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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM__________TO_____________
-------------------------------
Commission File Number 0-26816
IDX SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Vermont 03-0222230
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 IDX Drive
South Burlington, VT 05403
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (802-862-1022)
Indicate by check mark whether the registrant (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
---- ----
The number of shares outstanding of the registrant's common stock as of August
2, 2002 was 29,031,276.
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IDX SYSTEMS CORPORATION
FORM 10-Q
For the Period Ended June 30, 2002
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ...........................3
Condensed Consolidated Statements of Operations .................4
Condensed Consolidated Statements of Cash Flows .................5
Notes to Condensed Consolidated Financial Statements ............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ............................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................28
Item 2. Changes In Securities and Use of Proceeds...............29
Item 3. Defaults Upon Senior Securities ........................29
Item 4. Submission of Matters to a Vote of Security Holders ....29
Item 5. Other Information ......................................29
Item 6. Exhibits and Reports on Form 8-K .......................29
SIGNATURES................................................................30
EXHIBIT INDEX.............................................................31
Page 2 of 31
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
(unaudited) (audited)
ASSETS
Cash and marketable securities $ 42,594 $ 56,373
Accounts receivable, net 102,876 95,478
Refundable income taxes 7,745 12,100
Prepaid and other current assets 8,576 6,189
Deferred tax asset 7,718 7,718
--------------- -------------
TOTAL CURRENT ASSETS 169,509 177,858
Property and equipment, net 82,832 77,636
Capitalized software costs, net 2,738 2,055
Goodwill, net 1,511 1,391
Other assets 12,474 5,592
Deferred tax asset 790 790
-------------- ------------
TOTAL ASSETS $ 269,854 $ 265,322
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses
and other liabilities $ 43,155 $ 51,963
Deferred revenue 20,716 20,361
Notes payable to bank 18,727 15,000
------------- ------------
TOTAL CURRENT LIABILITIES 82,598 87,324
Stockholders' equity 187,256 177,998
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 269,854 $ 265,322
============ ============
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 31
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Systems sales $ 26,182 $ 33,666 $ 53,398 $ 59,828
Maintenance and service fees 86,561 70,641 167,216 139,059
-------- -------- -------- --------
TOTAL REVENUES 112,743 104,307 220,614 198,887
OPERATING EXPENSES
Cost of systems sales 8,588 8,444 17,813 19,773
Cost of maintenance and
services 64,184 59,562 127,095 114,352
Selling, general and
administrative 22,959 23,920 44,949 42,871
Software development costs 13,122 11,350 25,256 21,851
-------- -------- -------- --------
TOTAL OPERATING EXPENSE 108,853 103,276 215,113 198,847
OPERATING INCOME 3,890 1,031 5,501 40
OTHER INCOME
Other income 234 625 509 1,309
Gain on sale of investment
in subsidiary - - 4,273 35,546
Gain on investment - - - 5,849
-------- -------- -------- --------
TOTAL OTHER INCOME 234 625 4,782 42,704
Income before income taxes
and equity in loss of
unconsolidated affiliate 4,124 1,656 10,283 42,744
Equity in loss of
unconsolidated affiliate - (5,451) - (11,502)
Income tax benefit (provision) (1,361) 1,518 (3,393) (13,759)
-------- -------- -------- --------
NET INCOME (LOSS) $ 2,763 $(2,277) $ 6,890 $17,483
======== ======== ======== ========
BASIC EARNINGS PER SHARE
(LOSS) $ 0.10 $ (0.08) $ 0.24 $ 0.61
======== ======== ======== ========
Basic weighted average shares
outstanding $28,875 $28,476 $28,858 $28,455
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
(LOSS) $ 0.09 $ (0.08) $ 0.24 $ 0.61
======== ======== ======== ========
Diluted weighted average
shares outstanding $29,162 $28,476 $29,088 $28,786
======== ======== ======== ========
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 31
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended
June 30,
2002 2001
------------- ------------
OPERATING ACTIVITIES:
Net income $ 6,890 $ 17,483
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 7,869 7,488
Amortization 1,170 856
Deferred tax provision - 2,128
Increase in allowance for doubtful accounts 2,138 921
Minority interest - 297
Gain on investment - (5,849)
Equity in loss of unconsolidated affiliate - 11,502
Gain on sale of investment in subsidiary (4,273) (35,546)
Loss on disposition of assets 93 404
Changes in operating assets and liabilities:
Accounts receivable (9,538) 3,653
Prepaid expenses and other assets (3,604) (3,468)
Accounts payable and accrued expenses (4,535) (10,799)
Federal and state income taxes 4,355 6,877
Deferred revenue 354 (286)
------------ ------------
Net cash provided by (used in)
operating activities 919 (4,339)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (13,157) (25,941)
Purchase of securities available-for-sale (18,744) (65,270)
Proceeds from sale of securities
available-for-sale 27,293 96,787
Proceeds from sale of investment - 11,282
Business acquisitions - (2,080)
Other assets (7,498) (242)
------------ ------------
Net cash (used in) provided by
investing activities (12,106) 14,536
FINANCING ACTIVITIES:
Proceeds from sale of common stock 2,204 2,753
Proceeds from notes payable to bank 3,727 12,000
Contributions to affiliates, net - (472)
------------ ------------
Net cash provided by financing
activities 5,931 14,281
------------ ------------
Increase (decrease) in cash and
cash equivalents (5,256) 24,478
Cash and cash equivalents at beginning
of period 38,083 16,357
------------ ------------
Cash and cash equivalents at end of period 32,827 40,835
Securities available-for-sale 9,767 11,411
------------ ------------
Total cash and securities available-for-sale $ 42,594 $ 52,246
============ ============
Noncash investing activities:
Fair value of stock received from sale of
investment in subsidiary $ - $ 17,624
============ ============
Deconsolidation of minority interest in
real estate partnership $ - $ 8,979
============ ============
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The interim unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and in accordance with accounting principles generally
accepted in the United States. Accordingly, certain information and footnote
disclosures normally included in annual financial statements have been omitted
or condensed. In the opinion of management, all necessary adjustments
(consisting of normal recurring accruals and adjustments) have been made to
provide a fair presentation. The operating results for the three and six month
periods ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's latest annual report on Form 10-K filed with the Securities and
Exchange Commission on March 29, 2002.
Note 2 - New Accounting Standards
In March of 2002, the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) issued EITF No. 01-14, "Issue No. 01-14 of the
Financial Accounting Standards Board (FASB) Emerging Issues Task Force" ("EITF
No. 01-14"). EITF No. 01-14 states that customer reimbursements received for
"out-of-pocket" expenses incurred should be characterized on the income
statement as revenue. These expenses include, but are not limited to, airfare,
mileage, hotel stays, out-of-town meals, photocopies, and telecommunications and
facsimile charges. Service revenue and cost of service expenses have been
restated for all periods presented in order to reflect this change resulting in
no change to net income.
In June 2002, the FASB issued Statement of Accounting Standards (SFAS) No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No.
146"). This statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)",
("EITF No. 94-3"). SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
EITF No. 94-3 allowed for an exit cost liability to be recognized at the date of
an entity's commitment to an exit plan. SFAS No. 146 also requires that
liabilities recorded in connection with exit plans be initially measured at fair
value. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early adoption
encouraged. The Company does not expect the adoption of SFAS No. 146 will have a
material impact on its financial position or results of operations.
Note 3 - Deconsolidation, Acquisitions and Investments
In April 2002, the Company acquired a minority interest in Stentor, Inc., one of
the Company's strategic partners, by exercising a warrant to purchase 562,069
shares of preferred stock of Stentor, Inc. The Company paid approximately $7.5
million to purchase the preferred shares. Stentor, Inc. is a California based
medical informatics company and a worldwide leader in medical image and
information management. The warrant was issued to the Company in November 2000
in connection with the alliance agreement that was entered into by the parties
to jointly develop vnetix(TM), a medical image and information management system
(MIMS) combining the advanced intelligence of the Company's Radiology Imaging
Suite with the innovative image distribution technology from Stentor, Inc.
This investment will be carried at cost and there is currently no public market
for the preferred shares.
Through April 19, 2001, the Company's consolidated financial statements included
the accounts of the Company and BDP Realty Associates (BDP), a real estate trust
owned by certain stockholders and key employees of the Company whose real estate
was leased exclusively by the Company. Effective with the date of the
acquisition of the Company's corporate headquarters from BDP, the Company has
deconsolidated BDP and eliminated the net assets, principally real estate and a
minority interest, included in the Company's consolidated balance sheet as of
Page 6 of 31
that date. The Company's purchased its corporate headquarters from BDP for cash,
at the fair market value of approximately $15.0 million as determined by
independent appraisers, for in the second quarter of 2001. This amount has been
recorded as property and equipment.
In May 2001, the Company acquired PVI, LLC for approximately $1.0 million. This
acquisition has been accounted for under the purchase method of accounting. The
purchase price has been allocated based on estimated fair market values of PVI,
LLC's assets at the date of acquisition, principally to software. There are
contingent payments based on a percentage of future sales related to this
purchase, however, there have been no sales to date.
In June 2001, the Company acquired Vogt Management Consulting, Inc. for
approximately $1.1 million. This acquisition has been accounted for under the
purchase method of accounting. The purchase price has been allocated,
principally to goodwill, based on estimated fair market values of Vogt
Management Consulting, Inc.'s assets at the date of acquisition.
Had these purchase acquisitions occurred as of the beginning of the year in
which they occurred, the Company's pro forma operating results would not be
materially different than as reported in the accompanying condensed consolidated
financial statements.
Note 4 - Restructuring Charges
On September 28, 2001, the Company announced its plan to restructure and realign
its large physician group practice businesses. The Company implemented a
workforce reduction and restructuring program affecting approximately four
percent of the Company's employees. The restructuring program resulted in a
charge to earnings of approximately $19.5 million during the fourth quarter of
2001, in connection with costs associated with employee severance arrangements
of approximately $5.5 million, lease payment costs of approximately $5.2 million
and equipment and leasehold improvement write-offs related to the leased
facilities and workforce reduction of $8.8 million. Substantially all work force
related actions were completed during the fourth quarter of 2001. As of June 30,
2002, the Company had an accrual balance of $3.5 million primarily related to
leased facilities, of which approximately $1.1 million will be paid during the
remainder of 2002 and approximately $2.4 million thereafter.
Note 5 - Sale of Investment in Subsidiary and Other Related Matters
On January 8, 2001, the Company sold certain operations of its majority owned
subsidiary, ChannelHealth Incorporated to Allscripts Healthcare Solutions, Inc.,
a leading provider of point-of-care e-prescribing and productivity solutions for
physicians. In addition to the sale, the Company entered into a ten-year
strategic alliance whereby Allscripts is the exclusive provider of point-of-care
clinical applications sold by IDX to physician practices.
Allscripts acquired ChannelHealth in exchange for 8.6 million shares, or 21.3%,
of Allscripts stock on a pro-forma fully diluted basis, of which IDX received
approximately 90% or 7.5 million shares of Allscripts stock. The Allscripts
shares received are subject to restrictions on any transfer of the securities
for a period of one year from the date of the transaction and, after one year,
on the transfer of more than 25% of the Allscripts shares in any one year, and
16.67% in any one month and, under certain circumstances, more favorable sale
restrictions may apply. IDX recorded the Allscripts shares at their fair value
of $29.5 million, which included a discount from market value due to
restrictions on transfer, resulting in a $35.5 million gain on the transaction.
The reported gain is greater than the fair market value of the stock received
due to the Company's negative carrying value of the ChannelHealth investment at
the time of the sale. Pursuant to the strategic alliance agreement, IDX
guaranteed that Allscripts would have gross revenues resulting from the alliance
(less any commissions paid to IDX) of at least $4.5 million for fiscal year
Page 7 of 31
2001. IDX deferred $4.5 million of the gain on sale as of the date of the
transaction. IDX and Allscripts finalized the analysis related to the Allscripts
2001 eligible gross revenues guarantee, and IDX recognized an additional $4.3
million gain on the sale during the first three months of 2002.
At June 30, 2002, IDX owns approximately 20% of the outstanding common stock of
Allscripts and accounts for its investment under the equity method of
accounting. Under the equity method of accounting, IDX recognized its pro-rata
share of Allscripts 2001 losses and recorded an equity loss during 2001 of $17.6
million, including $5.5 million during the second quarter of 2001 and $11.5
million during the first six months of 2001. These equity losses resulted in the
elimination of the carrying value of the Allscripts investment during the third
quarter of 2001. Based on the quoted market price at June 30, 2002, the
Allscripts investment has a market value, of approximately $28.0 million which
is not currently reflected on the balance sheet.
Summary audited financial information for Allscripts for the year ended
December 31, 2001 is as follows in thousands:
Revenue $ 70,754
Gross profit 4,633
Net loss (418,931)
Current assets 64,846
Non current assets 52,598
Current liabilities 18,485
Non current liabilities 325
Summary unaudited financial information for Allscripts for the three and six
month periods ended June 30, 2002 and 2001 is as follows in thousands:
FOR THE THREE MONTHS ENDED JUNE 30:
2002 2001
---- ----
Revenue $20,094 $19,173
Gross profit 4,970 2,305
Net loss (3,962) (27,728)
FOR THE SIX MONTHS ENDED JUNE 30:
2002 2001
---- ----
Revenue $38,867 $35,772
Gross profit 8,792 3,316
Net loss (9,986) (58,528)
Note 7 - Income Taxes
The 2002 effective tax rate is lower than the statutory rate, primarily the
result of research credits. The 2001 effective tax rate was higher than the
statutory rate principally due to the non-deductible nature of certain costs
related to the sale of ChannelHealth. The net deferred tax assets as of June 30,
2002 of approximately $8.5 million are expected to be realized by generating
future taxable income and are otherwise recoverable through available tax
planning strategies.
Page 8 of 31
Note 8 - Segment Information
The Company views its operations and manages its business as principally two
segments, information systems and services that include software, hardware and
related services and medical transcription services. The Company's business
units have separate management teams and infrastructures that offer different
products and services. Accordingly, these business units have been classified as
reportable segments.
Information Systems and Services: This reportable segment consists of IDX
Systems Corporation's healthcare information solutions that includes software,
hardware and related services. IDX solutions enable healthcare organizations to
redesign patient care and other workflow processes in order to improve
efficiency and quality. The principal markets for this segment include physician
groups, management service organizations, hospitals and integrated delivery
networks primarily located in the United States.
Medical Transcription Services: This reportable segment consists of EDiX, a
provider of medical transcription outsourcing services. The principal markets
for this segment include hospitals and large physician group practices primarily
located in the United States.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to the Consolidated Financial Statements
included in Company's annual report on Form 10-K for the year ended December 31,
2001.
The Company evaluates the performance of its operating segments based on revenue
and operating income. Intersegment revenues are immaterial. No one customer
accounts for greater than 10% of revenue for any reportable segment.
Page 9 of 31
Summarized financial information concerning the Company's reportable segments is
shown in thousands in the following table:
Medical
Information Dictation and
Systems and Transcription
Services Services Total
-------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 2002
Net operating revenues $ 85,061 $ 27,682 $ 112,743
Operating income (loss) 4,948 (1,058) 3,890
Income (loss) before income taxes
and equity in loss of unconsolidated
affiliate 6,088 (1,964) 4,124
Identifiable operating assets 230,427 39,427 269,854
FOR THE THREE MONTHS ENDED JUNE 30, 2001
Net operating revenues $ 80,254 $ 24,053 $ 104,307
Operating income 127 904 1,031
Income before income taxes and equity
in loss of unconsolidated affiliate 1,597 59 1,656
Identifiable operating assets 52,552 32,534 285,086
FOR THE SIX MONTHS ENDED JUNE 30, 2002
Net operating revenues $ 165,984 $ 54,630 $ 220,614
Operating income (loss) 5,725 (224) 5,501
Income (loss) before income taxes
and equity in loss of unconsolidated
affiliate 12,283 (2,000) 10,283
Identifiable operating assets 230,427 39,427 269,854
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Net operating revenues $ 152,811 $ 46,076 $ 198,887
Operating income (loss) (1,737) 1,777 40
Income before income taxes and equity
in loss of unconsolidated affiliate 42,558 186 42,744
Identifiable operating assets 252,552 32,534 285,086
Corporate headquarter assets and related operating costs are included in the
Information Systems and Services segment information. Substantially all of the
Company's operations are in the United States.
Note 9 - Comprehensive Income
Total comprehensive income for the quarter ended June 30, 2002 amounted to $2.8
million compared to a comprehensive loss of $2.4 million for the same period in
2001. Total comprehensive income for the six months ended June 30, 2002 amounted
to $6.9 million compared to a comprehensive income of $17.4 million for the same
period in 2001. Comprehensive income/loss includes unrealized gains or losses on
the Company's available-for-sale securities that are included as a component of
stockholders' equity.
Page 10 of 31
Note 10 - Earnings Per Share Information
The following sets forth the computation of basic and diluted earnings (loss)
per share: (in thousands, except for per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income (loss) $ 2,763 $(2,277) $ 6,890 $ 17,483
------- -------- ------- --------
Numerator for basic and
diluted income (loss)
per share $2,763 $(2,277) $ 6,890 $ 17,483
====== ======== ========= =========
Denominator:
Basic weighted-average
shares outstanding 28,875 28,476 28, 858 28,455
Effect of employee
stock options 287 - 230 331
-------------------------------------------------
Denominator for diluted
income per share 29,162 28,476 29,088 28,786
------ ------ ------ ------
Basic income (loss)
per share $ .10 $ .(08) $ .24 $ .61
====== ======= ====== ======
Diluted income (loss)
per share $ .09 $ .(08) $ .24 $ .61
====== ======= ====== ======
Options for 1,719,018, and 2,578,742 shares for the three month periods ended
June 30, 2002 and 2001, respectively, were excluded from the calculation of
diluted earnings per share as the effect would have been anti-dilutive. Options
for 2,444,900, and 2,460,997 shares for the six month periods ended June 30,
2002 and 2001, respectively, were excluded from the calculation of diluted
earnings per share as the effect would have been anti-dilutive.
Note 11 - Legal Proceedings
On January 18, 2001, the Company commenced a lawsuit against Epic Systems
Corporation, a competitor of the Company, the University of Wisconsin Medical
Foundation (the Foundation), and two individuals, claiming, among other things,
that trade secrets of the Company involving its IDXtend medical group practice
system were wrongfully disclosed to, and misappropriated by, Epic in a series of
meetings that took place in 1998 and 1999. The defendants deny the Company's
claims. The Company's lawsuit seeks damages and injunctive relief and was
brought in the United States District Court for the Western District of
Wisconsin and is entitled, IDX Systems Corporation v. Epic Systems Corporation,
et al. The Foundation brought a counterclaim against the Company claiming that
its lawsuit interferes with a contract between the Foundation and Epic, and that
the confidentiality provisions in IDX's contracts with the Foundation are
invalid. The counterclaim seeks damages and declaratory judgment. The Company
denies the counterclaim.
Subsequently, Epic filed an Answer denying the essential elements of the
Company's claims, and asserted counterclaims against the Company. Epic alleges
that the Company's claims asserting its trade secret rights were brought in bad
faith, with an intent to injure Epic competitively, and thereby violated
Sections 1 and 2 of the Sherman Act because the Company allegedly possesses
monopoly power in the U.S. market for medical practice information systems. Epic
also claims that this same alleged conduct constitutes intentional interference
with its contract with the Foundation. The counterclaim seeks treble damages.
The Company denies the counterclaims. On July 31, 2001, the Company's lawsuit
against Epic, the Foundation and the individuals was dismissed and the
counterclaims of Epic and the Foundation were dismissed. The Company appealed
the dismissal of its lawsuit to the United States Court of Appeals, and on April
1, 2002, that appellate court affirmed the District Court's dismissal of the
trade secret claim, but reversed and remanded the other related claims of the
Company, including breach of contract and tortuous interference claims against
the defendants. The Company continues to vigorously pursue such remanded claims
Page 11 of 31
at the District Court. It has resumed its discovery efforts in anticipation of
trial, which has been scheduled to begin in September 2002.
In April 2000, the Company commenced a lawsuit for damages caused by wrongful
cancellation and material breach of contract by St. John Health System (SJHS),
in the United States District Court for Eastern District of Michigan, entitled
IDX Systems Corporation v. St. John Health System. Subsequently, SJHS commenced
a lawsuit against the Company in the Circuit Court of Wayne County, Michigan,
claiming unspecified damages against the Company for anticipatory repudiation,
breach of contract, tort and fraud. On motion of the Company, SJHS's lawsuit was
removed to and consolidated in the federal court. In its answer to the Company's
lawsuit, SJHS asserted the same claims previously asserted in its state court
action. In September 2001, SJHS specified damage claims of approximately $77.0
million in allegedly lost savings, and in January 2002 raised another theory of
alleged unspecified damages for "cover". The Company believes the claims of SJHS
are without merit and continues to vigorously defend itself and prosecute its
own claims for damages. The lawsuit is in the trial preparation stage and the
parties are awaiting scheduling of the trial by the court.
From time to time, the Company is a party to or may be threatened with other
litigation in the ordinary course of its business. The Company regularly
analyzes current information including, as applicable, the Company's defenses
and insurance coverage and as necessary, provides accruals for probable and
estimable liabilities for the eventual disposition of these matters. The
ultimate outcome of these matters is not expected to materially affect the
Company's business, financial condition or annual results of operations,
however, an adverse outcome could have a material impact on quarterly income or
cash flows.
Page 12 of 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q. THIS ITEM CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES AND EXCHANGE ACT OF 1934 THAT INVOLVE RISKS AND UNCERTAINTIES.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
INCLUDE THOSE SET FORTH UNDER "FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING
FUTURE PERFORMANCE" COMMENCING ON PAGE 21, AS WELL AS THOSE OTHERWISE DISCUSSED
IN THIS SECTION AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q. UNLESS
OTHERWISE SPECIFIED OR THE CONTEXT REQUIRES OTHERWISE, THE TERMS "WE", "US",
"OUR" AND THE "COMPANY" REFER TO IDX SYSTEMS CORPORATION AND ITS SUBSIDIARIES.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Those estimates are
based on our historical experience, terms of existing contracts, and our
observance of trends in the industry, information provided by our customers and
information available from other outside sources, as appropriate. Actual results
may differ from these estimates under different assumptions or conditions.
o Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions. We
have identified the following as our critical accounting policies: revenue
recognition and accounts receivable, income taxes and accounting for
litigation, commitments and contingencies. For a detailed discussion on the
application of these and other accounting policies, see Note 1 of Notes to
Consolidated Financial Statements included in the Company's annual report
on Form 10-K for the year ended December 31, 2001.
o Revenue recognition and accounts receivable. We recognize revenue
when evidence of an arrangement exists, contractual obligations have
been satisfied, title and risk of loss (in the case of hardware) have
been transferred to the customer and collection of the resulting receivable
is reasonably assured. We defer revenue when initial payment terms exceed
90 days. We recognize revenue on software licensing arrangements
involving multiple elements by allocation of the fair value of the
transaction to each element, or more typically using the residual
method when the arrangement includes undelivered elements. Fair value
determination requires management's judgment on a number of factors
including typical sales price. Revenue from software licensing
arrangements is principally recognized upon attainment of specified
contractual milestones and dates. Additionally, we periodically enter
into certain long-term contracts where revenue is recognized on a
percentage of completion basis or the completed contract method, as
appropriate measures of completion for each contract are achieved.
We also generate service revenues from the sale of product maintenance
contracts, consulting contracts and transcription service arrangements.
Revenue from maintenance contracts is recognized ratably over the support
period, including the installation period through the term of the
agreements, which is typically one year. Revenues from consulting and
transcription services are recognized in the period in which services
are performed. Revenue from hardware sales is recognized upon transfer
of title to customers.
Management estimates allowances for doubtful accounts receivable based on
historical experience and management's evaluation of the financial
condition of the customer. The Company typically does not require
collateral. Historically, management's estimates have been adequate to
Page 13 of 31
cover accounts receivable exposures. We believe our reported allowances at
April 30, 2002, are adequate. If the financial conditions of those
customers were to deteriorate, however, resulting in their inability to
make payments, we may need to record additional allowances which would
result in additional selling, general and administrative expenses being
recorded for the period in which such determination was made.
o Income taxes. Our valuation allowance relating to the net deferred tax
assets is based on our assessment of historical pre-tax income as well as
tax planning strategies designed to generate future taxable income.
These strategies include estimates and involve judgments relating to
certain favorable lease rights and unrealized gains in the Company's
investment in common stock of an equity investee. To the extent that
facts and circumstances change, these tax planning strategies may no
longer be sufficient to support the deferred tax assets and the Company
may be required to increase the valuation allowance. As we generate
future taxable income against which these tax assets may be applied,
some portion or all of the valuation allowance would be reversed and an
increase in net income would consequently be reported in future years.
o Accounting for litigation, commitments and contingencies. We are
currently involved in certain legal proceedings, which, if unfavorably
determined, could have a material adverse effect on our operating results
and financial condition. In connection with management's assessment of
these legal proceedings, management must determine if an unfavorable
outcome is probable and evaluate the costs for resolution of these matters,
if reasonably estimable. These determinations and related estimates
have been developed in consultation with outside counsel handling our
defense in these matters and is based upon an analysis of potential
results, assuming a combination of litigation and defense strategies.
See Part II, Item 1. "Legal Proceedings" and Note 11 to our audited
consolidated financial statements included in the Company's annual
report on Form 10-K for the year ended December 31, 2001.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K which contain accounting policies and other disclosures
required by generally accepted accounting principles.
GENERAL
Revenues increased to $112.7 million for the second quarter of 2002 from $104.3
million for the same period in 2001. Systems sales decreased $7.5 million
(22.2%) during the second quarter of 2002, while maintenance and service fees
increased $15.9 million (22.5%) as compared to the same period in the prior
year. The Company reported net income of $2.8 million, or $0.09 per share, for
the second quarter of 2002 as compared to a net loss of $2.3 million, or $0.08
per share, for the same period in 2001. Excluding the effects of the equity in
the loss of an unconsolidated affiliate of $5.5 million, the net income after
income taxes for the three months ended June 30, 2001 was $994,000 or $0.03 per
share.
On January 8, 2001, the Company sold ChannelHealth, including certain product
lines, to Allscripts Healthcare Solutions, Inc. (Allscripts), a leading provider
of point-of-care e-prescribing and productivity solutions for physicians.
ChannelHealth, incorporated in September 1999, was a majority owned subsidiary
of IDX. IDX retained the Patient and eCommerce Channels, which were previously
part of Channelhealth, enabling IDX to integrate an Internet solution that
leverages its core competencies in physician practice management systems. In
addition to the sale, the Company entered into a 10-year strategic alliance
whereby Allscripts will become the exclusive provider of point-of-care clinical
applications sold by IDX to physician practices. Allscripts acquired
Channelhealth in exchange for 8.6 million shares, or 21.3% of Allscripts stock
Page 14 of 31
on a pro-forma fully diluted basis, of which IDX received approximately 7.5
million shares (approximately 90%). This investment in Allscripts stock is
accounted for under the equity method. Under this method, IDX is required to
recognize a pro-rata share of Allscripts net income or loss after elimination of
certain related entity transactions. IDX recorded approximately $17.6 million in
its pro-rata share of Allscripts losses in 2001, including $5.5 million during
the second quarter of 2001, and reduced the carrying value of this investment to
zero in 2001. In the event Allscripts generates net income in the future, IDX
would not record its share of Allscripts net income until such time as IDX's
share of such future net income aggregated to an amount that was greater than
the proportionate share of cumulative losses IDX has not recorded subsequent to
its investment being written down to zero. IDX is not committed to and does not
currently plan to provide any future investments or advances to Allscripts.
Allscripts has reported losses since 1995 and may report losses in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
REVENUES
The Company's total revenues increased to $112.7 million during the three months
ended June 30, 2002 from $104.3 million for the corresponding period in 2001, an
increase of approximately $8.4 million or 8.1%. Revenues from systems sales
decreased to $26.2 million during the three months ended June 30, 2002 (23.2% of
total revenues) from $33.7 million for the corresponding period in 2001 (32.3%
of total revenues), a decrease of $7.5 million or 22.2%. This decrease was
primarily due to a decrease in recognized revenue from new sales and
installations of certain IDX systems.
Revenues from maintenance and service fees increased to $86.6 million during the
quarter ended June 30, 2002 (76.8% of total revenues) from $70.6 million for the
corresponding period in 2001 (67.7% of total revenues), an increase of $15.9
million or 22.5%. The increase was due to a $5.2 million increase in maintenance
revenue primarily resulting from price increases and an increase in the
Company's installed base, as well as a $4.8 million increase in installation and
consulting services provided by IDX's core business, combined with a $3.6
million increase in EDiX's medical transcription service fee revenue.
COST OF SALES AND SERVICES
System sales and the corresponding category of cost of system sales are
attributable to IDX's core business segment, information systems and services.
The cost of system sales increased to $8.6 million during the quarter ended June
30, 2002 from $8.4 million for the comparable period in 2001, an increase of
$144,000 or 1.7%. Cost of system sales fluctuates primarily due to the amount of
hardware and third party software included as a component of the Company's
systems sales. The gross margin as a percentage of systems sales decreased to
67.2% during the second quarter of 2002 from 74.9% for the same period in 2001.
Fluctuations in the gross profit margin as a percentage of system sales result
from the revenue mix of software license revenue which has a higher gross profit
margin and hardware sales which have a lower gross profit.
The cost of services increased to $64.2 million during the second quarter of
2002 from $59.6 million for the comparable period in 2001, an increase of $4.6
million or 7.8%. The increase in cost of services resulted from growth in client
services expenses, primarily medical transcription staff, as well as
maintenance, installation and consulting staff. The gross profit margin as a
percentage of maintenance and service fee revenues increased to 25.9% during the
second quarter of 2002 from 15.7% for the same period in 2001. The increase in
gross profit margin as a percentage of revenues is due to increased maintenance
and service revenue in IDX's core business partially offset by growth in
maintenance and service expenses, combined with a decrease in EDiX's gross
Page 15 of 31
profit margin due to higher labor and related costs as a percentage of total
revenue.
The gross profit margin as a percentage of maintenance and service fee revenues
of IDX's core business, information systems and services, increased to 28.9% in
the second quarter of 2002 from 12.2% for the same period in 2001 primarily due
to increased maintenance and installation revenue which was partially offset by
growth in maintenance and service expenses. The gross profit margin as a
percentage of revenues for the Company's medical dictation and transcription
business segment (EDiX) decreased to 19.5% for the second quarter of 2002 from
22.4% for the same period in 2001 due to higher labor and related costs as a
percentage of total revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $23.0 million for the
second quarter of 2002 from $23.9 million for the same period in 2001, a
decrease of $961,000 or 4.0%. As a percentage of total revenues, selling,
general and administrative expenses decreased to 20.4% for the second quarter of
2002 from 22.9% for the same period in 2001. IDX's core business, information
systems and services, selling, general and administrative expenses decreased
$2.8 million primarily due to a decrease in general administrative expenses
combined with decreased personnel costs during the second quarter of 2002 as
compared to the same period in the prior year. This decrease is a result of
restructuring programs and cost control initiatives. EDiX's selling, general and
administrative expenses increased $1.8 million during the second quarter of 2002
as compared to the same period in 2001 due to an increase in the allowance for
doubtful accounts of $1.2 million combined with increased costs in order to
support sales growth.
SOFTWARE DEVELOPMENT COSTS
Software development expenses increased to $13.1 million in 2002 from $11.3
million in 2001, an increase of $1.8 million or 15.6%. As a percentage of total
revenues, software development expenses increased to 11.6% in the second quarter
of 2002 from 10.9% for the same period in 2001. As a percentage of system sales,
software development costs increased to 50.1% in the second quarter of 2002 from
33.7% for the same period in 2001. The $1.8 million increase is primarily due to
increased personnel costs as compared to the prior year in IDX's core
information systems and services business segment. Approximately, $245,000 of
software development costs, net of amortization, were capitalized during the
second quarter of 2002 as compared to $665,000 for the same period in 2001.
Research and development costs in the medical dictation and transcription
business segment (EDiX) increased $133,000 to $695,000 for the second quarter of
2002 from $562,000 for the same period in 2001.
OTHER INCOME, NET
Interest income decreased to approximately $281,000 during the second quarter of
2002 as compared to $677,000 for the same period in 2001. This decrease was
primarily due to a lower average invested balance combined with lower interest
rates during the second quarter of 2002 as compared to the same period in 2001.
Interest expense during the second quarter of 2002 increased to $72,000 from $0
during the comparable period in 2001.
MINORITY INTEREST
The Company's consolidated financial statements included the accounts of the
Company and BDP Realty Associates (BDP) through April 2001. BDP's real estate
was leased exclusively by the Company, and the Company was subject to
substantially all the risks of ownership through the date that this property was
acquired by the Company at the fair market value of approximately $15.0 million
as determined by an independent appraiser. All transactions between the Company
and BDP have been eliminated. The minority interest, which was eliminated in
April 2001, represented the net income and equity of BDP.
Page 16 of 31
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE
IDX, through a wholly owned subsidiary, currently owns approximately 20% of the
outstanding common stock of Allscripts and records its investment under the
equity method of accounting. IDX records its interest in the losses of
Allscripts as a reduction to its investment account. IDX recorded an equity loss
during the second quarter of 2001 of $5.5 million on a pre-tax basis. IDX's
interest in the losses of Allscripts in 2001 reduced the balance of IDX's
investment carrying balance in Allscripts to zero, and accordingly no share of
Allscripts loss has been recorded during the second quarter of 2002.
INCOME TAXES
The Company recorded income tax expense of approximately $1.4 million during the
second quarter of 2002, an effective tax rate of 33.0%. This is lower than the
Company's historical tax rate of 40.0% due to certain research and
experimentation credits. The Company recorded an income tax benefit of
approximately $1.5 million during the second quarter of 2001, an effective tax
rate of 40.0%. The Company anticipates a consolidated effective tax rate of
approximately 33.0% for the year ending December 31, 2002. This favorable rate
is primarily the result of research credits projected to be generated and
utilized in 2002. The Company anticipates that EDiX's effective tax rate in 2002
will also be less than the statutory rate due to the use of operating loss carry
forwards, subject to annual limitations. The net deferred tax assets as of June
30, 2002 of approximately $8.5 million are expected to be realized by generating
future taxable income and are otherwise recoverable through available tax
planning strategies.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUES
The Company's total revenues increased to $220.6 million during the six months
ended June 30, 2002 from $198.9 million for the corresponding period in 2001, an
increase of approximately $21.7 million or 10.9%. Revenues from systems sales
(attributable to IDX's core business, information systems and services segment)
decreased to $53.4 million during the six months ended June 30, 2002 (24.2% of
total revenues) from $59.8 million for the corresponding period in 2001 (30.1%
of total revenues), a decrease of $6.4 million or 10.7%. This decrease was
primarily due to a decrease in new sales and installations of certain IDX
systems.
Revenues from maintenance and service fees increased to $167.2 million
during the six months ended June 30, 2002 (75.8% of total revenues) from $139.1
million for the corresponding period in 2001 (69.9% of total revenues), an
increase of $28.2 million or 20.2%. The increase was due to an $8.6 million
increase in EDiX's medical transcription service fee revenue, an $8.6 million
increase in maintenance revenue primarily resulting from price increases and an
increase in the Company's installed base, as well as an $8.4 million increase in
installation and consulting services provided by IDX's core business segment.
COST OF SALES AND SERVICES
System sales and the corresponding category of cost of system sales are
attributable to IDX's core business segment, information systems and services
segment. The cost of system sales decreased to $17.8 million during the six
months ended June 30, 2002 from $19.8 million for the comparable period in 2001,
a decrease of $2.0 million or 9.9%. The decrease in cost of system sales is
primarily a result of a decrease in hardware and third party software included
as a component of sales of the Company's systems sales. The gross margin as a
percentage of system sales decreased to 66.6% during the first six months of
2002 from 67.0% for the same period in 2001. Fluctuations in the gross profit
margin as a percentage of system sales result from the revenue mix of software
license revenues which have a higher gross profit margin and hardware revenues
which have a lower gross profit margin.
Page 17 of 31
The cost of services increased to $127.1 million during the first six months of
2002 from $114.4 million for the comparable period in 2001, an increase of $12.7
million or 11.1%. The increase in cost of services resulted from growth in
client services expenses, primarily medical transcription staff, as well as
maintenance, installation and consulting staff. The gross profit margin on
maintenance and service fee revenues increased to 24.0% during the first six
months of 2002 from 17.8% for the same period in 2001 and was due to increased
maintenance revenue in IDX's core business partially offset by growth in service
and maintenance expenses, combined with a decrease in EDiX's gross profit margin
due to higher labor and related costs as a percentage of total revenue.
The gross profit margin as a percentage of maintenance and service fee revenues
of IDX's core business, information systems and services, increased to 26.3% in
the first six months of 2002 from 16.8% for the same period in 2001 primarily
due to increased maintenance and service revenue offset partially by growth in
maintenance and service expenses. The gross profit margin as a percentage of
service revenues for the Company's medical dictation and transcription business
segment (EDiX) decreased to 19.3% for the first six months of 2002 from 19.8%
for the same period in 2001 due to higher labor and related costs as a
percentage of total revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $44.9 million for the
first six months of 2002 from $42.9 million for the same period in 2001, an
increase of $2.1 million or 4.8%. As a percentage of total revenues, selling,
general and administrative expenses decreased to 20.4% for the first six months
of 2002 from 21.6% for the same period in 2001. IDX's core business, information
systems and services, selling, general and administrative expenses decreased
$1.1 million primarily due to a decrease in general administrative expenses and
decreased personnel costs during the first half of 2002 as compared to the same
period in the prior year. This decrease is a result of restructuring programs
and cost control initiatives. EDiX's selling, general and administrative
expenses increased $3.2 million during the first half of 2002 as compared to the
same period in 2001 due to an increase in the allowance for doubtful accounts of
$1.2 million combined with increased costs in order to support sales growth.
SOFTWARE DEVELOPMENT COSTS
Software development expenses increased to $25.3 million during the first six
months of 2002 from $21.9 million for the same period in 2001, an increase of
$3.4 million or 15.6%. As a percentage of total revenues, software development
expenses increased to 11.4% in the first six months of 2002 from 11.0% for the
same period in 2001. As a percentage of system sales, software development costs
increased to 47.3% in the first six months of 2002 from 36.5% for the same
period in 2001. The $3.4 million increase is primarily due to increased
personnel costs as compared to the prior year in IDX's core information systems
and services business segment. Approximately $680,000 of software development
costs, net of amortization, were capitalized during the first six months of 2002
as compared to $950,000 for the same period in 2001. Research and development
costs in the medical dictation and transcription business segment (EDiX)
increased to $1.2 million for the first six months of 2002 from $977,000 for the
same period in 2001.
OTHER INCOME, NET
Interest income decreased to approximately $611,000 during the first six months
of 2002 as compared to $1.6 million for the same period in 2001. This decrease
was primarily due to a lower average invested balance combined with lower
interest rates during the first six months of 2002 as compared to the same
period in 2001. Interest expense during the first six months of 2002 increased
to $123,000 from $0 during the comparable period in 2001.
MINORITY INTEREST
The Company's consolidated financial statements included the accounts of the
Company and BDP Realty Associates (BDP) through April 2001. BDP's real estate
was leased exclusively by the Company, and the Company was subject to
substantially all the risks of ownership through the date that this property was
Page 18 of 31
acquired by the Company at the fair market value of approximately $15.0 million
as determined by an independent appraiser. All transactions between the Company
and BDP have been eliminated. The minority interest, which was eliminated in
April 2001, represented the net income and equity of BDP.
GAIN ON SALE OF INVESTMENT IN SUBSIDIARY
On January 8, 2001, Allscripts acquired IDX's interest in ChannelHealth in
exchange for approximately 7.5 million shares of Allscripts common stock
(Allscripts shares). The Allscripts shares received are subject to restrictions
on the transfer of more than 25% of the Allscripts shares in any one year, and
16.67% in any one month. IDX recorded the Allscripts shares at fair value of
$29.5 million, which included a discount from market value due to the four year
restrictions on transfer, resulting in a $35.5 million gain on the transaction.
IDX also entered into a ten-year strategic alliance agreement with Allscripts.
Pursuant to the strategic alliance agreement, IDX had guaranteed that Allscripts
will have gross revenues resulting from the alliance (less any commissions paid
to IDX) of at least $4.5 million for fiscal year 2001. IDX accrued the $4.5
million liability as of the date of the transaction. IDX and Allscripts have
finalized the analysis related to the Allscripts 2001 eligible gross revenues
guarantee, and accordingly, IDX has recognized an additional gain on the sale of
Channelhealth of $4.3 million during the first quarter of 2002. IDX accounts for
its investment in Allscripts under the equity method of accounting. As a result
of the transaction, the Company is entitled to representation on Allscripts
Board of Directors.
REALIZED GAIN ON INVESTMENT.
Other income during the six months of 2001 includes a $5.8 million realized gain
from a distribution of marketable equity securities related to an investment in
an unrelated investment partnership.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE.
IDX, through a wholly owned subsidiary, currently owns approximately 20% of the
outstanding common stock of Allscripts and records its investment under the
equity method of accounting. IDX records its interest in the losses of
Allscripts as a reduction to its investment account. IDX recorded an equity loss
during the first six months of 2001 of $11.5 million on a pre-tax basis. IDX's
interest in the losses of Allscripts in 2001 reduced the balance of IDX's
investment carrying balance in Allscripts to zero, and accordingly no share of
Allscripts loss has been recorded during the first six months of 2002.
INCOME TAXES
The Company recorded income tax expense of approximately $3.4 million during the
first six months of 2002, an effective tax rate of 33.0%. This is lower than the
Company's historical tax rate of 40.0% due to certain research and
experimentation credits. The Company recorded income tax expense of
approximately $13.8 million during the first six months of 2001, an effective
tax rate of 44.0%. The higher rate in 2001 is principally due to transaction
costs related to the sale of ChannelHealth that are non-deductible for income
tax purposes. The Company anticipates a consolidated effective tax rate of
approximately 33.0% for the year ending December 31, 2002. This favorable rate
is primarily the result of research credits projected to be generated and
utilized in 2002. The Company anticipates that EDiX's effective tax rate in 2002
will also be less than the statutory rate due to the use of operating loss carry
forwards, subject to annual limitations. The net deferred tax assets as of June
30, 2002 of approximately $8.5 million are expected to be realized by generating
future taxable income and are otherwise recoverable through available tax
planning strategies.
NEW ACCOUNTING STANDARDS
In March of 2002, the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) issued (EITF 01-14), [Issue No. 01-14 of the Financial
Accounting Standards Board (FASB) Emerging Issues Task Force (EITF)] EITF 01-14
states that customer reimbursements received for "out-of-pocket" expenses
incurred should be characterized on the income statement as revenue. These
expenses include, but are not limited to, airfare, mileage, hotel stays,
out-of-town meals, photocopies, and telecommunications and facsimile charges.
Service revenue and cost of service expenses have been restated for all periods
presented in order to reflect this change resulting in no change to net income.
Page 19 of 31
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. EITF 94-3 allowed for an exit cost
liability to be recognized at the date of an entity's commitment to an exit
plan. SFAS 146 also requires that liabilities recorded in connection with exit
plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with early adoption encouraged. The Company does not expect the adoption
of SFAS 146 will have a material impact on its financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company principally has funded its operations, working capital needs and
capital expenditures from operations and short-term borrowings under revolving
secured bank lines of credit.
Net cash provided by or used in operations is principally comprised of net
income and depreciation and is primarily affected by the net effect of the
change in accounts receivable, accounts payable, accrued expenses and non-cash
items relating to the sale of Channelhealth and certain components of
restructuring charges. 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 installation efforts which are dependent upon
the size of the transaction, the changing business plans of the customer, the
effectiveness of customers' management and general economic conditions. During
the first six months of 2002, accounts receivable from customers have been
collected on average within 84 days which represents a decrease of 8 days in
terms of average days to collect receivables from customers as compared to the
year ended December 31, 2001.
Cash flows related to investing activities have historically been related to the
purchase of computer and office equipment, leasehold improvements and the
purchase and sale of investment grade marketable securities. The Company
invested approximately $3.0 million on the acquisition and implementation of an
enterprise resource planning system during the second quarter of 2002 and
anticipates investing an additional $3.5 million related to this implementation
during the remainder of 2002. The Company purchased its corporate headquarters
facility from a related party in April 2001 for approximately $15.0 million
based on an independent appraisal of its fair market value. This transaction was
reviewed and approved by certain independent members of the Board of Directors
of the Company that had no financial interest in the transaction. In April 2000,
the Company entered into a new operating lease for office space in Seattle,
Washington, commencing in 2003, for a period of 12 years. The Company
anticipates approximately $4.5 million in cash outlays for improvements related
to this Seattle lease in 2002.
In addition, investing activities may also include purchases of interests in,
loans to and acquisitions of businesses for access to complementary products and
technologies. The Company expects these activities to continue. In April 2002,
the Company acquired a minority interest in Stentor, Inc., one of the Company's
strategic partners, by exercising a warrant to purchase 562,069 shares of
preferred stock of Stentor, Inc. The Company paid approximately $7.5 million to
purchase the preferred shares. Stentor, Inc. is a California based medical
informatics company and a worldwide leader in medical image and information
management. The warrant was issued to the Company in November 2000 in connection
with the alliance agreement that was entered into by the parties to jointly
develop vnetix(TM), a medical image and information management system (MIMS)
combining the advanced intelligence of the Company's Radiology Imaging Suite
with the innovative image distribution technology from Stentor, Inc. This
investment will be carried at cost and there is currently no public market for
the preferred shares. There can be no assurance that the Company will be able to
successfully complete any such purchases or acquisitions in the future.
Cash flows from financing activities historically relate to the issuance of
common stock through the exercise of employee stock options and in connection
with the employee stock purchase plan and proceeds from line of credit.
Cash,cash equivalents and securities available-for-sale at June 30, 2002 were
$42.6 million, a decrease of $13.8 million from December 31, 2001. The Company
entered into a new revolving line of credit agreement during the second quarter
of 2002 allowing the Company to borrow up to $40.0 million based on certain
restrictions. This line of credit is secured by deposit accounts, accounts
receivable and other assets and bears interest at the bank's base rate plus
..25%, which was approximately 5.0% as of June 30, 2002. This line of credit is
Page 20 of 31
subject to certain terms and conditions and will expire on June 27, 2005. At
June 30, 2002, the Company had $18.7 million outstanding under this arrangement
and is in compliance with all covenants under this agreement. As of August 6,
2002 there was no outstanding balance on this line of credit.
In addition to existing financing arrangements, the Company owns, through a
wholly owned subsidiary, approximately 7.5 million shares of Allscripts
Healthcare Solutions, Inc. stock, a public company listed on the Nasdaq National
Market under the symbol MDRX. This investment in Allscripts stock is accounted
for under the equity method. IDX recorded a non-cash equity loss during the
first nine months of 2001 of $17.6 million on a pre-tax basis that reduced the
balance of IDX's investment carrying balance in Allscripts to zero. This
investment has a quoted market value of approximately $28.0 million as of June
30, 2002, and is subject to certain sale restrictions that may significantly
impact the market value.
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 increase the number of its
professional staff during 2002 as needed to meet anticipated sales volume and to
support research and development efforts for certain products. To the extent
necessary to support increases in staffing, the Company may obtain additional
office space.
As of June 30, 2002, the Company has not entered into other material lease or
purchase commitments not disclosed above. The Company believes that currently
available funds will be sufficient to finance its operating requirements at
least through the next twelve months. To date, inflation has not had a material
impact on the Company's revenues or income.
During the six month period ended June 30, 2002, IDX has not engaged in:
o Material off-balance sheet activities, including the use of structured
finance or special purpose entities, with the exception of BDP Realty which
has been given full recognition in the financial statements for all periods
presented as described below, and 4901 LBJ as described below,
o Trading activities in non-exchange traded contracts, or
o Transactions with persons or entities that benefit from their
non-independent relationship with IDX, other than described below.
Through April 19, 2001, the Company's consolidated financial statements included
the accounts of the Company and BDP Realty Associates (BDP), a real estate trust
owned by certain stockholders and key employees of the Company, Robert H. Hoehl
and Richard E. Tarrant, whose real estate was leased exclusively by the Company.
Effective with the date of the acquisition of the Company's corporate
headquarters from BDP, the Company has deconsolidated BDP and eliminated the net
assets, principally real estate and minority interest, included in the Company's
consolidated balance sheet as of that date. The Company's corporate headquarters
were purchased from BDP for cash, at fair market value as determined by
independent appraisers, for approximately $15.0 million during the second
quarter of 2001. This amount has been recorded as property and equipment. This
transaction was reviewed and approved by certain independent members of the
Board of Directors of the Company that had no financial interest in the
transaction. Total rent expense includes $294,000 in 2001 related to this lease.
The Company leases an office building from 4901 LBJ Ltd. Partnership, a real
estate partnership (REP) owned by certain stockholders and key employees of the
Company. Lease agreements are based on fair market value rents and are reviewed
and approved by independent members of the Board of Directors. Total rent
expense includes approximately $279,000 during each of the six month periods
ending June 30, 2002 and June 30, 2001, respectively, related to this lease.
Page 21 of 31
FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE
This Quarterly Report on Form 10-Q contains "forward-looking statements" as
defined in Section 21E of the Securities and Exchange Commission Act of 1934.
For this purpose, any statements contained in this Quarterly Report on Form 10-Q
that are not statements of historical fact may be deemed to be forward-looking
statements. Words such as "believes," "anticipates," "plans," "expects," "will"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause results to differ
materially from those indicated by these forward-looking statements, including
among others, the factors set forth below. If any risk or uncertainty identified
in the following factors actually occurs, our business, financial condition and
operating results would likely suffer. In that event, the market price of IDX's
common stock could decline.
The Company undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes in future operating results, financial condition or business
over time.
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results.
The following important factors affect IDX's business and operations generally
or affect more than one segment of our business and operations:
QUARTERLY OPERATING RESULTS MAY VARY. The Company's quarterly operating results
have varied in the past and may vary in the future. IDX expects its quarterly
results of operations to continue to fluctuate. Because a significant percentage
of IDX's expenses are relatively fixed, the following factors could cause these
fluctuations:
o delays in customers purchasing decisions due to a variety of factors
such as consideration and management changes;
o long sales cycles;
o long installation and implementation cycles for the larger, more
complex and costlier systems;
o recognizing revenue at various points during the installation
process, typically based on milestones; and
o timing of new product and service introductions and product upgrade
releases.
In light of the above, IDX believes that its results of operations for any
particular quarter or fiscal year are not necessarily reliable indicators of
future performance.
VOLATILITY OF STOCK PRICE. IDX has experienced, and expects to continue to
experience, fluctuations in its stock price due to a variety of factors
including:
o actual or anticipated quarterly variations in operating results;
o changes in expectations of future financial performance;
o changes in estimates and/or ratings of securities analysts;
o market conditions particularly in the computer software and
healthcare industries;
o announcements of technological innovations, including Internet
delivery of information and use of application service provider
technology;
o new product introductions by IDX or its competitors;
o delay in customers purchasing decisions due to a variety of factors;
o market prices of competitors; and
o healthcare reform measures and healthcare regulation.
These fluctuations have had a significant impact on the market price of our
common stock, and may have a significant impact on the future market price of
our common stock.
Page 22 of 31
These fluctuations may affect operating results as follows:
o ability to transact stock acquisitions; and
o ability to retain and incent key employees.
FINANCIAL TRENDS. Although the Company's results from operations improved during
the first six months of 2002, year over year operating results and cash from
operations generally declined during the period from 1998 through 2000. In 2001
and 2000, IDX generated a net loss of approximately $8.6 million and $36.0
million, respectively. If these trends continue, IDX may have difficulty
financing future growth and funding operating initiatives, including future
acquisitions.
DISRUPTION IN THE ECONOMY. The terrorist events of September 11, 2001 have
sensitized the Company and many other businesses to the potential disruption
that such activities can have on the economy, the business cycle and,
ultimately, on the financial performance of these organizations. It is
impossible to know whether such terrorist activities will continue, and whether,
and to what extent, they may cause a disruption which may have a material
adverse effect on the business and financial condition of the Company.
NEW PRODUCT DEVELOPMENT AND RAPIDLY CHANGING TECHNOLOGY. To be successful, IDX
must enhance its existing products, respond effectively to technology changes
and help its clients adopt new technologies. In addition, IDX must introduce new
products and technologies to meet the evolving needs of its clients in the
healthcare information systems market. IDX may have difficulty in accomplishing
this because of:
o the continuing evolution of industry standards, for example,
transaction standards pursuant to the Health Insurance Portability
and Accountability Act of 1996; and
o the creation of new technological developments, for example, Internet
and application service provider technology.
IDX is currently devoting significant resources toward the development of
enhancements to its existing products, particularly in the area of
Internet-based functionality and the migration of existing products to new
hardware and software platforms, including relational database technology,
object-oriented architecture and application service provider technology.
However, IDX may not successfully complete these product developments or the
adaptation in a timely fashion, and IDX's current or future products may not
satisfy the needs of the healthcare information systems market. Any of these
developments may adversely affect IDX's competitive position or render its
products or technologies noncompetitive or obsolete.
CHANGES AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY. IDX currently derives
substantially all of its revenues from sales of financial, administrative and
clinical healthcare information systems, medical transcription services and
other related services within the healthcare industry. As a result, the success
of IDX is dependent in part on the political and economic conditions in the
healthcare industry.
Virtually all of IDX's customers and the other entities with which IDX has a
business relationship operate in the healthcare industry and, as a result, are
subject to governmental regulation, including Medicare and Medicaid regulation.
Accordingly, IDX's customers and the other entities with which IDX has a
business relationship are affected by changes in such regulations and
limitations in governmental spending for Medicare and Medicaid programs. Recent
actions by Congress have limited governmental spending for the Medicare and
Medicaid programs, limited payments to hospitals and other providers under such
programs, and increased emphasis on competition and other programs that
potentially could have an adverse effect on IDX's customers and the other
entities with which IDX has a business relationship. In addition, federal and
state legislatures have considered proposals to reform the U.S. healthcare
system at both the federal and state level. If enacted, these proposals could
increase government involvement in healthcare, lower reimbursement rates and
otherwise change the business environment of IDX's customers and the other
entities with which IDX has a business relationship. IDX's customers and the
other entities with which IDX has a business relationship could react to these
proposals and the uncertainty surrounding these proposals by curtailing or
Page 23 of 31
deferring investments, including those for IDX's products and services.
In addition, many healthcare providers are consolidating to create integrated
healthcare delivery systems with greater market power. These providers may try
to use their market power to negotiate price reductions for IDX's products and
services. If IDX is forced to reduce its prices, its operating margins would
likely decrease. As the healthcare industry consolidates, competition for
customers will become more intense and the importance of acquiring each customer
will become greater.
COMPETITION FOR HEALTHCARE INFORMATION SYSTEMS. The market for healthcare
information systems is intensely competitive, rapidly evolving and subject to
rapid technological change. IDX believes that the principal competitive factors
in this market include the breadth and quality of system and product offerings,
the features and capabilities of the systems, the price of the system and
product offerings, the ongoing support for the systems, the potential for
enhancements and future compatible products.
Some of IDX's competitors have greater financial, technical, product
development, marketing and other resources than IDX, and some of its competitors
offer products that it does not offer. The Company's principal existing
competitors include, Eclipsys Corporation, McKesson Medquist, Inc., Siemans AG,
Epic Systems Corporation and Cerner Corporation. Each of these competitors
offers a suite of products that compete with many of IDX's products. There are
other competitors that offer a more limited number of competing products. In
addition, IDX expects that major software information systems companies, large
information technology consulting service providers and system integrators,
Internet-based start-up companies and others specializing in the healthcare
industry may offer competitive products or services. In October 2001, Pfizer,
IBM and Microsoft announced the creation of a joint venture known as Amicore to
develop applications to automate the administrative, clinical and financial
functions of a medical practice and connect the practice to groups,
laboratories, pharmacies and other providers for physicians and physician
groups.
PRODUCT LIABILITY CLAIMS. Any failure by IDX's products that provide
applications relating to patient medical histories, diagnostic procedures and
treatment plans could expose IDX to product liability claims. These potential
claims may exceed IDX's current insurance coverage. Unsuccessful claims could be
costly to defend and divert management time and resources. In addition, IDX
cannot make assurances that it will continue to have appropriate insurance
available to it in the future at commercially reasonable rates.
KEY PERSONNEL. The success of IDX is dependent to a significant degree on its
key management, sales, marketing and technical personnel. To be successful IDX
must attract, motivate and retain highly skilled managerial, sales, marketing,
consulting and technical personnel, including programmers, consultants and
systems architects skilled in the technical environments in which IDX's products
operate. Competition for such personnel in the software and information services
industries is intense. IDX does not maintain "key man" life insurance policies
on any of its executives with the exception of Richard E. Tarrant. Additionally,
not all IDX personnel have executed noncompetition agreements.
GOVERNMENT REGULATION. Virtually all of IDX's customers and the other entities
with which IDX has a business relationship operate in the healthcare industry
and, as a result, are subject to governmental regulation. Because IDX's products
and services are designed to function within the structure of the healthcare
financing and reimbursement systems currently in place in the United States, and
because IDX is pursuing a strategy of developing and marketing products and
services that support its customers' regulatory and compliance efforts, IDX may
become subject to the reach of, and liability under, these regulations.
The Federal Anti-Kickback Law, among other things, prohibits the direct or
indirect payment or receipt of any remuneration for Medicare, Medicaid and
certain other Federal or state healthcare program patient referrals, or
arranging for or recommending referrals or other business paid for in whole or
in part by the federal health care programs. Violations of the Federal
Anti-Kickback Law may result in civil and criminal sanction and liability,
including the temporary or permanent exclusion of the violator from government
Page 24 of 31
health programs, treble damages and imprisonment for up to five years for each
violation. If the activities of a customer of IDX or other entity with which IDX
has a business relationship were found to constitute a violation of the Federal
Anti-Kickback Law and IDX, as a result of the provision of products or services
to such customer or entity, was found to have knowingly participated in such
activities, IDX could be subject to sanction or liability under such laws,
including the exclusion of IDX from government health programs. As a result of
exclusion from government health programs, IDX customers would not be permitted
to make any payments to IDX.
The Federal Civil False Claims Act and the Medicare/Medicaid Civil Money
Penalties regulations prohibit, among other things, the filing of claims for
services that were not provided as claimed, which were for services that were
not medically necessary, or which were otherwise false or fraudulent. Violations
of these laws may result in civil damages, including treble and civil penalties.
In addition, the Medicare/Medicaid and other Federal statutes provide for
criminal penalties for such false claims. If, as a result of the provision by
IDX of products or services to its customers or other entities with which IDX
has a business relationship, IDX provides assistance with the provision of
inaccurate financial reports to the government under these regulations, or IDX
is found to have knowingly recorded or reported data relating to inappropriate
payments made to a healthcare provider, IDX could be subject to liability under
these laws.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) contains
provisions regarding standardization, privacy, security and administrative
simplification in healthcare. As a result of regulations now proposed under
HIPAA, IDX intends to make investments to support customer operations in areas,
such as:
o electronic data transactions;
o computer system security; and
o patient privacy.
Although it is not possible to anticipate the final form of all regulations
under HIPAA, IDX has made and expects to continue to make investments in product
enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require IDX to make investments in new products
or charge higher prices. It may be expensive to implement security or other
measures designed to comply with any new legislation or regulation.
The United States Food and Drug Administration has promulgated a draft policy
for the regulation of computer software products as medical devices under the
1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To
the extent that computer software is a medical device under the policy, IDX, as
a manufacturer of such products, could be required, depending on the product,
to:
o register and list its products with the FDA;
o notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing such products; or
o obtain FDA approval by demonstrating safety and effectiveness before
marketing a product.
Depending on the intended use of a device, the FDA could require IDX
to obtain extensive data from clinical studies to demonstrate safety or
effectiveness, or substantial equivalence. If the FDA requires this data, IDX
would be required to obtain approval of an investigational device exemption
before undertaking clinical trials. Clinical trials can take extended periods of
time to complete. IDX cannot provide assurances that the FDA will approve or
clear a device after the completion of such trials. In addition, these products
would be subject to the Federal Food, Drug and Cosmetic Act's general controls,
including those relating to good manufacturing practices and adverse experience
reporting. Although it is not possible to anticipate the final form of the FDA's
policy with regard to computer software, IDX expects that the FDA is likely to
become increasingly active in regulating computer software intended for use in
healthcare settings regardless of whether the draft is finalized or changed. The
FDA can impose extensive requirements governing pre- and post-market conditions
like service investigation, approval, labeling and manufacturing. In addition,
the FDA can impose extensive requirements governing development controls and
quality assurance processes.
Page 25 of 31
SYSTEM ERRORS AND WARRANTIES. IDX's healthcare information systems are very
complex. As with complex systems offered by others, IDX's healthcare information
systems may contain errors, especially when first introduced. IDX's healthcare
information systems are intended to provide information to healthcare providers
for use in the diagnosis and treatment of patients. Therefore, users of IDX's
products may have a greater sensitivity to system errors than the market for
software products generally. Failure of an IDX customer's system to perform in
accordance with its documentation could constitute a breach of warranty and
require IDX to incur additional expenses in order to make the system comply with
the documentation. If such failure is not timely remedied, it could constitute a
material breach under a contract allowing the client to cancel the contract and
subject IDX to liability.
POTENTIAL INFRINGEMENT OF PROPRIETARY RIGHTS OF OTHERS. If any of IDX's products
violate third party proprietary rights, IDX may be required to re-engineer its
products or seek to obtain licenses from third parties to continue offering its
products without substantial re-engineering. Any efforts to reengineer IDX's
products or obtain licenses from third parties may not be successful, in which
case IDX may be forced to stop selling the infringing product or remove the
infringing functionality or feature. IDX may also become subject to damage
awards as a result of infringing the proprietary rights of others, which could
cause IDX to incur additional losses and have an adverse impact on its financial
position. IDX does not conduct comprehensive patent searches to determine
whether the technologies used in its products infringe patents held by others.
In addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. IDX's success and
competitiveness are dependent to a significant degree on the protection of its
proprietary technology. IDX relies primarily on a combination of copyrights,
trade secret laws, patents and restrictions on disclosure to protect its
proprietary technology. Despite these precautions, others may be able to copy or
reverse engineer aspects of IDX's products, to obtain and use information that
IDX regards as proprietary or to independently develop similar technology.
Litigation may continue to be necessary to enforce or defend IDX's proprietary
technology or to determine the validity and scope of the proprietary rights of
others. This litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of management and technical resources.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. IDX intends to continue to grow in
part through either acquisitions of complementary products, technologies and
businesses or alliances with complementary businesses. IDX may not be successful
in these acquisitions or alliances, or in integrating any such acquired or
aligned products, technologies or businesses into its current business and
operations. Factors which may affect IDX's ability to expand successfully
include:
o the generation of sufficient financing to fund potential
acquisitions and alliances;
o the successful identification and acquisition of products,
technologies or businesses;
o effective integration and operation of the acquired or aligned
products, technologies or businesses despite technical
difficulties, geographic limitations and personnel issues; and
o overcoming significant competition for acquisition and alliance
opportunities from companies that have significantly greater
financial and management resources.
STRATEGIC ALLIANCE WITH ALLSCRIPTS HEALTHCARE SOLUTIONS. In 2001, IDX entered
into a ten-year strategic alliance with Allscripts Healthcare Solutions, Inc. to
co-operatively develop, market and sell integrated clinical and practice
management products.
During the term of the alliance, IDX is prohibited from co-operating with direct
competitors of Allscripts to develop or provide any products similar to or in
competition with Allscripts products in the practice management systems market.
If the strategic alliance is not successful, or the restrictions placed on IDX
during the term of the strategic alliance prohibit IDX from successfully
marketing and selling certain products and services, IDX's operating results may
suffer. Additionally, if Allscripts breaches the strategic alliance, it may also
leave the Company without critical clinical components for its information
systems offerings in the physician group practice markets.
Page 26 of 31
BUSINESS RELATIONSHIP WITH COMPAQ/HEWLETT-PACKARD. Compaq Computer Corporation
completed its proposed merger with Hewlett-Packard Company in May 2002. Prior to
the merger, Compaq had been leading provider of hardware and operating system
software used by a majority of the applications offered by the Company. To the
extent the merger impacts the product lines that IDX uses in its product
offering, or the development activities of the combined entity, it may adversely
affect IDX's ability to continue to offer its products on the historical
hardware platforms. To date, there has not been any significant change in the
relationship between IDX and the resulting company HP/Compaq but as a result,
the merger could have a material adverse effect upon the business of IDX.
RESTRICTIONS ON LIQUIDATION OF INVESTMENT IN ALLSCRIPTS HEALTHCARE SOLUTIONS. In
January 2001, IDX received approximately 7.5 million shares of common stock of
Allscripts Healthcare Solutions, Inc. in connection with the acquisition by
Allscripts of IDX's majority owned subsidiary, ChannelHealth Incorporated. IDX
entered into a stock rights and restrictions agreement with Allscripts, pursuant
to which, among other things, IDX agreed to restrictions on the sale of its
shares of Allscripts common stock. In general, IDX is prohibited from selling
more than 25% of it shares of Allscripts common stock in any one year, and
16.67% in any one month. The restrictions on IDX's ability to sell shares of
Allscripts common stock may make it difficult for IDX to liquidate its
investment in Allscripts and may adversely affect the value of such investment.
ANTI-TAKEOVER DEFENSES. IDX's Second Amended and Restated Articles of
Incorporation and Second Amended and Restated Bylaws contain certain
anti-takeover provisions, which could deter an unsolicited offer to acquire IDX.
For example, IDX's board of directors is divided into three classes, only one of
which will be elected at each annual meeting. These provisions may delay or
prevent a change in control of IDX.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IDX does not currently use derivative financial instruments. The Company
generally places its securities available-for-sale investments in high credit
quality instruments primarily U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with contractual
maturities of a year or less. We do not expect any material loss from our
marketable security investments.
Internationally, IDX invoices customers in United States currency. The Company
is exposed to minimal foreign exchange rate fluctuations and does not enter into
foreign currency hedge transactions. Through June 30, 2002, foreign currency
fluctuations have not had a material impact on our financial position or results
of operations.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities that may experience a decline in market
value due to changes in interest rates. A hypothetical 10% increase or decrease
in interest rates, however, would not have a material adverse effect on our
financial condition.
Interest rates on short-term borrowings with floating rates carry a degree of
interest rate risk. Our future interest expense may increase if interest rates
fluctuate. Interest expense was immaterial in the first six months of 2002 and
2001.
Interest income on the Company's investments is included in "Other Income." The
Company accounts for cash equivalents and securities available-for-sale in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Cash equivalents are
short-term highly liquid investments with original maturity dates of three
months or less. Cash equivalents are carried at cost, which approximates fair
market value. The Company's investments are classified as securities
available-for-sale and are recorded at fair value with any unrealized gain or
loss recorded as an element of stockholders' equity.
Page 27 of 31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 18, 2001, the Company commenced a lawsuit against Epic Systems
Corporation, a competitor of the Company, the University of Wisconsin Medical
Foundation (the Foundation), and two individuals, claiming, among other things,
that trade secrets of the Company involving its IDXtend medical group practice
system were wrongfully disclosed to, and misappropriated by, Epic, in a series
of meetings that took place in 1998 and 1999. The defendants deny the Company's
claims. The Company's lawsuit seeks damages and injunctive relief and was
brought in the United States District Court for the Western District of
Wisconsin and is entitled, IDX Systems Corporation v. Epic Systems Corporation,
et al. The Foundation brought a counterclaim against the Company claiming that
its lawsuit interferes with a contract between the Foundation and Epic, and that
the confidentiality provisions in IDX's contracts with the Foundation are
invalid. The counterclaim seeks damages and declaratory judgment. The Company
denies the counterclaim.
Subsequently, Epic filed an Answer denying the essential elements of the
Company's claims, and asserted counterclaims against the Company. Epic alleges
that the Company's claims asserting its trade secret rights were brought in bad
faith, with an intent to injure Epic competitively, and thereby violated
Sections 1 and 2 of the Sherman Act because the Company allegedly possesses
monopoly power in the U.S. market for medical practice information systems. Epic
also claims that this same alleged conduct constitutes intentional interference
with its contract with the Foundation. The counterclaim seeks treble damages.
The Company denies the counterclaims. On July 31, 2001, the Company's lawsuit
against Epic, the Foundation and the individuals was dismissed and the
counterclaims of Epic and the Foundation were dismissed. The Company appealed
the dismissal of its lawsuit to the United States Court of Appeals, and on April
1, 2002, that appellate court affirmed the District Court's dismissal of the
trade secret claim, but reversed and remanded the other related claims of the
Company, including breach of contract and tortious interference claims against
the defendants. The Company continues to vigorously pursue such remanded claims
at the District Court. It has resumed its discovery efforts in anticipation of
trial, which has been scheduled to begin in September 2002.
In April 2000, the Company commenced a lawsuit for damages caused by wrongful
cancellation and material breach of contract by St. John Health System (SJHS),
in the United States District Court for Eastern District of Michigan, entitled
IDX Systems Corporation v. St. John Health System. Subsequently, SJHS commenced
a lawsuit against the Company in the Circuit Court of Wayne County, Michigan,
claiming unspecified damages against the Company for anticipatory repudiation,
breach of contract, tort and fraud. On motion of the Company, SJHS's lawsuit was
removed to and consolidated in the federal court. In its answer to the Company's
lawsuit, SJHS asserted the same claims previously asserted in its state court
action. In September 2001, SJHS specified damage claims of approximately $77.0
million in allegedly lost savings, and in January 2002 raised another theory of
alleged unspecified damages for "cover". The Company believes the claims of SJHS
are without merit and continues to vigorously defend itself and prosecute its
own claims for damages, which the Company believes may exceed approximately $9.0
million. The lawsuit is in the trial preparation stage and the parties are
awaiting scheduling of the trial by the court.
From time to time, the Company is a party to or may be threatened with other
litigation in the ordinary course of its business. The Company regularly
analyzes current information including, as applicable, the Company's defenses
and insurance coverage and as necessary, provides accruals for probable and
estimable liabilities for the eventual disposition of these matters. The
ultimate outcome of these matters is not expected to materially affect the
Company's business, financial condition or results of operations.
Page 28 of 31
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2002 Annual Meeting of Stockholders on May 20,
2002. Of the 28,851,174 shares of common stock outstanding and entitled
to vote at this meeting, 22,895,765 were represented at this meeting,
in person or by proxy. The following matter was voted upon at the
Annual Meeting.
1. Richard E. Tarrant and Allen Martin, Esq. were elected to serve for
a term of three years as Class I Directors. The remaining terms of
Stuart H. Altman, Ph.D., Henry M. Tufo, M.D., Robert H. Hoehl,
Mark F. Wheeler, M.D. and David P. Hunter continued after the
meeting. The result of the vote with respect to each nominee for
director was as follows:
For Withheld
--- --------
Richard E. Tarrant 21,285,839 1,609,926
Allen Martin, Esq. 22,756,710 139,055
ITEM 5. OTHER INFORMATION
Shareholder's Proposal for 2003 Annual Meeting.
As set forth in the Company's Proxy Statement for its 2002 Annual
Meeting of Stockholders, proposals of stockholders intended to be
included in the Company's proxy statement for the 2003 Annual Meeting
of Stockholders must be received by the Company at its principal office
in South Burlington, Vermont not later than December 23, 2002.
Stockholders who wish to make a proposal at the 2003 Annual Meeting -
other than one that will be included in the Company's proxy materials -
must notify the Company no later than March 8, 2003. If a stockholder
who wishes to present a proposal fails to notify the Company by this
date, the proxies that management solicits for the meeting will have
discretionary authority to vote on the stockholder's proposal if it is
properly brought before the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this Form 10-Q are listed on the Exhibit
Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference:
(b) There were no Forms 8-K filed during the second quarter of 2002.
Page 29 of 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDX SYSTEMS CORPORATION
Date: August 14, 2002 By: /S/ JOHN A. KANE
____________________________
John A. Kane,
Sr. Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
Page 30 of 31
EXHIBITS
--------
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description Page
- ---------- ----------- ----
10.1 Loan and Security Agreement by and among IDX 32
Systems Corporation, IDX Information Systems
Corporation, IDX Investment Corporation, EDiX
Corporation and Heller Healthcare Finance, Inc.
dated as of June 27, 2002.
10.2 Revolving Credit Note by and among IDX Systems 71
Corporation, IDX Information Systems Corporation,
IDX Investment Corporation, EDiX Corporation and
Heller Healthcare Finance, Inc. dated as of
June 27, 2002.
99.1 Certification pursuant to 18 U.S.C. Section 1350 77
Page 31 of 31