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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 SEPTEMBER 30, 2003
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
---- ----
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
---- ----
The number of shares outstanding of the registrant's common stock as of
October 22, 2003 was 29,529,445.
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IDX SYSTEMS CORPORATION
FORM 10-Q
For the Period Ended September 30, 2003
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets ........................3
Condensed Consolidated Statements of Income ..................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 ...........................16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ..........................................................36
Item 4. Controls and Procedures .................................37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................38
Item 2. Changes In Securities and Use of Proceeds................40
Item 3. Defaults Upon Senior Securities .........................40
Item 4. Submission of Matters to a Vote of Security Holders .....40
Item 5. Other Information .......................................40
Item 6. Exhibits and Reports on Form 8-K ........................40
SIGNATURES.................................................................41
EXHIBIT INDEX..............................................................42
Page 2 of 42
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Cash $ 26,750 $ 40,135
Marketable securities 75,451 14,300
Accounts receivable, net 90,406 86,596
Refundable income taxes 8,699 7,590
Prepaid and other current assets 10,377 8,169
Deferred tax asset 1,727 2,033
Assets of discontinued operations - 42,099
--------- ---------
TOTAL CURRENT ASSETS 213,410 200,922
Property and equipment, net 82,221 71,038
Capitalized software costs, net 2,306 2,126
Goodwill, net 2,508 2,411
Other assets 13,427 13,778
Deferred tax asset 5,273 1,570
--------- ---------
TOTAL ASSETS $ 319,145 $ 291,845
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses
and other liabilities $ 49,525 $ 56,647
Deferred revenue 24,909 17,969
Notes payable to bank - 18,727
Liabilities of discontinued operations - 6,289
--------- ---------
TOTAL CURRENT LIABILITIES 74,434 99,632
Commitments and contingencies - -
Stockholders' equity 244,711 192,213
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 319,145 $ 291,845
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 3 of 42
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
System sales $ 37,342 $ 30,404 $ 106,669 $ 83,802
Maintenance and service fees 64,089 58,450 185,482 171,036
-------- -------- --------- --------
TOTAL REVENUES 101,431 88,854 292,151 254,838
OPERATING EXPENSES
Cost of system sales 13,431 10,816 36,731 28,629
Cost of maintenance and services 44,575 42,183 129,926 125,181
Selling, general and administrative 21,334 18,276 62,846 54,495
Software development costs 13,971 12,536 41,549 36,626
-------- -------- --------- --------
TOTAL OPERATING EXPENSES 93,311 83,811 271,052 244,931
-------- -------- --------- --------
OPERATING INCOME 8,120 5,043 21,099 9,907
OTHER INCOME
Other income 252 825 338 1,330
Gain on sale of investment in
subsidiary - - - 4,273
-------- -------- --------- --------
TOTAL OTHER INCOME 252 825 338 5,603
-------- -------- --------- --------
Income before income taxes 8,372 5,868 21,437 15,510
Income tax benefit (provision) 1,929 (1,936) (1,990) (5,118)
-------- -------- --------- --------
INCOME FROM CONTINUING OPERATIONS 10,301 3,932 19,447 10,392
DISCONTINUED OPERATIONS
Income (loss) from discontinued
operations, net of income taxes (814) 289 (388) 718
Gain on sale of discontinued
operations, net of income taxes 814 - 27,214 -
-------- -------- --------- --------
INCOME FROM DISCONTINUED OPERATIONS - 289 26,826 718
-------- -------- --------- --------
NET INCOME $ 10,301 $ 4,221 $ 46,273 $ 11,110
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Income from continuing operations $ 0.35 $ 0.14 $ 0.66 $ 0.36
Income from discontinued operations $ - $ 0.01 $ 0.92 $ 0.02
-------- -------- --------- --------
BASIC EARNINGS PER SHARE $ 0.35 $ 0.15 $ 1.58 $ 0.38
======== ======== ======== ========
Basic weighted average shares
outstanding 29,446 29,032 29,271 28,916
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income from continuing operations $ 0.34 $ 0.13 $ 0.66 $ 0.36
Income from discontinued operations $ - $ 0.01 $ 0.90 $ 0.02
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.14 $ 1.56 $ 0.38
======== ======== ======== ========
Diluted weighted average shares
outstanding 30,224 29,180 29,699 29,119
======== ======== ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 4 of 42
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net income $ 46,273 $ 11,110
Less: Income (loss) from discontinued operations,
net of income taxes (388) 718
Gain on disposal of discontinued operations,
net of income taxes 27,214 -
---------- ----------
Net income from continuing operations 19,447 10,392
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,297 8,358
Amortization 1,347 1,720
Restricted stock - amortization and forfeitures 258 225
Deferred tax asset (845) 4,435
Increase in allowance for doubtful accounts 882 1,002
Gain on sale of investment in subsidiary - (4,273)
Loss on disposition of asset - 93
Tax benefit related to exercise of
non-qualified stock options 747 -
Changes in operating assets and liabilities:
Accounts receivable (4,693) (2,272)
Prepaid expenses and other assets (3,388) (4,987)
Accounts payable and accrued expenses (7,432) (5,225)
Federal and state income taxes (1,108) 6,817
Deferred revenue 6,940 (1,165)
---------- ----------
Net cash provided by operating
activities from continuing operations 21,452 15,120
INVESTING ACTIVITIES:
Purchase of property and equipment, net (21,794) (10,890)
Purchase of marketable securities (190,574) (22,116)
Proceeds from sale of marketable securities 129,422 30,523
Net proceeds from the sale of EDiX Corporation 54,852 -
Other assets (997) (7,498)
---------- ----------
Net cash used in investing activities
from continuing operations (29,091) (9,981)
FINANCING ACTIVITIES:
Proceeds from exercises of common stock options 5,284 2,222
Proceeds from debt issuance 23,727 56,181
Repayment of debt issuance (42,454) (52,454)
---------- ----------
Net cash (used in) provided by
financing activities from continuing
operations (13,443) 5,949
---------- ----------
Net cash provided by (used in)
continuing operations (21,082) 11,088
Net cash provided by (used in)
discontinued operations 7,697 (3,428)
---------- ----------
Net increase (decrease) in cash and cash equivalents (13,385) 7,660
Cash and cash equivalents at beginning of period 40,135 38,083
---------- ----------
Cash and cash equivalents at end of period $ 26,750 $ 45,743
========== ==========
Supplemental Cash Flow Information
Cash paid for interest $ 273 $ 107
Cash paid (received) for income taxes $ 2,800 $ (400)
Non-cash Financing Activities:
Issuance of restricted stock $ 314 $ -
Forfeiture of restricted stock $ (1,515) $ -
Issuance of common stock for compensation $ 521 $ -
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 5 of 42
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION
IDX Systems Corporation ("IDX" or the "Company") provides healthcare information
systems and services to large integrated healthcare delivery enterprises
principally located in the United States and Canada. Revenues are derived from
the licensing of software, hardware sales, and provision of maintenance and
services related to systems sales. Through June 18, 2003, the Company also
derived revenues from the provision of medical transcription services through
its wholly owned subsidiary, EDiX Corporation ("EDiX").
On June 18, 2003, the Company completed the sale of EDiX to Total eMed, Inc.
("TEM"), a medical transcription company based in Franklin, Tennessee. EDiX was
accounted for as a discontinued operation and therefore, EDiX's results of
operations and cash flows have been removed from the Company's results of
continuing operations and cash flows for all periods presented in this Quarterly
Report on Form 10-Q. EDiX's assets and liabilities as of December 31, 2002 have
been reported in the condensed consolidated balance sheets as assets and
liabilities of discontinued operations. See Note 13 for further information on
the sale of EDiX.
Certain reclassifications of prior period data have been made to conform to the
current reporting period.
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, and the accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002, filed with the Securities and
Exchange Commission on March 31, 2003. 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 nine month periods ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003.
NOTE 2 - ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation plan under Accounting
Principal Bulletin Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its stock-based
compensation plans. Accordingly, the Company records expense for employee stock
compensation plans equal to the excess of the market price of the underlying IDX
shares at the date of grant over the exercise price of the stock-related award,
if any (known as the intrinsic value). In general, all employee stock options
are issued with the exercise price equal to the market price of the underlying
shares at the grant date and therefore, no compensation expense is recorded. In
addition, no compensation expense is recorded for purchases under the 1995
Employee Stock Purchase Plan (the "ESPP") in accordance with APB No. 25. The
intrinsic value of restricted stock units and certain other stock-based
compensation issued to employees as of the date of grant is amortized to
compensation expense over the vesting period. Options granted to scientific
advisory board members and other non-employees are recorded at fair value based
on the fair value measurement criteria of Statement of Financial Accounting
Standard ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
SFAS No. 123 establishes the fair value based method of accounting for
stock-based compensation plans. The Company has adopted the disclosure-only
alternative for stock options granted to employees and directors and for
employee stock purchases under the ESPP under SFAS No. 123. The following table
summarizes the pro forma operating results of the Company had compensation cost
been determined in accordance with the fair value based method prescribed by
SFAS No. 123.
Page 6 of 42
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
(IN THOUSANDS, EXCEPT FOR
- ------------------------
PER SHARE DATA) 2003 2002 2003 2002
- --------------- ---- ---- ---- ----
Net income as reported $ 10,301 $ 4,221 $ 46,273 $ 11,110
Add:
Stock-based employee compensation
expense included in reported net
income, net of related tax effects 106 50 230 180
Deduct:
Total stock-based compensation under
fair value based methods, net of
related tax effects (1,464) (1,146) (4,654) (3,683)
--------------------- ------------------
Pro forma net income - SFAS 123 $ 8,943 $ 3,125 $ 41,849 $ 7,607
--------------------- ------------------
Basic net income per share:
As reported $ 0.35 $ 0.15 $ 1.58 $ 0.38
Pro forma - SFAS 123 $ 0.30 $ 0.11 $ 1.43 $ 0.26
Diluted net income per share:
As reported $ 0.34 $ 0.14 $ 1.56 $ 0.38
Pro forma - SFAS 123 $ 0.30 $ 0.11 $ 1.41 $ 0.26
NOTE 3 - NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS. FIN 45 clarifies the disclosure requirements made by a guarantor in its
interim and annual statements explaining that a guarantor must recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
imposed by issuing a guarantee. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's fiscal year-end. The
provisions of FIN 45 do not have a material impact on the financial position of
IDX.
In January 2003, the FASB issued FIN 46, CONSOLIDATION OF VARIABLE INTEREST
ENTITIES, to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. Prior to FIN 46, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN 46 changes that
guidance by requiring a variable interest entity, as defined in FIN 46, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or is entitled to receive
a majority of the entity's residual returns or both. FIN 46 also requires
disclosure about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. On October 8,
2003, the Financial Accounting Standards Board deferred the effective date of
FIN 46 for variable interest entities created before January 31, 2003 to periods
ending after December 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of FIN 46 is not expected
to have a material impact on the Company's financial position, results of
operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION--TRANSITION DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosure in financial
statements regarding the effects of stock-based compensation. The provisions of
SFAS No. 148 are effective for fiscal and interim periods ending after
Page 7 of 42
December 15, 2002. The Company will continue to apply APB No. 25 as the
method used to account for stock-based employee compensation arrangements,
where applicable, but has adopted the disclosure requirements of SFAS No. 148.
NOTE 4 - BUSINESS COMBINATIONS AND DIVESTITURES
On June 18, 2003, the Company sold all the capital stock of EDiX to TEM in
exchange for $64.0 million in cash. See Note 13 for further information on the
sale of EDiX.
In April 2002, the Company acquired a minority interest in Stentor, Inc.
("Stentor"), one of the Company's strategic partners, by exercising a warrant to
purchase 562,069 shares of preferred stock of Stentor. The Company paid
approximately $7.5 million to purchase the preferred shares. Stentor is a
California based medical informatics company with products for medical image and
information management. The warrant was issued to the Company in November 2000
in connection with an alliance agreement that was entered into by the parties to
jointly develop a medical image and information management system ("MIMS")
combining the Company's Imaging Suite(TM) product with the image distribution
technology from Stentor. This investment is carried at cost. There is currently
no public market for the preferred shares of Stentor.
On January 8, 2001, the Company sold certain operations of its majority owned
subsidiary, ChannelHealth Incorporated ("ChannelHealth") to Allscripts
Healthcare Solutions, Inc. ("Allscripts"), 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.
In exchange for its 87% ownership of ChannelHealth, IDX received approximately
7.5 million shares (subject to certain resale restrictions as discussed below)
of Allscripts common stock, which represented approximately a 20% ownership
interest in Allscripts. IDX valued the shares of Allscripts common stock at an
estimated fair value of $29.5 million, which included a discount from market
value due to restrictions on transfer. IDX recorded the initial investment in
Allscripts at $17.6 million, which was less than the value of the shares
received of $29.5 million due to an $11.9 million limitation adjustment for the
portion of the gain on the sale of ChannelHealth that represented IDX's
ownership in Allscripts. At the time of the transaction, ChannelHealth's
liabilities exceeded its assets, resulting in a gain after transaction costs of
approximately $40 million. Pursuant to the alliance agreement, IDX guaranteed
that Allscripts gross revenues resulting from the alliance (less any commissions
paid to IDX) would amount to at least $4.5 million for fiscal year 2001. Due to
this contingency, IDX deferred $4.5 million of the gain as of the date of the
transaction and recognized a gain of $35.5 million in 2001. An additional gain
of $4.3 million was recognized in the first quarter of 2002 when the contingency
was resolved.
IDX accounts for its investment in Allscripts under the equity method of
accounting. Under the equity method of accounting, IDX recognized its pro rata
share of Allscripts 2001 losses resulting in the elimination of the carrying
value of this investment during the third quarter of 2001. IDX has not recorded
its share of Allscripts losses since then. As of September 30, 2003, the
Company's unrecorded share of Allscripts cumulative losses amounts to $68.6
million. At September 30, 2003, the estimated market value of the Company's
investment in Allscripts is approximately $30.5 million based on the closing
price per share of Allscripts common stock on the NASDAQ National Market. Due to
certain restrictions on the Company's ability to resell the stock, the value the
Company might realize upon a sale of its position in Allscripts likely would be
less than the value referenced in the preceding sentence.
As of September 30, 2003, the Company has sold an aggregate of approximately
14,000 shares of Allscripts common stock, which has not materially changed its
ownership interest in Allscripts.
Summary unaudited financial information for Allscripts for the three and nine
months ended September 30, 2003 and September 30, 2002 is as follows (in
thousands):
Page 8 of 42
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue $ 22,488 $ 20,006 $ 62,188 $ 58,873
Gross profit 8,655 5,236 21,360 14,028
Net loss (918) (3,199) (5,095) (13,185)
Summary unaudited financial information for Allscripts as of September 30, 2003
and audited financial information as of December 31, 2002 is as follows (in
thousands):
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
2003 2002
------------------- ------------------
Current assets $ 39,938 $ 63,095
Non-current assets 68,804 41,258
Current liabilities 23,639 18,369
Non-current liabilities 2,042 163
NOTE 5 - LEASE ABANDONMENT CHARGE
In 1999, the Company entered into a lease for new office space in Seattle.
Although the Company continued to utilize the existing space, an active search
for a sublessor was initiated and has been ongoing. In 2002, the Company
determined it would consolidate its Seattle operations into the new office space
and abandoned the space subject to the former lease. Due to the depressed
Seattle real estate market and the inability to obtain a sublessor, the Company
recorded a lease abandonment charge of $9.2 million in its core information
systems and services business segment in the fourth quarter of 2002. The lease
abandonment charge is related to lease payments of approximately $7.9 million
through the end of the lease term in 2005 and non-cash write-offs of certain
leasehold improvements of approximately $1.3 million. As of December 31, 2002,
the Company had an accrual balance of $9.2 million. During the first nine months
of 2003, leasehold improvements of $1.3 million were written off and lease
payments of approximately $2.1 million were made. Of the $5.8 million accrual
remaining at September 30, 2003, approximately $700,000 will be paid during the
remainder of 2003 and approximately $5.1 million thereafter. In the event that
the Company is able to secure a sub-tenant to assume its prior lease in a future
reporting period, the present value of the future sub-lease income would be
recorded as a reduction in expenses under the lease abandonment caption in the
financial statements in the period in which the sub-lease agreement is signed.
NOTE 6 - RESTRUCTURING CHARGES
On September 28, 2001, the Company announced its plan to restructure and realign
its large physician group practice business. 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, comprised of
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 workforce reduction related actions
were completed during the fourth quarter of 2001. As of December 31, 2002, the
Company had an accrual balance of $2.9 million, primarily related to leased
facilities, of which approximately $1.3 million was paid during the first nine
months of 2003. Of the $1.6 million accrual balance at September 30, 2003,
approximately $200,000 will be paid during the remainder of 2003 and
approximately $1.4 million thereafter.
NOTE 7 - SEGMENT INFORMATION
On June 18, 2003, the Company completed the sale of EDiX to TEM. Effective with
the sale, the Company's continuing operations are classified into one reportable
business segment, Information Systems and Services. Information Systems and
Page 9 of 42
Services consist of IDX's healthcare information solutions that include
software, hardware and related services. IDX solutions enable healthcare
organizations to redesign patient care and other workflow processes in order to
improve efficiency and quality. The principal markets for this segment include
physician groups, management service organizations, hospitals and integrated
delivery networks primarily located in the United States and Canada.
Through the first quarter of 2003, the Company had an additional segment,
medical transcription services, which provided medical transcription outsourcing
services for hospitals and large physician group practices primarily located in
the United States. This segment was discontinued effective as of the second
quarter of 2003 with the sale of EDiX to TEM and is reflected in discontinued
operations (see Note 13). Accordingly, because the Company currently operates
under one business segment, segment information is no longer being disclosed
separately. Operating results for the discontinued transcription services
segment have been restated to exclude general corporate overhead previously
allocated to the segment and interest charged on certain inter-company loans,
net of income taxes.
NOTE 8 - ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Accounts payable $ 15,454 $ 15,189
Employee compensation and benefits 9,344 14,886
Restructuring charges 1,572 2,869
Accrued expenses 5,500 6,855
Reserve for lease abandonment charges 5,792 9,183
Other 11,863 7,665
--------- ---------
$ 49,525 $ 56,647
--------- ---------
NOTE 9 - INCOME TAXES
The Company's 2003 and 2002 effective tax rate for continuing operations is
lower than the Company's historical rate of 40.0%. For 2003, the lower effective
tax rate of 9.3% is due to the utilization of previously reserved net operating
losses and research and experimentation credits to offset income taxes and a
decline in the deferred tax asset valuation allowance. The valuation allowance
declined by $4.4 million as a result of management's expectations that the
Company will more likely than not realize future tax benefits through tax
planning strategies related to unrealized gains on the Company's investment in
publicly traded common stock that the Company accounts for using the equity
method of accounting. For 2002, the lower effective tax rate of 33% is primarily
due to research credits.
The net deferred tax assets as of September 30, 2003 of approximately $7.0
million are expected to be realized by generating future taxable income and are
otherwise recoverable through available tax planning strategies.
NOTE 10 - COMPREHENSIVE INCOME
Total comprehensive income for the three and nine months ended September 30,
2003 and 2002 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 10,301 $ 4,221 $ 46,273 $ 11,110
Other comprehensive income:
Unrealized gain (loss) on
marketable securities, net of
tax (4) 10 (8) 26
--------- -------- --------- ---------
Comprehensive income $ 10,297 $ 4,231 $ 46,265 $ 11,136
--------- -------- --------- ---------
Page 10 of 42
NOTE 11 - EARNINGS PER SHARE INFORMATION
The following sets forth the computation of basic and diluted earnings per share
(in thousands, except for per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator for basic and
diluted income per share
Continuing operations $ 10,301 $ 3,932 $ 19,447 $ 10,392
Discontinued operations - 289 26,826 718
--------- -------- --------- ---------
Total $ 10,301 $ 4,221 $ 46,273 $ 11,110
--------- -------- --------- ---------
Denominator:
Basic weighted average
shares outstanding 29,446 29,032 29,271 28,916
Effect of employee stock
options 778 148 428 203
--------- -------- --------- ---------
Denominator for diluted
income per share 30,224 29,180 29,699 29,119
--------- -------- --------- ---------
Basic income per share
Continuing operations $ 0.35 $ 0.14 $ 0.66 $ 0.36
Discontinued operations - 0.01 0.92 0.02
--------- -------- --------- ---------
Total $ 0.35 $ 0.15 $ 1.58 $ 0.38
--------- -------- --------- ---------
Diluted income per share
Continuing operations $ 0.34 $ 0.13 $ 0.66 $ 0.36
Discontinued operations - 0.01 0.90 0.02
--------- -------- --------- ---------
Total $ 0.34 $ 0.14 $ 1.56 $ 0.38
--------- -------- --------- ---------
Options to acquire 1,051,398 and 4,529,862 shares of the Company's common stock
for the three months ended September 30, 2003 and 2002, respectively, were
excluded from the calculation of diluted earnings per share, as the effect would
not have been dilutive. Options for 1,875,278 and 3,137,221 shares for the
nine-month periods ended September 30, 2003 and 2002, respectively, were
excluded from the calculation of diluted earnings per share, as the effect would
not have been dilutive.
NOTE 12 - FINANCING ARRANGEMENTS
The Company has a revolving line of credit agreement (the "Line") allowing the
Company to borrow up to $40.0 million subject to certain restrictions. The Line
is secured by deposit accounts, accounts receivable and other assets and bears
interest at the bank's base rate plus .25%. At September 30, 2003 the rate on
the Line was 4.25% and no amounts were outstanding. The Line will expire on June
27, 2005.
NOTE 13 - DISCONTINUED OPERATIONS
On June 18, 2003, the Company completed the sale of EDiX to TEM. The Company
received $64.0 million in cash from TEM in exchange for all the capital stock of
EDiX. Accordingly, EDiX was accounted for as a discontinued operation in the
second quarter of 2003 and the Company reflected an estimated net gain on the
sale of $26.4 million. The Company transferred approximately $8.2 million of
cash to TEM as part of the sale of EDiX, resulting in a net cash inflow related
to the EDiX sale of $54.9 million, net of transaction costs.
The Stock Purchase and Sale Agreement, dated April 10, 2003 between the Company
and TEM, as amended, provided for an adjustment of the purchase price to the
extent the amount of working capital (current assets less current liabilities)
of EDiX as of June 18, 2003 did not equal $20,796,000. The working capital
adjustment was finalized as of October 22, 2003 as mutually agreed upon by the
Company and TEM. An additional gain of $814,000, net of income taxes, was
reflected this quarter as a gain on the sale of discontinued operations
resulting in a net gain on the sale of discontinued operations of $27.2 million.
The gain was offset by a net loss this quarter from discontinued operations of
$814,000, net of income taxes, due to the reclassification of operating expenses
previously charged against the gain.
Page 11 of 42
EDiX represented the Company's medical transcription services segment (See Note
7).
The following is a summary of operating results for EDiX through the date of
closing of the sale of EDiX (June 18, 2003):
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues $ - $ 28,807 $ 54,810 $ 83,437
------ -------- -------- ---------
Pre-tax income (loss)
from discontinued operations (1,123) 432 (2) 1,072
Pre-tax gain on disposal of
discontinued operations 1,123 - 24,972 -
Benefit (provision) for income
taxes from income (loss)
from discontinued operations 309 (143) (386) (354)
Benefit (provision) for income
taxes from the gain on
disposal of discontinued
operations (309) - 2,242 -
------- -------- -------- --------
Income from discontinued
operations, net of tax $ - $ 289 $ 26,826 $ 718
------- -------- -------- --------
The provision for income taxes on income from discontinued operations was
significantly higher for the nine months ended September 30, 2003 as compared to
the nine months ended September 30, 2002 primarily due to certain state tax
payments.
The gain on the disposal of EDiX resulted in an income tax benefit of $2.2
million. The Company's tax basis in the stock of EDiX exceeded the net proceeds
from the sale, resulting in a capital loss on the sale for tax purposes. A tax
benefit arises from this deductible temporary difference, which more likely than
not will reverse in the foreseeable future and be realized.
NOTE 14- COMMITMENTS AND CONTINGENCIES
Leases:
At September 30, 2003, minimum lease payments, net of sublease proceeds, for
certain facilities and equipment under noncancelable leases are as follows (in
thousands):
YEAR TOTAL
--------------------------------------------- ------------
2003 remaining $ 3,643
2004 14,525
2005 15,268
2006 13,183
2007 12,934
Thereafter 88,003
-----------
$ 147,556
-----------
Of the $147.6 million in future minimum lease payments, approximately $5.8
million was accrued in 2002 as a lease abandonment charge. See Note 5.
Richard E. Tarrant, Chairman of the Company's Board of Directors, is the
President and a director of LBJ Real Estate Inc., a Vermont corporation ("LBJ
Real Estate"). Certain executive officers of LBJ Real Estate are also directors
or executive officers of the Company, including Robert H. Hoehl, a director of
the Company, and John A. Kane, the Company's Chief Financial Officer, who also
serves as a director of LBJ Real Estate. The stockholders of LBJ Real Estate
include Messrs. Tarrant and Hoehl and an independent individual. LBJ Real Estate
holds a 1% general partnership interest in LBJ Ltd. Partnership, a Vermont
limited partnership and an affiliate of the Company ("LBJ"), and Messrs. Hoehl,
Page 12 of 42
Tarrant, and Kane and Mr. Robert F. Galin, the Company's Senior Vice President
of Sales, and two other employees of the Company hold 72.95% limited partnership
interests. Through September 30, 2003, the Company leased an office building
from LBJ. On September 30, 2003, LBJ sold the real estate leased by the Company
to an unrelated third party. The Company is continuing to lease the real estate
from the new owners under a new lease agreement, which has been approved by
certain independent members of the Board of Directors of the Company who have no
financial interest in the transaction.
Total rent expense was approximately $7.7 million and $6.1 million for the nine
months ended September 30, 2003 and 2002, respectively. Total rent paid to LBJ
was approximately $414,000 and $417,000 during the nine months ended September
30, 2003 and 2002, respectively.
The Company leases office space to Allscripts in Burlington, Vermont. Total rent
received from Allscripts was approximately $172,000 and $146,000 during the nine
months ended September 30, 2003 and 2002, respectively.
CONTINGENCIES:
Federal regulations issued in accordance with the Health Insurance Portability
and Accountability Act of 1996, ("HIPAA"), impose national health data standards
on health care providers that conduct electronic health transactions, health
care clearinghouses that convert health data between HIPAA-compliant and
non-compliant formats, and health plans. Collectively, these groups, including
most of IDX's customers and IDX's e-Commerce Services clearinghouse business,
are known as covered entities. These HIPAA standards include:
o transaction and code set standards (the "TCS Standards") that
prescribe specific transaction formats and data code sets for
certain electronic health care transactions;
o privacy standards (the "Privacy Standards") that protect
individual privacy by limiting the uses and disclosures of
individually identifiable health information; and
o data security standards (the "Security Standards") that
require covered entities to implement administrative, physical
and technological safeguards to ensure the confidentiality,
integrity, availability and security of individually
identifiable health information in electronic form.
All covered entities were required to comply with the TCS Standards by October
16, 2003. The Privacy Standards imposed by HIPAA have been in effect for most
covered entities since April 14, 2003, while the compliance deadline for the
Security Standards is April 21, 2005.
Many covered entities, including some of IDX's customers, IDX's eCommerce
Services clearinghouse business, and trading partners of IDX's clearinghouse
business, were not fully compliant with the TCS Standards as of and since
October 16, 2003. Although IDX has taken a number of steps to update its systems
and work with its customers and trading partners to achieve compliance with the
TCS Standards, failure to comply with the standards under HIPAA may subject IDX
to civil monetary penalties and, in certain circumstances, criminal penalties.
The Company does not believe this issue will have a significant impact on its
financial position, results of operations or cash flows.
INDEMNIFICATIONS:
IDX includes indemnification provisions in software license agreements with its
customers. These indemnification provisions include provisions indemnifying the
customer against losses, expenses, and liabilities from damages that could be
awarded against the customer in the event that IDX's software is found to
infringe upon a patent or copyright of a third party. The scope of remedies
available under these indemnification obligations is limited by the software
Page 13 of 42
license agreements. IDX believes that its internal business practices and
policies and the ownership of information, works and rights agreements signed by
all employees limits IDX's risk in paying out any claims under these
indemnification provisions. To date IDX has not been subject to any litigation
and has not had to reimburse any customers for any losses associated with these
indemnification provisions.
NOTE 15 - LEGAL PROCEEDINGS
In late 2001, the Company finalized a "Cooperative Agreement" with a
non-regulatory federal agency within the U.S. Commerce Department's Technology
Administration, NIST, whereby the Company agreed to lead a $9.2 million,
multi-year project awarded by NIST to a joint venture composed of the Company
and four other joint venture partners. The project entails research and
development to be conducted by the Company and its partners in the grant.
Subsequently, an employee of the Company made allegations that the Company had
illegally submitted claims for labor expenses and license fees to NIST and that
the Company never had a serious interest in researching the technological
solutions described in the proposal to NIST.
The Company believes the employee has likely filed an action under the Federal
False Claims Act under seal in the Federal District Court for the Western
District of Washington with respect to his claims, sometimes referred to as a
"qui tam" complaint. The Company has no information regarding the specific
allegations in the qui tam complaint. Further, the Company has no information
concerning the actual amount of money at issue in the qui tam complaint or in
any action the employee has brought claiming damages for alleged retaliatory
actions by the Company. The Company has been informed that the U.S. Attorney's
office will investigate the claims. The Company has not yet been served with
legal process detailing the allegations. The Company has also recently been
informed by the U.S. Attorney's office that it is investigating whether the
Company made false statements in connection with the application for the project
award from NIST. The Company is reviewing information provided by the U.S.
Attorney and intends to cooperate in the U.S. Attorney's investigation.
In April 2003, the Company filed a complaint against the employee with the
United States District Court for the Western District of Washington, entitled
IDX SYSTEMS CORPORATION V. MAURICIO LEON (case no. C03-972R). The Company's
lawsuit asks the Court to grant a declaratory judgment stating that, should the
Company terminate the employee's employment, such action would not constitute
retaliation for alleged whistle-blowing activities in violation of the Federal
False Claims Act or the Sarbanes-Oxley Act and would not constitute a violation
of the employee's rights under other laws.
In May 2003, the employee filed a complaint against the Company with the Federal
District Court for the Western District of Washington, entitled MAURICIO A.
LEON, M.D. V. IDX SYSTEMS CORPORATION (case no CV03 1158P) asserting that the
Company had knowledge that the employee engaged in "protected activity" and
retaliated against the employee in violation of the False Claims Act. In
addition, the employee alleges that the Company violated the Americans with
Disabilities Act and its Washington State counterpart in part through
retaliation against the employee for exercising the employee's rights under the
federal and state discrimination laws. The employee also asserts other causes of
action including wrongful termination in violation of public policy, fraudulent
inducement to enter into an employment contract with the Company, and negligent
and intentional infliction of emotional distress. The employee requests relief
including, but not limited to, an injunction against the Company enjoining and
restraining the Company from the alleged harassment and discrimination, wages,
damages, attorneys' fees, interest and costs. In addition, the employee's
complaint alleges that the Company falsified unspecified documents submitted to
the Government and made unspecified false statements to the Government.
Following a hearing on October 21, 2003, the Court on October 22, 2003, issued a
series of orders regarding alignment of the IDX V. LEON and LEON V. IDX cases.
Pursuant to the orders, the claims asserted by the parties will proceed under
the case of LEON V. IDX, case number CV03-1158. The employee may file an amended
complaint within 14 days to address concerns raised in IDX's motion to strike,
and IDX will realign its declaratory judgment claims as affirmative defenses
and/or counterclaims in that case. The employee has filed a motion for an
injunction to reinstate his pay and benefits pending conclusion of the action.
The motion is scheduled for hearing on November 21, 2003. The Company intends to
vigorously defend itself and to vigorously pursue relief through prosecution of
its own claims in the consolidated lawsuits.
Page 14 of 42
In May 2003, the employee filed a complaint against the Company with the U.S.
Department of Labor, pursuant to Section 1514A of the Sarbanes-Oxley Act of
2002. The employee's complaint asserts that, notwithstanding alleged notice to
the Company of the employee's allegations, Company management conspired to
continue to defraud the government by allowing fraudulent activities to continue
uncorrected and by concealing and avoiding its obligations to report any and all
fraudulent activities to the proper authorities. In addition, the employee's
complaint alleges that the Company acted to retaliate, harass and intimidate the
employee in contravention of the Sarbanes-Oxley Act's whistleblower provisions.
The employee's complaint requests relief including, but not limited to,
reinstatement, back-pay, with interest, and compensation for any damages
sustained by the employee as a result of the alleged discrimination. The
Department of Occupational Health and Safety is investigating the employee's
complaint on behalf of the U.S. Department of Labor, and the Company intends to
cooperate in the investigation. The Company intends to vigorously defend against
these claims.
There are additional claims made by the employee against the Company, including
a charge with the U.S. Equal Employment Opportunity Commission, claiming that
the employee was discriminated against in violation of the Americans with
Disabilities Act, the processing of which the EEOC has subsequently terminated
through a Notice of Right to Sue. In addition, based on a media report, the
Company believes the employee has also apparently filed a claim with the Office
of Civil Rights of Health and Human Services based on an assertion that the
Company retaliated against him by allegedly releasing medical information in
violation of the requirements of the Health Insurance Portability and
Accountability Act or 1996. The Company has not received notice of any charge
from the agency, and the agency has not confirmed that any claim has been filed.
The Company intends vigorously to defend against the claims.
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 (case no 00-71631).
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" (system
replacement costs). On September 30, 2002, the United States District Court for
the Eastern District of Michigan dismissed all of SJHS's claims of fraud, tort
and breach of contract, and SJHS's claims for alleged lost savings and
consequential damages, leaving only its claim for anticipatory repudiation. On
October 15, 2002, SJHS requested reconsideration of these rulings. On March 28,
2003, the Court denied SJHS's request for reconsideration of its September
ruling and also barred SJHS from introducing any evidence concerning, or making
any arguments concerning, its claims for "cover" damages. On May 20, 2003, the
parties filed a "Proposed Joint Final Pretrial Order" in which SJHS listed
alleged damages of approximately $13.8 million, including approximately $5.6
million in alleged "out-of-pocket," "resources," "labor" and other costs and
approximately $5.9 million in "replacement" hardware and software. IDX has moved
to dismiss all of these damages claims on grounds that they are barred by the
Court's prior orders and by the contract's exclusion against consequential or
incidental damages. Those motions are pending before the Court. 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 trial is scheduled to commence on November 3, 2003.
From time to time, the Company is a party to or may be threatened with
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.
Page 15 of 42
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE CONDENSED
CONSOLIDATED 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 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", 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.
GENERAL
Founded in 1969, IDX Systems Corporation provides information technology
(software and service) solutions to maximize value in the delivery of healthcare
by improving the quality of patient service, enhancing medical outcomes and
reducing the costs of care. Healthcare providers purchase IDX systems, which are
designed to be complementary and functionally rich, to improve their patients'
experience through simpler access, safer care delivery and more streamlined
accounting.
Our revenue growth is driven by demand for new healthcare information technology
systems and services as well as installation, maintenance and service to our
existing customers, which total more than 3,300 installation sites and include
more than 138,000 physicians. Earnings growth is driven primarily by software
sales, which yield significantly higher gross profit margins than our other
revenue components - hardware and services.
We believe our biggest opportunity for both revenue and earnings growth will be
driven by the increasing demand for safer care delivery and improved business
performance - both of which we believe can be significantly improved through
automation.
We measure our financial performance by monitoring revenue and backlog from
systems and services, days sales outstanding, recurring revenue, gross profit
margin, operating profit margin and bookings.
Our revenues from continuing operations increased to $101.4 million for the
third quarter of 2003 from $88.9 million for the same period in 2002. Systems
sales, which include software and hardware sales, increased 22.8% in the third
quarter of 2003, while maintenance and service fees grew 9.6% as compared to the
same period in the prior year.
We reported operating income of $8.1 million for the third quarter of 2003 as
compared to operating income of $5.0 million for the same period in 2002, an
increase of $3.1 million. In the third quarter of 2003, we reported net income
from continuing operations of $10.3 million, or $0.35 basic earnings per share,
as compared to net income from continuing operations of $3.9 million, or $0.14
basic earnings per share, for the same period in 2002, an increase of
approximately $6.4 million.
Net income from continuing operations for the three and nine month periods ended
September 30, 2003 includes a $4.4 million income tax benefit resulting from the
decline in our deferred tax asset valuation allowance. The decline in the
valuation allowance is a result of management expectations that the Company will
more likely than not realize future tax benefits through tax planning strategies
related to unrealized gains on the Company's investment in publicly traded
common stock that the Company accounts for using the equity method of
accounting. Net income from continuing operations for the nine months ended
September 30, 2002, includes a gain of $2.9 million, net of income taxes,
resulting from the sale of its majority owned subsidiary, ChannelHealth to
Allscripts.
Page 16 of 42
MATTERS AFFECTING ANALYSIS
On June 18, 2003, the Company completed the disposition of its wholly owned
subsidiary, EDiX Corporation ("EDiX"), to Total eMed, Inc. ("TEM"), a medical
transcription company based in Franklin, Tennessee. With the sale of EDiX, we no
longer provide medical transcription outsourcing services, and effective as of
the second quarter of 2003, the financial statements have been restated to
reflect EDiX as a discontinued operation for all periods presented in this
report. For purposes of this Quarterly Report on Form 10-Q, the discussion will
relate to our Information Systems and Services segment as such segment is
currently operated. As a result, EDiX is no longer being discussed as a separate
segment. The results of EDiX through June 18, 2003 are discussed in the Results
of Operations section below under Discontinued Operations.
OFF-BALANCE SHEET ARRANGEMENTS
During the nine months ended September 30, 2003, the Company did not engage in:
o material off-balance sheet activities, including the use of structured
finance or special purpose entities;
o trading activities in non-exchange traded contracts; or
o transactions with persons or entities that benefit from their
non-independent relationship with the Company, other than as described
below.
Richard E. Tarrant, Chairman of the Company's Board of Directors, is
the President and a director of LBJ Real Estate Inc., a Vermont
corporation ("LBJ Real Estate"). Certain executive officers of LBJ Real
Estate are also directors or executive officers of the Company,
including Robert H. Hoehl, a director of the Company, and John A. Kane,
the Company's Chief Financial Officer, who also serves as a director of
LBJ Real Estate. The stockholders of LBJ Real Estate include Messrs.
Tarrant and Hoehl and an independent individual. LBJ Real Estate holds
a 1% general partnership interest in LBJ Ltd. Partnership, a Vermont
limited partnership and an affiliate of the Company ("LBJ"), and
Messrs. Hoehl, Tarrant, and Kane and Mr. Robert F. Galin, the Company's
Senior Vice President of Sales, and two other employees of the Company
hold 72.95% limited partnership interest.
Through September 30, 2003, the Company leased an office building from
LBJ. On September 30, 2003, LBJ sold the real estate leased by the
Company to an unrelated third party. The Company is continuing to lease
the real estate from the new owners under a new lease agreement, which
has been approved by certain independent members of the Board of
Directors of the Company who have no financial interest in the
transaction. Total rent paid to LBJ was approximately $414,000 and
$417,000 during the nine months ended September 30, 2003 and 2002,
respectively, related to this issue.
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 disclosures of contingent assets
and liabilities at the date of our financial statements. Those estimates are
based on our experience; terms of existing contracts, our observance of trends
in the industry, information provided by our customers and information available
from other outside sources, which are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our consolidated financial statements,
and may potentially result in materially different results under different
assumptions and conditions. We have identified the following as critical
accounting policies to our Company:
Page 17 of 42
o revenue recognition,
o allowance for doubtful accounts,
o capitalization of software development costs,
o income taxes,
o restructuring and lease abandonment charges, and
o accounting for litigation, commitments and contingencies.
Revenue Recognition - We license software and sell hardware and related
ancillary products to customers through our direct sales force. We generally
recognize revenue from software license, hardware and related ancillary product
revenues using the residual method when:
o persuasive evidence of an arrangement exists, which is typically when
a customer has signed a non-cancelable sales and software license
agreement;
o delivery, which is typically FOB shipping point, is complete for the
software (either physically or electronically), hardware and related
ancillary products;
o the customer's fee is deemed to be fixed or determinable and free of
contingencies or significant uncertainties;
o collectibility is probable; and
o vendor specific objective evidence of fair value exists for all
undelivered elements, typically maintenance and professional services.
Under the residual method, we defer revenue recognition of the fair value of the
undelivered elements and we allocate the remaining portion of the arrangement
fee to the delivered elements and recognize it as revenue, assuming all other
conditions for revenue recognition have been satisfied. We recognize
substantially all of our product revenue in this manner. If we cannot determine
the fair value of any undelivered element included in an arrangement, we will
defer revenue recognition until all elements are delivered, services are
performed or until fair value can be objectively determined.
As part of an arrangement, we typically sell maintenance contracts as well as
professional services to customers. Maintenance services include telephone and
Web-based support as well as rights to unspecified upgrades and enhancements,
when and if we make them generally available. Professional services are deemed
to be non-essential and typically are for implementation planning, loading of
software, installation of hardware, training, building simple interfaces,
running test data and assisting in the development and documentation of process
rules, and best practices consulting.
We recognize revenues from maintenance services ratably over the term of the
maintenance contract period based on vendor specific objective evidence of fair
value. Vendor specific objective evidence of fair value is based upon the amount
charged for maintenance when purchased separately, which is typically the
contract's renewal rate. Maintenance services are typically stated separately in
an arrangement.
We generally recognize revenues from professional services based on vendor
specific objective evidence of fair value when: (1) a non-cancelable agreement
for the services has been signed or a customer's purchase order has been
received; and (2) the professional services have been delivered. Vendor specific
objective evidence of fair value is based upon the price charged when
professional services are sold separately and is typically based on an hourly
rate for professional services.
Our arrangements with customers generally include acceptance provisions.
However, these acceptance provisions are typically based on our standard
acceptance provision, which provides the customer with a right to a refund if
the arrangement is terminated because the product did not meet our published
specifications. This right generally expires 30 days after installation. The
product is deemed accepted unless the customer notifies us otherwise. Generally,
we determine that these acceptance provisions are not substantive and
Page 18 of 42
historically have not been exercised, and therefore should be accounted for as a
warranty in accordance with Statement of Financial Accounting Standards No. 5.
At the time we enter into an arrangement, we assess the probability of
collection of the fee and the terms granted to the customer. Our typical payment
terms include a deposit and subsequent payments based on specific milestone
events and dates. If we consider the payment terms for the arrangement to be
extended or if the arrangement includes a substantive acceptance provision, we
defer revenue not meeting the criterion for recognition under SOP 97-2 and
classify this revenue as deferred revenue, including deferred product revenue.
Payments from customers are typically due within 90days of invoice date. We
recognize deferred revenue, assuming all other conditions for revenue
recognition have been satisfied, when the payment of the arrangement fee becomes
due and/or when the uncertainty regarding acceptance is resolved as generally
evidenced by written acceptance or payment of the arrangement fee.
Additionally, we periodically enter into certain long-term contracts where we
generally recognize revenue on a percentage of completion basis using
labor-input measures. We recognize losses, if any, on fixed price contracts when
the loss is determined. We record revenue in excess of billings on long-term
service contracts as unbilled receivables and include in trade accounts
receivable. We record billings in excess of revenue recognized on service
contracts as deferred revenue until revenue recognition criteria are met.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - IDX maintains an allowance for doubtful
accounts to reflect estimated losses resulting from the inability of customers
to make required payments. We base this allowance on estimates after
consideration of factors such as the composition of the accounts receivable
aging and bad debt history and our evaluation of the financial condition of the
customers. If the financial condition of customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances and bad debt expense may be required. We typically do not require
collateral. Historically, our estimates have been adequate to cover accounts
receivable exposures.
CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS - We expense all costs incurred in
the research, design and development of software for sale to others until
technological feasibility is established. Technological feasibility is
established when planning, designing, coding and testing activities have been
completed so that the working model is consistent with the product design as
confirmed by testing. Thereafter, we capitalize and amortize software
development costs to software development expense on a straight-line basis over
the lesser of 18 months or the estimated lives of the respective products,
beginning when the products are offered for sale. We expense costs incurred in
the development of software for internal use until it becomes probable that
these developments will provide additional functionality that will benefit
future periods. Thereafter, we capitalize and amortize certain costs to
operating expense on a straight-line basis over the lesser of five years or the
estimated economic life of the software. While we believe that our current
estimates and the underlying assumptions regarding capitalized software
development costs are appropriate, future events could necessitate adjustments
to these estimates resulting in additional software development expense in the
period of adjustment.
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 unrealized gains in our
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 we may be required to increase the
valuation allowance. To the extent that 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 periods.
RESTRUCTURING AND LEASE ABANDONMENT CHARGES - We have recorded restructuring and
lease abandonment charges associated with restructuring plans approved by
management over the last three years. These reserves include estimates
pertaining to employee separation costs and real estate lease obligations. The
reserve associated with lease obligations could be materially affected by
factors such as the ability to obtain subleases, the creditworthiness of
sub-lessees, market value of properties, and the ability to negotiate early
termination agreements with lessors. While we believe that our current estimates
regarding lease obligations are adequate, future events could necessitate
significant adjustments to these estimates.
Page 19 of 42
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 our assessment of these legal proceedings, we must determine
if an unfavorable outcome is probable and evaluate the costs for resolution of
these matters, if reasonably estimable. We have developed these determinations
and related estimates in consultation with outside counsel handling our defense
in these matters and are based upon an analysis of potential results, assuming a
combination of litigation and defense strategies. See Part II, Item 1 "Legal
Proceedings" and Note 15 of Notes to Condensed Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q.
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 accounting principles generally accepted
in the United States, 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 for the year ended December 31, 2002, which contain
accounting policies and other disclosures required by accounting principles
generally accepted in the United States.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2002
REVENUES
The Company's total revenues increased to $101.4 million during the three months
ended September 30, 2003 from $88.9 million for the same period in 2002, an
increase of $12.6 million or 14.2%. Revenues from systems sales increased to
$37.3 million during the three months ended September 30, 2003 (36.8% of total
revenues) from $30.4 million for the same period in 2002 (34.2% of total
revenues), an increase of $6.9 million or 22.7%. The increase in systems sales
was due to an increase in software license revenue of $4.5 million and an
increase in hardware and third party software revenue of $2.6 million as
compared to the prior year.
Revenues from maintenance and service fees increased to $64.1 million during the
three months ended September 30, 2003 (63.2% of total revenues) from $58.5
million for the same period in 2002 (65.8% of total revenues), an increase of
$5.6 million or 9.6%. The increase was primarily due to annual maintenance price
increases combined with an increase in installed base and a $2.8 million
increase in installation, consulting and other services.
COST OF SALES
The cost of system sales increased to $13.4 million during the three months
ended September 30, 2003 from $10.8 million for the same period in 2002, an
increase of $2.6 million or 24.1%. The increase in cost of system sales is
primarily a result of an increase in hardware included as a component of sales
of the Company's system sales. The gross margin on systems sales decreased to
64.0% during the three months ended September 30, 2003 from 64.4% for the same
period in 2002. Fluctuations in the gross profit margin as a percentage of
system sales typically result from the revenue mix of software license revenue,
which has a higher gross profit margin, and hardware and third party software
sales, which have a lower gross profit margin. The decrease in the gross profit
margin as a percentage of sales was primarily due to the increase in lower
margin hardware and third party software sales as a component of system sales in
the third quarter 2003 as compared to third quarter 2002.
The cost of maintenance and services increased to $44.6 million during the three
months ended September 30, 2003 from $42.2 million for the same period in 2002,
an increase of $2.4 million or 5.7%. The gross profit margin on maintenance and
service fees increased to 30.4% during the three months ended September 30, 2003
as compared to 27.8% for the same period in 2002. The increase in margin was
primarily due to increased maintenance revenue, which was only partially offset
by growth in service and maintenance expenses.
Page 20 of 42
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses increased to $21.3 million
during the three months ended September 30, 2003 from $18.3 million for the same
period in 2002, an increase of $3.0 million or 16.4%. This increase was
primarily due to increases in professional fees of $1.3 million, occupancy
expenses of $800,000, insurance expense of $300,000, depreciation of $300,000
and various other expenses of $300,000. As a percentage of total revenues, total
selling, general and administrative expenses was 21.0% for the three months
ended September 30, 2003 as compared to 20.6% for the same period in 2002.
SOFTWARE DEVELOPMENT COSTS
Total software development costs increased to $14.0 million during the three
months ended September 30, 2003 from $12.5 million for the same period in 2002,
an increase of $1.5 million or 12.0%. As a percentage of total revenues, total
software development costs decreased to 13.8% during the three months ended
September 30, 2003 from 14.1% for the same period in 2002. As a percentage of
total system sales, total software development costs decreased to 37.4% during
the three months ended September 30, 2003 from 41.2% for the same period in
2002. This decrease as a percentage of total system sales was primarily due to
the higher systems sales amount in the three months ended September 30, 2003.
The $1.5 million increase in total software development costs was primarily due
to an increase in salary related expenses.
As described in Note 1 of our audited consolidated financial statements and
notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2002, which contain accounting policies and other disclosures
required by generally accepted accounting principles, software development costs
incurred subsequent to the establishment of technological feasibility until
general release of the related products are capitalized. Historically, costs
incurred during beta site testing have not been material; however, as the
Company develops products that use more complex technologies as well as more
comprehensive clinical systems, the time and effort required to complete beta
site testing may be significantly more extensive. Consequently, capitalized
software development costs may become more significant in future reporting
periods. Approximately $811,000 and $343,000 of total software development costs
were capitalized during the three months ended September 30, 2003 and 2002,
respectively. Amortization of software development costs was approximately
$297,000 and $699,000 during the three months ended September 30, 2003 and 2002,
respectively.
LEASE ABANDONMENT CHARGE
In the fourth quarter of 2002, the Company recorded a lease abandonment charge
of $9.2 million in its core information systems and services business segment.
The lease abandonment charge is related to asset impairment and rent obligations
through 2005 under the lease agreement associated with the Company's former
Seattle office. In 2002, the Company determined it would consolidate its Seattle
operations into the new office space and abandon the space subject to the former
lease. The Company has been unable to secure a sub-tenant to assume its prior
lease. The lease abandonment charge consisted of costs related to the net
present value of future lease payments of approximately $7.9 million and
non-cash write-offs of certain leasehold improvements of approximately $1.3
million. During the three months ended September 30, 2003, lease payments of
approximately $700,000 were made. As of September 30, 2003, the Company had an
accrual balance of $5.8 million primarily related to leased facilities, of which
approximately $700,000 will be paid during the remainder of 2003, and
approximately $5.1 million thereafter. In the event that the Company is able to
secure a sub-tenant to assume its prior lease in a future reporting period, the
present value of the future sub-lease income would be recorded as a reduction in
expenses under the lease abandonment caption in the financial statements in the
period in which the sub-lease agreement is signed.
OTHER INCOME
Total interest income decreased to approximately $334,000 during the three
months ended September 30, 2003 as compared to $934,000 for the same period in
2002. The decrease was primarily due to approximately $730,000 in nonrecurring
interest income related to federal and state tax refunds during the three months
ended September 30, 2002. Excluding the effect of interest income related to the
tax refunds, interest income increased to $334,000 from $204,000 for the same
Page 21 of 42
period in 2002. This increase is primarily due to the receipt of sales proceeds
from the EDiX transaction on June 18, 2003.
INCOME TAXES
The Company recorded an income tax benefit of approximately $1.9 million during
the three months ended September 30, 2003, resulting in an effective tax rate
from continuing operations for the quarter of (23.0%). This is lower than the
Company's historical tax rate of 40.0% due to the utilization of previously
reserved net operating losses and research and experimentation credits to offset
income taxes and a decline in the deferred tax asset valuation allowance. The
valuation allowance declined $4.4 million as a result of management expectations
that the Company will more likely than not realize future tax benefits through
tax planning strategies related to unrealized gains on the Company's investment
in publicly traded common stock that the Company accounts for using the equity
method of accounting. The Company recorded income tax expense of approximately
$1.9 million during the three months ended September 30, 2002, an effective tax
rate of 33.0%. This favorable rate is primarily the result of research and
experimentation credits. The net deferred tax assets as of September 30, 2003 of
approximately $7.0 million are expected to be realized by generating future
taxable income and are otherwise recoverable through available tax planning
strategies.
GAIN ON SALE OF DISCONTINUED OPERATIONS
On June 18, 2003, the Company completed the sale of EDiX to TEM. The Company
received $64.0 million in cash from TEM in exchange for all the capital stock of
EDiX. Accordingly, EDiX was accounted for as a discontinued operation in the
second quarter of 2003 and the Company reflected an estimated net gain on the
sale of $26.4 million. The Stock Purchase and Sale Agreement, dated April 10,
2003 between the Company and TEM, as amended, provided for an adjustment of the
purchase price to the extent the amount of working capital (current assets less
current liabilities) of EDiX as of June 18, 2003 did not equal $20,796,000. The
working capital adjustment was finalized as of October 22, 2003 as mutually
agreed upon by the Company and TEM. An additional net gain of $814,000 was
reflected this quarter as a gain on the sale of discontinued operations
resulting in a net gain on the sale of discontinued operations of $27.2 million.
The gain was offset by an additional net loss this quarter from discontinued
operations of $814,000 due to the reclassification of operating expenses
previously charged against the gain. See Note 13 of the Notes to Condensed
Consolidated Financial Statements.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2002
REVENUES
The Company's total revenues increased to $292.2 million during the nine months
ended September 30, 2003 from $254.8 million for the same period in 2002, an
increase of $37.4 million or 14.7%. Revenues from systems sales increased to
$106.7 million during the nine months ended September 30, 2003 (36.5% of total
revenues) from $83.8 million for the same period in 2002 (32.9% of total
revenues), an increase of $22.9 million or 27.3%. The increase in system sales
was due to an increase in software license revenue of $15.1 million and an
increase in hardware and third party software revenue of $7.8 million as
compared to the prior year.
Revenues from maintenance and service fees increased to $185.5 million during
the nine months ended September 30, 2003 (63.5% of total revenues) from $171.0
million for the same period in 2002 (67.1% of total revenues), an increase of
$14.5 million or 8.5%. The increase was primarily due to annual maintenance
price increases combined with an increase in installed base and a $8.5 million
increase in installation, consulting and other services.
COST OF SALES
The cost of system sales increased to $36.7 million during the nine months ended
September 30, 2003 from $28.6 million for the same period in 2002, an increase
of $8.1 million or 28.3%. The increase in cost of system sales was primarily a
Page 22 of 42
result of an increase in hardware included as a component of sales of the
Company's systems sales. The gross margin on systems sales was 65.6% during the
nine months ended September 30, 2003 as compared to 65.9% for the same period in
2002. Fluctuations in the gross profit margin as a percentage of system sales
typically result from the revenue mix of software license revenue, which has a
higher gross profit margin, and hardware and third party software sales, which
have a lower gross profit margin. The decrease in the gross profit margin as a
percentage of sales was primarily due to the increase in lower margin hardware
and third party software sales as a component of system sales in the first nine
months of 2003 as compared to the first nine months of 2002.
The cost of maintenance and services increased to $129.9 million during the nine
months ended September 30, 2003 from $125.2 million for the same period in 2002,
an increase of $4.7 million or 3.8%. The gross profit margin on maintenance and
service fees increased to 30.0% during the nine months ended September 30, 2003
from 26.8% for the same period in 2002. The increase in margin was primarily due
to increased maintenance revenue, which was only partially offset by growth in
service and maintenance expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses increased to $62.8 million
during the nine months ended September 30, 2003 from $54.5 million for the same
period in 2002, an increase of $8.3 million or 15.2%. This increase was
primarily due to increases in personnel related expenses of $2.9 million,
occupancy expenses of $2.4 million, insurance expenses of $700,000, travel
related expenses of $500,000, professional fees of $500,000, depreciation of
$500,000, marketing related expenses of $500,000, and telecommunications
expenses of $300,000. As a percentage of total revenues, total selling, general
and administrative expenses remained fairly constant at 21.5% for the nine
months ended September 30, 2003 as compared to 21.4% for the same period in
2002.
SOFTWARE DEVELOPMENT COSTS
Total software development costs increased to $41.6 million during the nine
months ended September 30, 2003 from $36.6 million for the same period in 2002,
an increase of $5.0 million or 13.7%. As a percentage of total revenues, total
software development costs decreased to 14.2% during the nine months ended
September 30, 2003 as compared to 14.4% for the same period in 2002. As a
percentage of total system sales, total software development costs decreased to
39.0% during the nine months ended September 30, 2003 from 43.7% for the same
period in 2002. The $5.0 million increase in total software development costs
was primarily due to an increase in salary related expenses.
As described in Note 1 of our audited consolidated financial statements and
notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2002, which contain accounting policies and other disclosures
required by generally accepted accounting principles, software development costs
incurred subsequent to the establishment of technological feasibility until
general release of the related products are capitalized. Historically, costs
incurred during beta site testing have not been material, however, as the
Company develops products that use more complex technologies as well as more
comprehensive clinical systems, the time and effort required to complete beta
site testing may be significantly more extensive. Consequently, capitalized
software development costs may become more significant in future reporting
periods. Approximately $1.5 million and $2.0 million of total software
development costs were capitalized during the nine months ended September 30,
2003 and 2002, respectively. Amortization of software development costs was
approximately $1.3 million and $1.7 million during the nine months ended
September 30, 2003 and 2002, respectively.
LEASE ABANDONMENT CHARGE
In the fourth quarter of 2002, the Company recorded a lease abandonment charge
of $9.2 million in its core information systems and services business segment.
The lease abandonment charge is related to asset impairment and rent obligations
through 2005 under the lease agreement associated with the Company's former
Seattle office. In 2002, the Company determined it would consolidate its Seattle
operations into the new office space and abandon the space subject to the former
lease. The Company has been unable to secure a sub-tenant to assume its prior
lease. The lease abandonment charge consisted of costs related to the net
Page 23 of 42
present value of future lease payments of approximately $7.9 million and
non-cash write-offs of certain leasehold improvements of approximately $1.3
million. During the first nine months of 2003, leasehold improvements of $1.3
million were written off and lease payments of approximately $2.1 million were
made. As of September 30, 2003, the Company had an accrual balance of $5.8
million primarily related to leased facilities, of which approximately $700,000
will be paid during the remainder of 2003, and approximately $5.1 million
thereafter. In the event that the Company is able to secure a sub-tenant to
assume its prior lease in a future reporting period, the present value of the
future sub-lease income would be recorded as a reduction in expenses under the
lease abandonment caption in the financial statements in the period in which the
sub-lease agreement is signed.
OTHER INCOME
Total interest income decreased to approximately $743,000 during the nine months
ended September 30, 2003 as compared to $1.5 million for the same period in
2002. The decrease was primarily due to approximately $730,000 in nonrecurring
interest income related to federal and state tax refunds received in 2002.
Excluding the effect of interest income related to the tax refunds, interest
income decreased to $743,000 from $770,000 for the same period in 2002.This
decrease was primarily due to lower interest rates in the nine months ended
September 30, 2003 as compared to rates in the same period in 2002. Total
interest expense increased to approximately $405,000 during the nine months
ended September 30, 2003 from $233,000 during the same period in 2002, primarily
due to higher balances on short-term borrowings.
GAIN ON SALE OF INVESTMENT IN SUBSIDIARY
On January 8, 2001, the Company sold certain of the net assets and operations of
its majority owned subsidiary, ChannelHealth to Allscripts, a public company
providing point-of-care electronic prescribing and productivity solutions for
physicians. In addition to the sale, the Company entered into a ten-year
strategic alliance agreement with Allscripts (the "Alliance Agreement"), whereby
Allscripts is the exclusive provider of point-of-care clinical applications sold
by the Company to physician practices.
Pursuant to the Alliance Agreement, the Company guaranteed that Allscripts gross
revenues resulting from the alliance (less any commissions paid to the Company)
would amount to at least $4.5 million for fiscal year 2001. Due to this
contingency, IDX deferred $4.5 million of the gain as of the date of the
transaction and recognized a gain of $35.5 million in 2001. An additional gain
of $4.3 million was recognized in the first quarter of 2002 when the contingency
was resolved. See Note 4 of the Notes to Condensed Consolidated Financial
Statements.
INCOME TAXES
The Company recorded total income tax expense of approximately $2.0 million
during the nine months ended September 30, 2003, resulting in an effective tax
rate from continuing operations of 9.3%. This is lower than the Company's
historical tax rate of 40.0% due to the utilization of previously reserved net
operating losses and research and experimentation credits to offset income taxes
and a decline in the deferred tax asset valuation allowance. The valuation
allowance declined $4.4 million as a result of management expectations that the
Company will more likely than not realize future tax benefits through tax
planning strategies related to unrealized gains on the Company's investment in
publicly traded common stock that the Company accounts for using the equity
method of accounting. The Company recorded income tax expense of approximately
$5.1 million during the nine months ended September 30, 2002, an effective tax
rate of 33.0%. This favorable rate was primarily the result of research and
experimentation credits. The net deferred tax assets as of September 30, 2003 of
approximately $7.0 million are expected to be realized by generating future
taxable income and are otherwise recoverable through available tax planning
strategies.
GAIN ON SALE OF DISCONTINUED OPERATIONS
On June 18, 2003, the Company completed the sale of EDiX to TEM. The Company
received $64.0 million in cash from TEM in exchange for all the capital stock of
EDiX. Accordingly, EDiX was accounted for as a discontinued operation in the
second quarter of 2003 and the Company reflected an estimated net gain on the
sale of $26.4 million. The Stock Purchase and Sale Agreement, dated April 10,
2003 between the Company and TEM, as amended, provided for an adjustment of the
purchase price to the extent the amount of working capital (current assets less
Page 24 of 42
current liabilities) of EDiX as of June 18, 2003 did not equal $20,796,000. The
working capital adjustment was finalized as of October 22, 2003 as mutually
agreed upon by the Company and TEM. An additional net gain of $814,000 was
reflected this quarter as a gain on the sale of discontinued operations
resulting in a net gain on the sale of discontinued operations of $27.2 million.
The gain was offset by an additional net loss this quarter from discontinued
operations of $814,000 due to the reclassification of operating expenses
previously charged against the gain. See Note 13 of the Notes to Condensed
Consolidated Financial Statements.
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 continuing operations is principally comprised
of net income or loss and is primarily affected by the net effect of the change
in accounts receivable, accounts payable, accrued expenses and non-cash items
relating to depreciation and amortization, deferred taxes, the sale of
ChannelHealth, and certain components of lease abandonment and restructuring
charges. Accounts receivable, deferred revenue and accounts payable fluctuate
considerably due to the nature of the Company's business, including, 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 nine months
ended September 30, 2003, accounts receivable from customers have been collected
on average within 84 days, which represents a decrease of 7 days as compared to
the year ended December 31, 2002 and an increase of 2 days as compared to the
nine months ended September 30, 2002.
The sale of EDiX is not expected to have an adverse impact on the future
liquidity of IDX. Since the acquisition of EDiX in 1999 until the disposition of
EDiX in June 2003, IDX had contributed cash to support the on-going operations
of EDiX.
Cash flows related to investing activities from continuing operations 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 $6.5 million on the acquisition
and implementation of an enterprise resource planning system during 2002 and has
invested $8.5 million for the nine months ended September 30, 2003. The Company
anticipates investing an additional $3.0 million in the fourth quarter of 2003
and $2.4 million in 2004 related to this system implementation. During the nine
months ended September 30, 2003, the cash flows provided by investing activities
also included the inflow of $54.9 million from the sale of EDiX, net of
transaction costs and net of $8.2 million of cash transferred as part of the
EDiX business. See Note 13 of the Notes to Condensed Consolidated Financial
Statements.
In addition, investing activities from continuing operations may also include
purchases of, interests in, loans to and acquisitions of businesses for access
to complementary products and technologies. The Company expects to continue in
these types of activities in the future. 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. for $7.5 million. Each preferred share is convertible, at any time at the
option of the holder, into one share of common stock of Stentor, Inc., subject
to certain adjustments. In addition, the preferred shares are not entitled to
dividends but are entitled to a liquidation preference equal to the amount paid
by the Company to purchase such shares.
Cash flows from financing activities from continuing operations historically
relate to the issuance of shares of the Company's common stock through the
exercise of employee stock options and in connection with the Company's employee
stock purchase plan and proceeds from the lines of credit.
Cash, cash equivalents and marketable securities at September 30, 2003 were
$102.2 million, an increase of $47.8 million from December 31, 2002, due
primarily to the proceeds received from the sale of EDiX. 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, subject to certain
restrictions. This line of credit is secured by deposit accounts, accounts
Page 25 of 42
receivable and other assets of the Company and certain of its subsidiaries and
bears interest at the bank's base rate plus .25%. At September 30, 2003 the rate
on the line was 4.25% and no amounts were outstanding. This line of credit is
subject to certain terms and conditions and will expire on June 27, 2005.
In addition to existing financing arrangements, the Company owns, through a
wholly owned subsidiary, approximately 7.5 million shares of common stock of
Allscripts, a public company listed on the NASDAQ National Market under the
symbol "MDRX". This investment is accounted for under the equity method. The
Company recorded an equity loss during 2001 of $17.6 million on a pre-tax basis
that reduced the balance of the Company's investment carrying balance in
Allscripts to zero. The estimated market value of this investment is
approximately $30.5 million as of September 30, 2003 based on the closing price
per share of Allscripts common stock on September 30, 2003 on the NASDAQ
National Market. Due to certain restrictions on the Company's ability to resell
the stock, the value the Company might realize upon a sale of its position in
Allscripts likely would be less than the value referenced in the preceding
sentence.
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 leases for the Company's operating
facilities. The Company plans to increase its professional staff during the
remainder of 2003 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.
The following table summarizes our contractual obligations at September 30,
2003, and the effect such obligations are expected to have on our liquidity and
cash in future periods:
(IN THOUSANDS) TOTAL REMAINDER OF
2003 2004-2005 2006-2007 2008+
- --------------------------------------------------------------------------------
Contractual Obligations
Non-cancelable
operating leases $ 147,556 $ 3,643 $ 29,793 $ 26,117 $ 88,003
---------------------------------------------------
Total contractual
cash obligations $ 147,556 $ 3,643 $ 29,793 $ 26,117 $ 88,003
---------------------------------------------------
Of the $147.6 million in non-cancelable operating lease obligations,
approximately $5.8 million was accrued in 2002 as a lease abandonment charge.
See Note 5 of the Notes to Condensed Consolidated Financial Statements.
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.
NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 clarifies the disclosure requirements made by a guarantor in its
interim and annual statements explaining that a guarantor must recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
imposed by issuing a guarantee. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantor's fiscal year-end. The
provisions of FIN 45 do not have a material impact on the financial position of
IDX.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
Page 26 of 42
liabilities and activities of another entity. Until now, a company generally has
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 changes that guidance by
requiring a variable interest entity, as defined in FIN 46, to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or is entitled to receive a majority
of the entity's residual returns or both. FIN 46 also requires disclosure about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. On October 8, 2003, the
Financial Accounting Standards Board deferred the effective date of FIN 46 for
variable interest entities created before January 31, 2003 to periods ending
after December 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of FIN 46 is not expected
to have a material impact on the Company's financial position, results of
operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition Disclosure, An Amendment of FASB Statement No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosure in financial
statements regarding the effects of stock-based compensation. The provisions of
SFAS No. 148 are effective for fiscal and interim periods ending after December
15, 2002. The Company will continue to apply APB No. 25 as the method used to
account for stock-based employee compensation arrangements, where applicable,
but has adopted the disclosure requirements of SFAS No. 148.
Page 27 of 42
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 EXCHANGE ACT OF 1934. FOR THIS PURPOSE,
ANY STATEMENTS CONTAINED IN THIS QUARTERLY REPORT THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WORDS SUCH AS
"BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS," "WILL" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THERE ARE A NUMBER OF
IMPORTANT FACTORS THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING AMONG OTHERS,
STATEMENTS REGARDING THE HEALTH CARE INDUSTRY, STATEMENTS REGARDING OUR
PRODUCTS, PRODUCT DEVELOPMENT AND INFORMATION TECHNOLOGY, STATEMENTS REGARDING
FUTURE REVENUE OR OTHER FINANCIAL TRENDS, STATEMENTS REGARDING FUTURE
ACQUISITIONS, STRATEGIC ALLIANCES, OR OTHER AGREEMENTS, AND STATEMENTS REGARDING
OUR INTELLECTUAL PROPERTY. 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 the Company's 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 meaningful or reliable
indicators of future performance.
FINANCIAL TRENDS. Although the Company's results from operations have been
fairly stable during 2002 and the first nine months of 2003, since 1999 the
Company's revenue and results from operations have been volatile. During 2000
and 2001, certain of the Company's customers delayed making purchasing decisions
with respect to certain of the Company's software systems resulting in longer
sales cycles for such systems. Management believes such delays were due to a
number of factors, including customer organization changes, government
approvals, pressures to reduce expenses, product complexity, competition and the
September 11 national tragedy. While the Company believes these factors were
temporary, they may continue to cause reductions or delays in spending for new
systems and services in the future. If these delays reoccur, they may cause
unanticipated revenue volatility, decreased revenue visibility and affect the
future financial performance of the Company.
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:
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o actual or anticipated quarterly variations in operating results;
o changes in expectations of future financial performance;
o changes in estimates of securities analysts;
o market conditions particularly in the computer software and Internet
industries;
o announcements of technological innovations, including Internet
delivery of information, clinical information systems advances, 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.
These fluctuations may affect operating results as follows:
o our ability to transact stock acquisitions; and
o our ability to retain and incent key employees.
NEW PRODUCT DEVELOPMENT AND RAPIDLY CHANGING TECHNOLOGY. To be successful, IDX
must continuously enhance its existing products, respond effectively to
technology changes, and help its customers adopt new technologies. In addition,
IDX must introduce new products and technologies to meet the evolving needs of
its customers in the healthcare information systems market. IDX may have
difficulty in accomplishing this because of:
o the continuing evolution of industry standards, for example, 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 technologies.
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, and other related services within the
healthcare industry. As a result, the success of IDX is dependent in part on
political and economic conditions as they relate to 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.
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Accordingly, IDX's customers and the other entities with which IDX has a
business relationship are affected by changes in such regulations and
limitations in governmental spending for Medicare and Medicaid programs. Recent
actions by Congress have limited governmental spending for the Medicare and
Medicaid programs, limited payments to hospitals and other providers under such
programs, and increased emphasis on competition and other programs that
potentially could have an adverse effect on IDX's customers and the other
entities with which IDX has a business relationship. In addition, federal and
state legislatures have considered proposals to reform the U.S. healthcare
system at both the federal and state level. If enacted, these proposals could
increase government involvement in healthcare, lower reimbursement rates and
otherwise change the business environment of IDX's customers and the other
entities with which IDX has a business relationship. IDX's customers and the
other entities with which IDX has a business relationship could react to these
proposals and the uncertainty surrounding these proposals by curtailing or
deferring investments, including those for IDX's products and services.
In addition, many healthcare providers are consolidating to create integrated
healthcare delivery systems with greater market power. These providers may try
to use their market power to negotiate price reductions for IDX's products and
services. If IDX 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 we do not offer. The Company's principal existing
competitors include Eclipsys Corporation, McKesson Corporation, Siemans AG, Epic
Systems Corporation, GE Medical and Cerner Corporation. Each of these
competitors offer 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. IDX may be unable to compete successfully against these organizations.
In addition, IDX expects that major software information systems companies,
large information technology consulting service providers and system
integrators, and others specializing in the healthcare industry may offer
competitive products or services.
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 for personal injury
and wrongful death. 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.
PRODUCT MALFUNCTION FINANCIAL CLAIMS. Any failure by IDX's eCommerce electronic
claims submission service, or by elements of IDX's systems that provide elements
of claims submitted by its clients could expose IDX to liability claims for
incorrect billing and electronic 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. Not all of
IDX personnel have executed noncompetition agreements. Such agreements, even if
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executed, are difficult and expensive to enforce, and enforcement efforts could
result in substantial costs and diversion of management and technical resources.
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
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.
HIPAA AND RELATED REGULATIONS
Federal regulations issued in accordance with the Health Insurance Portability
and Accountability Act of 1996, or HIPAA, impose national health data standards
on health care providers that conduct electronic health transactions, health
care clearinghouses that convert health data between HIPAA-compliant and
non-compliant formats, and health plans. Collectively, these groups, including
most of IDX's customers and IDX's e-Commerce Services clearinghouse business,
are known as covered entities. These HIPAA standards include:
o transaction and code set standards (the "TCS Standards") that
prescribe specific transaction formats and data code sets for
certain electronic health care transactions;
o privacy standards (the "Privacy Standards") that protect
individual privacy by limiting the uses and disclosures of
individually identifiable health information; and
o data security standards (the "Security Standards") that
require covered entities to implement administrative, physical
and technological safeguards to ensure the confidentiality,
integrity, availability and security of individually
identifiable health information in electronic form.
All covered entities were required to comply with the TCS Standards by October
16, 2003. The Privacy Standards imposed by HIPAA have been in effect for most
covered entities since April 14, 2003, while the compliance deadline for the
Security Standards is April 21, 2005.
Failure to comply with the standards under HIPAA may subject IDX to civil
monetary penalties and, in certain circumstances, criminal penalties. Under
HIPAA, covered entities may be subject to civil monetary penalties in the amount
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of $100 per violation, capped at a maximum of $25,000 per year for violation of
any particular standard. However, civil monetary penalties may not be assessed
if a covered entity's failure to comply is based on reasonable cause and not
willful neglect, and the failure to comply is remedied within 30 days, or a
longer period determined to be appropriate by the U.S. Department of Health and
Human Services, or HHS. The U.S. Department of Justice, or DOJ, may seek to
impose criminal penalties for certain violations of HIPAA. Criminal penalties
under the statute vary depending upon the nature of the violation but could
include fines of not more than $250,000 and/or imprisonment.
HIPAA TRANSACTION AND CODE SET STANDARDS
Many covered entities, including some of IDX's customers, IDX's eCommerce
Services clearinghouse business, and trading partners of IDX's clearinghouse
business, were not fully compliant with the TCS Standards as of October 16,
2003. However, IDX has deployed contingency plans to accept non-standard
transactions, as contemplated in the "Guidance on Compliance with HIPAA
Transactions and Code Sets After the October 16, 2003 Implementation Deadline"
(which we refer to as the CMS Guidance) issued by the Centers for Medicare &
Medicaid Services, or CMS, on July 24, 2003. In the CMS Guidance, CMS stated
that covered entities are responsible for complying with the TCS Standards
following the October 16, 2003 compliance date. However, the CMS Guidance also
provides that CMS's focus will be on obtaining voluntary compliance and that CMS
will follow a complaint-driven approach to enforcement of the TCS Standards. The
CMS Guidance also indicates that CMS will consider a covered entity's good faith
efforts to comply with the TCS Standards in determining whether to seek civil
monetary penalties against a non-compliant covered entity and whether to extend
the time allowed for the covered entity to remedy the non-compliance.
The CMS Guidance also indicated that in connection with its enforcement
activities, CMS might require non-compliant covered entities to submit and
implement corrective action plans to achieve compliance in a time and manner
acceptable to CMS. CMS has provided no further guidance on when it might require
a corrective action plan, or what a corrective action plan might involve. In the
event that IDX were required to submit and implement a corrective action plan,
IDX could be required to take steps and incur costs to achieve compliance in a
different manner or shorter timeframe than IDX would otherwise choose, which
could have an adverse impact on IDX's business operations.
In light of the CMS Guidance, IDX has taken a number of steps to update its
systems and work with its customers and trading partners to achieve compliance
with the TCS Standards. IDX has made significant changes to the software and
information systems that it uses internally and that customers and trading
partners use in the conduct of business with IDX. IDX has also established with
most of its customers and trading partners the electronic pathways necessary to
process transactions in compliance with the TCS Standards and conducted testing,
re-testing and quality assurance processes related to such transactions, and
made adjustments to its systems where appropriate. IDX has also undertaken
educational and outreach efforts to communicate with its customers and trading
partners relating to the CMS Guidance, IDX's and its customers' and trading
partners' approach to compliance with the TCS Standards, and implementation of
contingency plans.
Although IDX has taken these proactive steps, by deploying its contingency plan
and accepting non-standard transactions, IDX, like most covered entities, was
not in full compliance with the TCS Standards as of and since October 16, 2003.
Although the CMS Guidance indicated that CMS will follow a complaint-driven
approach, IDX cannot provide any assurances regarding how CMS would apply the
CMS Guidance in general or to IDX's e-Commerce Services clearinghouse business
in particular. In the event of enforcement action by CMS against IDX, there can
be no assurances that IDX will be able to establish good faith efforts
sufficient to protect it from liability for civil monetary penalties. There also
can be no assurances that CMS would be willing to extend the 30-day time period
for IDX to remedy its non-compliance, or that IDX would be able to remedy its
non-compliance within the 30-day time period or any extended period granted by
CMS.
Even with the deployment of contingency plans, it is possible that there may be
disruption in current claim submission and payment cycles, which could adversely
affect IDX's customers' ability to pay IDX for its services and products and
could adversely impact anticipated revenue of IDX's eCommerce Services
clearinghouse business. As a result, IDX could experience loss of anticipated
revenue. Further, since the entire healthcare system, including IDX's eCommerce
Services clearinghouse business and its customers who use IDX's information
systems to generate claims data, has not operated at full capacity using the
newly-mandated standard transactions, it is possible that currently undetected
errors may cause rejection of claims, extended payment cycles, system
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implementation delays, cash flow reduction, with the attendant risk of liability
and claims against the company.
As stated above in the section entitled "HIPAA and Related Regulations," the DOJ
may seek to impose criminal penalties, including fines and imprisonment, in the
event of a covered entity's knowing violation of HIPAA. It is not clear whether
criminal penalties may be imposed for violations only of the Privacy Standards,
or also for violations of the TCS Standards. To date, the DOJ has not provided
any guidance regarding when it would seek to impose criminal penalties for
violations of the HIPAA regulations. There can be no assurances that the DOJ
will not seek criminal penalties against IDX for its failure to comply with the
TCS Standards.
HIPAA PRIVACY STANDARDS
The Privacy Standards apply to the portions of IDX's eCommerce Services
clearinghouse business that process healthcare transactions and provide
technical services to other participants in the healthcare industry. The Privacy
Standards place on covered entities specific limitations on the use and
disclosure of individually identifiable health information. The Privacy
Standards also require covered entities like the IDX eCommerce Services
clearinghouse business to establish policies and procedures to safeguard
individually identifiable health information, and to obtain individual
authorizations for some uses and disclosures of such information. The Privacy
Standards further provide certain access rights to individuals.
IDX made certain changes in its products and services to comply with the Privacy
Standards. The effect of the Privacy Standards on our business is difficult to
predict and there can be no assurances that IDX will adequately address the
risks created by the Privacy Standards and their implementation or that IDX will
be able to take advantage of any resulting opportunities. In addition, we are
unable to predict what changes to the Privacy Standards might be made in the
future or how those changes could affect our business.
States may also adopt privacy or security standards that are more stringent than
the Privacy Standards. This may lead to different restrictions for handling
health information. As a result, IDX's customers may demand information
technology solutions that are adaptable to reflect different and changing
regulatory requirements. In the future, federal or state governmental
authorities may impose additional restrictions on the collection, use,
transmission and other disclosures of health information. IDX cannot predict the
potential impact that these future rules, as finally approved, may have on its
business. However, the demand for IDX's products may decrease if IDX is not able
to develop and offer products that can address the regulatory challenges and
compliance obligations facing its customers.
HIPAA SECURITY STANDARDS
On February 20, 2003, HHS published the Security Standards. The Security
Standards establish detailed requirements for safeguarding patient information
that is electronically transmitted or electronically stored. The Security
Standards establish 42 implementation specifications, 20 of which are
"required," meaning they must be implemented as specified in the rule, while the
other 22 are "addressable." Complying with "addressable" implementation
specifications will require IDX to assess whether these specifications
constitute a reasonable and appropriate safeguard for the particular business
activity; if not, IDX must design and implement an alternative approach to
satisfy the particular standard. The Security Standards apply to the portions of
our eCommerce Services clearinghouse business that process healthcare
transactions, that provide technical services to other participants in the
healthcare industry, and that enable electronic communications of patient
information among healthcare industry participants. Most participants in the
healthcare industry must be in compliance with the Security Standards by April
21, 2005.
Some of the Security Standards are technical in nature, while others may be
addressed through policies and procedures for using information systems. The
Security Standards may require us to incur significant costs in evaluating our
products and in ensuring that our systems meet all of the implementation
specifications. We are unable to predict what changes might be made to the
Security Standards prior to the 2005 implementation deadline or how those
changes might impact our business. The effect of the Security Standards on our
business is difficult to predict and there can be no assurances that we will
adequately address the risks created by the Security Standards and their
implementation or that we will be able to take advantage of any resulting
opportunities.
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GENERAL
The effect of HIPAA on IDX's business is difficult to predict and there can be
no assurances that IDX will adequately address the business risks created by
HIPAA and its implementation, or that IDX will be able to take advantage of any
resulting business opportunities. Furthermore, IDX is unable to predict what
changes to HIPAA, or the regulations issued pursuant to HIPAA, might be made in
the future or how those changes could affect its business or the costs of
compliance with HIPAA.
MEDICAL DEVICE REGULATIONS
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.
SYSTEM ERRORS AND WARRANTIES. IDX's healthcare information systems are very
complex. As with all complex information systems, 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.
A security breach could damage IDX's reputation or result in liability. IDX
retains and transmits confidential information, including patient health
information, in its processing centers and other facilities. It is critical that
these facilities and infrastructure remain secure and be perceived by the
marketplace as secure. IDX may be required to expend significant capital and
other resources to protect against security breaches and hackers or to alleviate
problems caused by breaches. Despite the implementation of security measures,
this infrastructure or other systems that we interface with, including the
Internet and related systems, may be vulnerable to physical break-ins, hackers,
improper employee or contractor access, computer viruses, programming errors,
attacks by third parties or similar disruptive problems. Any compromise of our
security, whether as a result of our own systems or systems that they interface
with, could reduce demand for IDX's services and products.
Customer satisfaction and IDX's business could be harmed if IDX's eCommerce
Services clearinghouse business experiences delays, failures or loss of data in
its systems. IDX relies on WebMD Envoy to provide some transactions for IDX's
eCommerce Services clearinghouse business. The occurrence of a major
catastrophic event or other system failure at any of IDX's facilities, at WebMD
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Envoy's facilities, or at any third party facility, including telecommunications
provider facilities, could interrupt data processing or result in the loss of
stored data, which could harm IDX's business.
POTENTIAL INFRINGEMENT OF PROPRIETARY RIGHTS OF OTHERS. If any of IDX's products
violate third party proprietary rights, IDX may be required to reengineer its
products or seek to obtain licenses from third parties to continue offering its
products without substantial reengineering. Any efforts to reengineer IDX's
products or obtain licenses from third parties may not be successful, in which
case IDX may be forced to stop selling the infringing product or remove the
infringing functionality or feature. IDX may also become subject to damage
awards as a result of infringing the proprietary rights of others, which could
cause IDX to incur additional losses and have an adverse impact on its financial
position. IDX does not conduct comprehensive patent searches to determine
whether the technologies used in its products infringe patents held by others.
In addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending; many of which are confidential when filed, with regard to similar
technologies.
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 may 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 to cooperatively develop,
market and sell integrated clinical and practice management products.
During the term of the alliance, IDX is prohibited from cooperating 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 or the Company 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.
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 in connection with the acquisition by Allscripts
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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. Prior to January 2006, IDX is prohibited from selling
more than 25% of its shares of Allscripts common stock in any one year, and
16.67% of such 25% 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.
DISRUPTION IN THE ECONOMY. The terrorist events of September 11, 2001, as well
as new terrorists threats, the war in Iraq and the possibility of war in other
areas of the Middle East, 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 or military
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.
LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. IDX is involved
in several litigation matters which are described in greater detail in Part II,
Item 1, Legal Proceedings. An unfavorable resolution of pending litigation could
have a material adverse effect on IDX's financial condition. Litigation may
result in substantial costs and expenses and significantly divert the attention
of IDX management regardless of the outcome. There can be no assurance that IDX
will be able to achieve a favorable settlement of pending litigation or obtain a
favorable resolution of litigation if it is not settled. In addition, current
litigation could lead to increased costs or interruptions of normal business
operations of IDX.
No charges of wrongdoing have been brought against the Company in connection
with the U.S. Attorney's investigation, which is also described in greater
detail in Part II, Item 1, Legal Proceedings, and the Company does not believe
that it has engaged in any wrongdoing in connection with this matter. However,
since this investigation is or may still be underway and, investigations of this
type customarily are conducted in whole or in part in secret, the Company lacks
sufficient information to determine with certainty its ultimate scope and
whether the government authorities will assert claims resulting from this
investigation that could implicate or reflect adversely upon the Company.
Because the Company's reputation for integrity is an important factor in its
business dealings with NIST and other governmental agencies, if a government
authority were to make an allegation, or if there were to be a finding, of
improper conduct on the part of or attributable to the Company in any matter,
including in respect of the U.S. Attorney's investigation, such an allegation or
finding could have a material adverse effect on the Company's business,
including its ability to retain existing contracts and to obtain new or renewal
contracts. In addition, continuing adverse publicity resulting from this
investigation and related matters could have such a material adverse effect.
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 September 30, 2003, 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
Page 36 of 42
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 nine months of 2003 and
2002. 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.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as
of September 30, 2003. Based on this evaluation, the Company's chief executive
officer and chief financial officer concluded that, as of September 30, 2003,
the Company's disclosure controls and procedures were (1) designed to ensure
that material information relating to the Company, including its consolidated
subsidiaries, is made known to the Company's chief executive officer and chief
financial officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they
provide reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
During 2002, the Company began implementation of an enterprise resource planning
("ERP") system, designed to align and integrate the Company's employees,
processes and technology through software applications. The ERP system includes
enterprise financial reporting applications, of which the Company implemented
during the fourth quarter of 2002 the core applications for general ledger,
accounts receivable, billing, accounts payable and fixed assets. Since the
initial implementation, the Company has made minor modifications to those
applications to improve their overall design and effectiveness, and we may take
other corrective action if our reviews identify any deficiencies or weaknesses
in our controls. Management believes that the ongoing implementation of the ERP
system will only enhance our internal controls over financial reporting.
Page 37 of 42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In late 2001, the Company finalized a "Cooperative Agreement" with a
non-regulatory federal agency within the U.S. Commerce Department's Technology
Administration, NIST, whereby the Company agreed to lead a $9.2 million,
multi-year project awarded by NIST to a joint venture composed of the Company
and four other joint venture partners. The project entails research and
development to be conducted by the Company and its partners in the grant.
Subsequently, an employee of the Company made allegations that the Company had
illegally submitted claims for labor expenses and license fees to NIST and that
the Company never had a serious interest in researching the technological
solutions described in the proposal to NIST.
The Company believes the employee has likely filed an action under the Federal
False Claims Act under seal in the Federal District Court for the Western
District of Washington with respect to his claims, sometimes referred to as a
"qui tam" complaint. The Company has no information regarding the specific
allegations in the qui tam complaint. Further, the Company has no information
concerning the actual amount of money at issue in the qui tam complaint or in
any action the employee has brought claiming damages for alleged retaliatory
actions by the Company. The Company has been informed that the U.S. Attorney's
office will investigate the claims. The Company has not yet been served with
legal process detailing the allegations. The Company has also recently been
informed by the U.S. Attorney's office that it is investigating whether the
Company made false statements in connection with the application for the project
award from NIST. The Company is reviewing information provided by the U.S.
Attorney and intends to cooperate in the U.S. Attorney's investigation.
In April 2003, the Company filed a complaint against the employee with the
United States District Court for the Western District of Washington, entitled
IDX SYSTEMS CORPORATION V. MAURICIO LEON (case no. C03-972R). The Company's
lawsuit asks the Court to grant a declaratory judgment stating that, should the
Company terminate the employee's employment, such action would not constitute
retaliation for alleged whistle-blowing activities in violation of the Federal
False Claims Act or the Sarbanes-Oxley Act and would not constitute a violation
of the employee's rights under other laws.
In May 2003, the employee filed a complaint against the Company with the Federal
District Court for the Western District of Washington, entitled MAURICIO A.
LEON, M.D. V. IDX SYSTEMS CORPORATION (case no CV03 1158P) asserting that the
Company had knowledge that the employee engaged in "protected activity" and
retaliated against the employee in violation of the False Claims Act. In
addition, the employee alleges that the Company violated the Americans with
Disabilities Act and its Washington State counterpart in part through
retaliation against the employee for exercising the employee's rights under the
federal and state discrimination laws. The employee also asserts other causes of
action including wrongful termination in violation of public policy, fraudulent
inducement to enter into an employment contract with the Company, and negligent
and intentional infliction of emotional distress. The employee requests relief
including, but not limited to, an injunction against the Company enjoining and
restraining the Company from the alleged harassment and discrimination, wages,
damages, attorneys' fees, interest and costs. In addition, the employee's
complaint alleges that the Company falsified unspecified documents submitted to
the Government and made unspecified false statements to the Government.
Following a hearing on October 21, 2003, the Court on October 22, 2003, issued a
series of orders regarding alignment of the IDX V. LEON and LEON V. IDX cases.
Pursuant to the orders, the claims asserted by the parties will proceed under
the case of Leon v. IDX, case number CV03-1158. The employee may file an amended
complaint within 14 days to address concerns raised in IDX's motion to strike,
and IDX will realign its declaratory judgment claims as affirmative defenses
and/or counterclaims in that case. The employee has filed a motion for an
injunction to reinstate his pay and benefits pending conclusion of the action.
The motion is scheduled for hearing on November 21, 2003. The Company intends to
vigorously defend itself and to vigorously pursue relief through prosecution of
its own claims in the consolidated lawsuits.
In May 2003, the employee filed a complaint against the Company with the U.S.
Department of Labor, pursuant to Section 1514A of the Sarbanes-Oxley Act of
2002. The employee's complaint asserts that, notwithstanding alleged notice to
the Company of the employee's allegations, Company management conspired to
continue to defraud the government by allowing fraudulent activities to continue
Page 38 of 42
uncorrected and by concealing and avoiding its obligations to report any and all
fraudulent activities to the proper authorities. In addition, the employee's
complaint alleges that the Company acted to retaliate, harass and intimidate the
employee in contravention of the Sarbanes-Oxley Act's whistleblower provisions.
The employee's complaint requests relief including, but not limited to,
reinstatement, back-pay, with interest, and compensation for any damages
sustained by the employee as a result of the alleged discrimination. The
Department of Occupational Health and Safety is investigating the employee's
complaint on behalf of the U.S. Department of Labor, and the Company intends to
cooperate in the investigation. The Company intends to vigorously defend against
these claims.
There are additional claims made by the employee against the Company, including
a charge with the U.S. Equal Employment Opportunity Commission, claiming that
the employee was discriminated against in violation of the Americans with
Disabilities Act, the processing of which the EEOC has subsequently terminated
through a Notice of Right to Sue. In addition, based on a media report, the
Company believes the employee has also apparently filed a claim with the Office
of Civil Rights of Health and Human Services based on an assertion that the
Company retaliated against him by allegedly releasing medical information in
violation of the requirements of the Health Insurance Portability and
Accountability Act or 1996. The Company has not received notice of any charge
from the agency, and the agency has not confirmed that any claim has been filed.
The Company intends vigorously to defend against the claims.
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 (case no 00-71631).
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" (system
replacement costs). On September 30, 2002, the United States District Court for
the Eastern District of Michigan dismissed all of SJHS's claims of fraud, tort
and breach of contract, and SJHS's claims for alleged lost savings and
consequential damages, leaving only its claim for anticipatory repudiation. On
October 15, 2002, SJHS requested reconsideration of these rulings. On March 28,
2003, the Court denied SJHS's request for reconsideration of its September
ruling and also barred SJHS from introducing any evidence concerning, or making
any arguments concerning, its claims for "cover" damages. On May 20, 2003, the
parties filed a "Proposed Joint Final Pretrial Order" in which SJHS listed
alleged damages of approximately $13.8 million, including approximately $5.6
million in alleged "out-of-pocket," "resources," "labor" and other costs and
approximately $5.9 million in "replacement" hardware and software. IDX has moved
to dismiss all of these damages claims on grounds that they are barred by the
Court's prior orders and by the contract's exclusion against consequential or
incidental damages. Those motions are pending before the Court. 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 trial is scheduled to commence on November 3, 2003.
From time to time, the Company is a party to or may be threatened with
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.
Page 39 of 42
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
None
ITEM 5. OTHER INFORMATION
Stockholder's Proposal for 2004 Annual Meeting
As set forth in the Company's Proxy Statement for its 2003 Annual
Meeting of Stockholders, proposals of stockholders intended to be
included in the Company's proxy statement for the 2004 Annual Meeting
of Stockholders must be received by the Company at its principal office
in South Burlington, Vermont not later than December 22, 2003.
Stockholders who wish to make a proposal at the 2004 Annual Meeting -
other than one that will be included in the Company's proxy materials -
must notify the Company no later than March 7, 2004. 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) The registrant filed the following reports on Form 8-K during the
third quarter of 2003:
On July 3, 2003, the registrant filed a report on Form 8-K
reporting that on June 18, 2003, it had completed the disposition
of its wholly owned subsidiary, EDiX Corporation, to Total eMed,
Inc.
On July 22, 2003, the registrant furnished a report on Form 8-K,
which attached a press release regarding its financial results for
the quarter ended June 30, 2003.
Page 40 of 42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDX SYSTEMS CORPORATION
Date: November 4, 2003 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 41 of 42
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
31.1 Certification of the CEO of IDX Systems Corporation pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended
31.2 Certification of the CFO of IDX Systems Corporation pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended
32 Certification of the CEO and CFO of IDX Systems Corporation
pursuant to 18 U.S.C. Section 1350
Page 42 of 42