-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vmt7WDiRtr1Cgn3N9/zDhTvypBGDwZkeY1dE+pqAZREW8rrNrO1kPjWNUgRqdLXd 5KmQlnnVQ431TDokg+VJhA== 0001001185-03-000046.txt : 20031105 0001001185-03-000046.hdr.sgml : 20031105 20031105090428 ACCESSION NUMBER: 0001001185-03-000046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDX SYSTEMS CORP CENTRAL INDEX KEY: 0001001185 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 030222230 STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26816 FILM NUMBER: 03977917 BUSINESS ADDRESS: STREET 1: 1400 SHELBURNE RD STREET 2: PO BOX 1070 CITY: SOUTH BURLINGTON STATE: VT ZIP: 05403 BUSINESS PHONE: 8028621022 MAIL ADDRESS: STREET 1: 1400 SHELBURNE RD STREET 2: PO BOX 1070 CITY: SOUTH BURLINGTON STATE: VT ZIP: 05403 10-Q 1 idx3q03.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2003 ================================================================================ 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. ================================================================================ 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: Page 28 of 42 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. Page 29 of 42 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 Page 30 of 42 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 Page 31 of 42 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 Page 32 of 42 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. Page 33 of 42 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 Page 34 of 42 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 Page 35 of 42 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 EX-31 3 ceocert.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, James H. Crook, Jr., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of IDX Systems Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ JAMES H. CROOK, JR ------------------------------------ Dated: November 4, 2003 James H. Crook, Jr. Chief Executive Officer EX-31 4 cfocert.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, John A. Kane, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of IDX Systems Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ JOHN A. KANE ------------------------------------ Dated: November 4, 2003 John A. Kane Sr. Vice President, Finance and Administration, Chief Financial Officer and Treasurer EX-32 5 cert906.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of IDX Systems Corporation (the "Company") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, James H. Crook, Jr., Chief Executive Officer of the Company, and John A. Kane, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 4, 2003 /s/ JAMES H. CROOK, JR. ------------------------------- James H. Crook, Jr. Chief Executive Officer Dated: November 4, 2003 /s/ JOHN A. KANE -------------------------------- John A. Kane Sr. Vice President, Finance and Administration, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----