0 0 221 223 257 163,465 170,039 163,449 215,719 224,205 215,677 21,887 27,125 43,495 59,660 116,991 181,589 14,242 20,138 31,975 49,051 85,568 181,160 4,512 0 0 165 205 592 20 57 99 7,292 13,960 4,583 2,794 5,587 3,566 4,498 8,372 1,017 0 0 0 0 0 0 0 0 0 4,498 8,372 1,017 0.18 0.15 (0.29) 0.17 0.15 (0.28)
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