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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 MARCH 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM__________TO____________
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Commission File Number 0-26816
IDX SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Vermont 03-0222230
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 IDX Drive
South Burlington, VT 05403
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (802-862-1022)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of May 3,
2002 was 28,861,187.
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Page 1 of 29
IDX SYSTEMS CORPORATION
FORM 10-Q
For the Period Ended March 31, 2002
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets .............................3
Condensed Consolidated Statements of Operations ...................4
Condensed Consolidated Statements of Cash Flows ...................5
Notes to Condensed Consolidated Financial Statements ..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .....................................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................26
Item 2. Changes In Securities and Use of Proceeds.................27
Item 3. Defaults Upon Senior Securities ..........................27
Item 4. Submission of Matters to a Vote of Security Holders ......27
Item 5. Other Information ........................................27
Item 6. Exhibits And Reports On Form 8-K .........................27
SIGNATURES..................................................................28
EXHIBIT INDEX...............................................................29
Page 2 of 29
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(unaudited) (audited)
ASSETS
Cash and marketable securities $ 48,841 $ 56,373
Accounts receivable, net 103,576 95,478
Refundable income taxes 9,143 12,100
Prepaid and other current assets 7,713 6,189
Deferred tax asset 7,718 7,718
---------- ---------
TOTAL CURRENT ASSETS 176,991 177,858
Property and equipment, net 78,806 77,636
Capitalized software costs, net 2,493 2,055
Goodwill, net 1,511 1,391
Other assets 5,649 5,592
Deferred tax asset 790 790
---------- ---------
TOTAL ASSETS $ 266,240 $ 265,322
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and
other liabilities $ 45,093 $ 51,963
Deferred revenue 20,117 20,361
Notes payable to bank 18,727 15,000
--------- ---------
TOTAL CURRENT LIABILITIES 83,937 87,324
Stockholders' equity 182,303 177,998
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 266,240 $ 265,322
========= =========
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 29
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2002 2001
---------- -------------
REVENUES
Systems sales $ 27,216 $ 26,162
Maintenance and service fees 77,409 65,647
--------- ---------
TOTAL REVENUES 104,625 91,809
OPERATING EXPENSES
Cost of systems sales 9,224 11,329
Cost of maintenance and services 59,666 52,019
Selling, general and administrative 21,990 18,951
Software development costs 12,134 10,501
--------- ---------
TOTAL OPERATING EXPENSE 103,014 92,800
--------- ---------
Operating income (loss) 1,611 (991)
OTHER INCOME
Other income 276 684
Gain on sale of investment in subsidiary 4,273 35,546
Gain on investment - 5,849
-------- ---------
TOTAL OTHER INCOME 4,549 42,079
-------- ---------
Income before income taxes and equity in
loss of unconsolidated affiliate 6,160 41,088
Equity in loss of unconsolidated affiliate - (6,051)
Income tax provision (2,033) (15,277)
--------- ---------
NET INCOME $ 4,127 $ 19,760
======== =========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.69
======== =========
Basic weighted average shares outstanding 28,841 28,434
======== =========
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.68
======== =========
Diluted weighted average shares outstanding 29,015 28,871
======== =========
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 29
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
IDX SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net income $ 4,127 $ 19,760
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 3,826 3,751
Amortization 432 83
Deferred tax provision - 4,316
Increase in allowance for doubtful
accounts 444 612
Minority interest - 245
Gain on investment - (5,849)
Equity in loss of unconsolidated affiliate - 6,051
Gain on sale of investment in subsidiary (4,273) (35,546)
Loss on disposition of assets - 404
Changes in operating assets and liabilities:
Accounts receivable (8,544) 2,075
Prepaid expenses and other assets (2,576) (2,390)
Accounts payable and accrued expenses (2,598) (6,730)
Federal and state income taxes 2,957 11,914
Deferred revenue (244) (133)
---------- -----------
Net cash used in operating activities (6,449) (1,437)
INVESTING ACTIVITIES:
Purchase of property and equipment, net (4,994) (5,374)
Purchase of securities available-for-sale (6,051) (22,231)
Proceeds from sale of securities available-
for-sale 15,006 15,925
Proceeds from sale of investment - 11,282
Other assets - -
---------- -----------
Net cash provided by (used in)
investing activities 3,961 (398)
FINANCING ACTIVITIES:
Proceeds from sale of common stock 171 747
Proceeds from notes payable to bank 3,727 -
---------- -----------
Net cash provided by financing
activities 3,898 747
---------- -----------
Increase (decrease) in cash and cash equivalents 1,410 (1,088)
Cash and cash equivalents at beginning of period 38,083 16,357
---------- -----------
Cash and cash equivalents at end of period 39,493 15,269
Securities available-for-sale 9,348 49,334
---------- -----------
Total cash and securities available-for-sale $ 48,841 $ 64,603
========== ===========
Noncash investing activities:
Fair value of stock received from sale of
investment in subsidiary $ - $ 17,624
SEE NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The interim unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and in accordance with accounting principles generally
accepted in the United States. Accordingly, certain information and footnote
disclosures normally included in annual financial statements have been omitted
or condensed. In the opinion of management, all necessary adjustments
(consisting of normal recurring accruals and adjustments) have been made to
provide a fair presentation. The operating results for the three months ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For further information, refer
to the consolidated financial statements and footnotes included in the Company's
latest annual report on Form 10-K filed with the Securities and Exchange
Commission.
Note 2 - New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 applies to all business combinations completed after June
30, 2001, which among other things, requires the use of the purchase method of
accounting. SFAS No. 141 also establishes new criteria for determining whether
intangible assets should be recognized separately from goodwill. SFAS No. 142
provides that goodwill and intangible assets with indefinite lives will not be
amortized, but rather will be reviewed for impairment at least annually. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. The
Company has adopted SFAS No. 141 and SFAS No. 142 and has determined that they
had no significant impact on its financial condition or results of operations.
Accordingly, pro forma results of IDX for the quarter ended March 31, 2001 have
not been presented to reflect the impact of SFAS No. 142, had the standard been
adopted on January 1, 2001.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
superseded SFAS No. 121, "Accounting for Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company is required to adopt SFAS No. 144 in the
first quarter of fiscal 2002. The Company has adopted SFAS No. 144 effective
January 1, 2002 and has determined that it had no significant impact on its
financial condition or results of operations.
Note 3 - Deconsolidation and Acquisitions
Through April 19, 2001, the Company's consolidated financial statements included
the accounts of the Company and BDP Realty Associates (BDP), a real estate trust
owned by certain stockholders and key employees of the Company whose real estate
was leased exclusively by the Company. Effective with the date of the
acquisition of the Company's corporate headquarters from BDP, the Company has
deconsolidated BDP and eliminated the net assets, principally real estate and a
minority interest, included in the Company's consolidated balance sheet as of
that date. The Company's corporate headquarters were purchased from BDP for
cash, at the fair market value as determined by independent appraisers, for
approximately $15.0 million in the second quarter of 2001. This amount has been
recorded as property and equipment.
In May 2001, the Company acquired PVI, LLC for approximately $1.0 million. This
acquisition has been accounted for under the purchase method of accounting. The
purchase price has been allocated based on estimated fair market values of PVI,
LLC's assets at the date of acquisition, principally to software. There are
Page 6 of 29
contingent payments based on a percentage of future sales related to this
purchase, however, there have been no sales to date.
In June 2001, the Company acquired Vogt Management Consulting, Inc. for
approximately $1.1 million. This acquisition has been accounted for under the
purchase method of accounting. The purchase price has been allocated,
principally to goodwill, based on estimated fair market values of Vogt
Management Consulting, Inc.'s assets at the date of acquisition.
Had these purchase acquisitions occurred as of the beginning of the year in
which they occurred, the Company's pro forma operating results would not be
materially different than as reported in the accompanying consolidated financial
statements.
Note 4 - Restructuring Charges
On September 28, 2001, the Company announced its plan to restructure and
realign its large physician group practice businesses. The Company implemented a
workforce reduction and restructuring program affecting approximately four
percent of the Company's employees. Though the Company reduced certain expenses
in the cost of sales and services and selling, general and administrative areas
as a result of the workforce restructuring program, the Company continues to
evaluate and invest resources in the development of various products, new
opportunities and initiatives that management believes will provide appropriate
returns to shareholders. The restructuring program resulted in a charge to
earnings of approximately $19.5 million during the fourth quarter of 2001, in
connection with costs associated with employee severance arrangements of
approximately $5.5 million, lease payment costs of approximately $5.2 million
and equipment and leasehold improvement write-offs related to the leased
facilities and workforce reduction of $8.8 million. Workforce related accruals,
consisting principally of employee severance costs, were based on specific
identification of employees to be terminated, along with their job
classification and functions, and their location. Substantially all work-force
related actions were completed during the fourth quarter of 2001, with the
exception of a minimal number of staff assigned to transition teams. As of March
31, 2002, the Company had an accrual balance of $4.1 million related to leased
facilities. Cash expenditures related to these accruals are expected to be
approximately $1.7 million in 2002 and approximately $2.4 million thereafter.
On June 21, 2000, the Company recorded an expense related to a restructuring
program. As of March 31, 2002, the Company had an accrued expense balance of
$670,000 related to restructuring costs.
Note 5 - Sale of Investment in Subsidiary and Other Related Matters
On January 8, 2001, the Company sold certain operations of its majority owned
subsidiary, ChannelHealth Incorporated to Allscripts Healthcare Solutions, Inc.,
a leading provider of point-of-care e-prescribing and productivity solutions for
physicians. ChannelHealth provided a set of Internet-based clinical and
productivity solutions for physicians. IDX retained the operations of the
Patient and e-Commerce Channels, which were previously part of Channelhealth. In
addition to the sale, the Company has entered into a ten-year strategic alliance
whereby Allscripts will become the exclusive provider of point-of-care clinical
applications sold by IDX to physician practices.
Allscripts acquired ChannelHealth in exchange for 8.6 million shares, or 21.3%
of Allscripts stock on a pro-forma fully diluted basis, of which IDX received
approximately 90% or 7.5 million shares of Allscripts stock. The Allscripts
shares received are subject to restrictions on any transfer of the securities
for a period of one year from the date of the transaction and, after one year,
on the transfer of more than 25% of the Allscripts shares in any one year, and
16.67% in any one month and, under certain circumstances, more favorable sale
restrictions may apply. IDX recorded the Allscripts shares at fair value of
$29.5 million, which included a discount from market value due to restrictions
on transfer, resulting in a $35.5 million gain on the transaction. The reported
gain is greater than the fair market value of the stock received due to the
Company's negative carrying value at the time of the sale of the underlying
Page 7 of 29
investment in ChannelHealth. Pursuant to the strategic alliance agreement, IDX
had guaranteed that Allscripts will have gross revenues resulting from the
alliance (less any commissions paid to IDX) of at least $4.5 million for fiscal
year 2001. IDX accrued the $4.5 million liability as of the date of the
transaction. IDX and Allscripts have finalized the analysis related to the
Allscripts 2001 eligible gross revenues guarantee and accordingly, IDX has
recognized an additional gain on the sale of Channelhealth of $4.3 million
during the first three months of 2002. IDX accounts for its investment in
Allscripts under the equity method of accounting. Under the equity method of
accounting, IDX has recognized its pro-rata share of Allscripts 2001 losses
which resulted in the elimination of the carrying value of this investment
during the third quarter of 2001. IDX recorded an equity loss during 2001 of
$17.6 million, including $6.1 million during the first quarter of 2001.
At March 31, 2002, IDX owns approximately 20% of the outstanding common stock of
Allscripts and accounts for its investment under the equity method of
accounting. This investment has a market value, which is not currently reflected
on the balance sheet, of approximately $47.2 million based on the quoted market
price as of March 31, 2002, however, as outlined above, the Company's investment
is subject to certain sale restrictions.
Summary audited financial information for Allscripts for the year ended December
31, 2001 is as follows in thousands:
Revenue $ 70,754
Gross profit 4,633
Net loss (418,931)
Current assets 64,846
Non current assets 52,598
Current liabilities 18,485
Non current liabilities 325
Summary unaudited financial information for Allscripts for the three months
ended March 31, 2002 and 2001 is as follows in thousands:
2002 2001
---- ----
Revenue $18,773 $16,599
Gross profit 3,822 1,011
Net loss (6,024) (30,801)
Note 6 - Subsequent Event
In April 2002, the Company invested $7.5 million in a strategic partner,
Stentor, Inc. This investment will be carried at cost. Stentor, Inc., a
California based medical informatics company, is a world leader in medical image
and information management.
Page 8 of 29
Note 7 - Income Taxes
The 2002 effective tax rate is lower than the statutory rate, primarily the
result of research credits. The 2001 effective tax rate was higher than the
statutory rate principally due to the non-deductible nature of certain costs
related to the sale of ChannelHealth. The net deferred tax assets as of March
31, 2002 of approximately $8.5 million are expected to be realized by generating
future taxable income and are otherwise recoverable through available tax
planning strategies.
Note 8 - Segment Information
The Company is required to disclose segment information in accordance with the
provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about major customers, products and services,
and geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions on how to allocate resources and assess performance. The
Company views its operations and manages its business as principally two
segments, healthcare information solutions that include software, hardware and
related services and medical transcription services.
The Company's business units have separate management teams and infrastructures
that offer different products and services. Accordingly, these business units
have been classified as reportable segments.
Information Systems and Services: This reportable segment consists of IDX
Systems Corporation's healthcare information solutions that includes software,
hardware and related services. IDX solutions enable healthcare organizations to
redesign patient care and other workflow processes in order to improve
efficiency and quality. The principal markets for this segment include
physician groups, management service organizations, hospitals, and integrated
delivery networks primarily located in the United States.
Medical Transcription Services: This reportable segment consists of EDiX, a
provider of medical transcription outsourcing services. The principal markets
for this segment include hospitals and large physician group practices primarily
located in the United States.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on revenue and
operating income. Intersegment revenues are immaterial. No one customer accounts
for greater than 10% of revenue for any reportable segment.
Page 9 of 29
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
MEDICAL
INFORMATION DICTATION AND
SYSTEMS AND TRANSCRIPTION
SERVICES SERVICES TOTAL
----------- -------------- -----
FOR THE THREE MONTHS ENDED
MARCH 31, 2002
Net operating revenues $ 77,677 $ 26,948 $ 104,625
Operating income 777 834 1,611
Income (loss) before income
taxes and equity in loss
of unconsolidated affiliate 6,196 (36) 6,160
Identifiable operating assets 226,995 39,245 266,240
FOR THE THREE MONTHS ENDED
MARCH 31, 2001
Net operating revenues $ 69,786 $ 22,023 $ 91,809
Operating income (loss) (1,864) 873 (991)
Income before income taxes and
equity in loss of
unconsolidated affiliate 34,910 127 35,037
Identifiable operating assets 258,058 30,474 288,532
Corporate headquarter assets and related operating costs are included in IDX
Healthcare Information Systems and Services segment information. Substantially
all of the Company's operations are in the United States.
Note 9 - Comprehensive Income
Total comprehensive income for the quarter ended March 31, 2002 amounted to $4.1
million compared to a comprehensive income of $19.7 million for the same period
in 2001. Comprehensive income/loss includes unrealized gains or losses on the
Company's available-for-sale securities that are included as a component of
stockholders' equity.
Page 10 of 29
Note 10 - Earnings Per Share Information
The following sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31,
2002 2001
---- ----
Numerator:
Net income $ 4,127 $ 19,760
-------- --------
Numerator for basic and diluted
income per share $ 4,127 $ 19,760
======== ========
Denominator:
Basic weighted-average shares outstanding 28, 841 28,434
Effect of employee stock options 174 437
---------------------------
Denominator for diluted income per share 29,015 28,871
------ ------
Basic income per share $ .14 $ .69
======= =======
Diluted income per share $ .14 $ .68
======= =======
Note 11 - Legal Proceedings
On January 18, 2001, the Company commenced a lawsuit against Epic Systems
Corporation, a competitor of the Company, the University of Wisconsin Medical
Foundation (the Foundation), and two individuals, claiming, among other things,
that trade secrets of the Company involving its IDXtend medical group practice
system were wrongfully disclosed to, and misappropriated by, Epic in a series of
meetings that took place in 1998 and 1999. The defendants deny the Company's
claims. The Company's lawsuit seeks damages and injunctive relief and was
brought in the United States District Court for the Western District of
Wisconsin and is entitled, IDX Systems Corporation v. Epic Systems Corporation,
et al. The Foundation brought a counterclaim against the Company claiming that
its lawsuit interferes with a contract between the Foundation and Epic, and that
the confidentiality provisions in IDX's contracts with the Foundation are
invalid. The counterclaim seeks damages and declaratory judgment. The Company
denies the counterclaim.
Subsequently, Epic filed an Answer denying the essential elements of the
Company's claims, and asserted counterclaims against the Company. Epic alleges
that the Company's claims asserting its trade secret rights were brought in bad
faith, with an intent to injure Epic competitively, and thereby violated
Sections 1 and 2 of the Sherman Act because the Company allegedly possesses
monopoly power in the U.S. market for medical practice information systems. Epic
also claims that this same alleged conduct constitutes intentional interference
with its contract with the Foundation. The counterclaim seeks treble damages.
The Company denies the counterclaims. On July 31, 2001, the Company's lawsuit
against Epic, the Foundation and the individuals was dismissed and the
counterclaims of Epic and the Foundation were dismissed. The Company appealed
the dismissal of its lawsuit to the United States Court of Appeals, and on April
1, 2002, that appellate court affirmed the District Court's dismissal of the
trade secret claim, but reversed and remanded the other related claims of the
Company, including breach of contract and tortious interference claims against
the defendants. The Company intends to vigorously pursue such remanded claims at
the District Court. It has resumed its discovery efforts in anticipation of
trial, which has been scheduled to begin in September.
In April 2000, the Company commenced a lawsuit for damages caused by wrongful
cancellation and material breach of contract by St. John Health System (SJHS),
in the United States District Court for Eastern District of Michigan, entitled
IDX Systems Corporation v. St. John Health System. Subsequently, SJHS commenced
a lawsuit against the Company in the Circuit Court of Wayne County, Michigan,
claiming unspecified damages against the Company for anticipatory repudiation,
breach of contract, tort and fraud. On motion of the Company, SJHS's lawsuit was
removed to and consolidated in the federal court. In its answer to the Company's
Page 11 of 29
lawsuit, SJHS asserted the same claims previously asserted in its state court
action. In September 2001, SJHS specified damage claims of approximately $77
million in allegedly lost savings, and in January 2002 raised another theory of
alleged unspecified damages for "cover". The Company believes the claims of SJHS
are without merit and continues to vigorously defend itself and prosecute its
own claims for damages, which the Company believes may exceed approximately $9
million. The lawsuit is in the trial preparation stage and the parties are
awaiting scheduling of the trial by the court.
From time to time, the Company is a party to or may be threatened with other
litigation in the ordinary course of its business. The Company regularly
analyzes current information including, as applicable, the Company's defenses
and insurance coverage and as necessary, provides accruals for probable and
estimable liabilities for the eventual disposition of these matters. The
ultimate outcome of these matters is not expected to materially affect the
Company's business, financial condition or results of operations.
Page 12 of 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE CONDENSED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS QUARTERLY REPORT ON
FORM 10-Q. THIS ITEM CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES AND
EXCHANGE ACT OF 1934 THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE INCLUDED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE THOSE SET
FORTH UNDER "FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE
PERFORMANCE" COMMENCING ON PAGE 19, AS WELL AS THOSE OTHERWISE DISCUSSED IN THIS
SECTION AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Those estimates are
based on our historical experience, terms of existing contracts, and our
observance of trends in the industry, information provided by our customers and
information available from other outside sources, as appropriate. Actual results
may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We have identified
the following as critical accounting policies to our Company: revenue
recognition and accounts receivable, income taxes and accounting for litigation,
commitments and contingencies. For a detailed discussion on the application of
these and other accounting policies, see Note 1 of Notes to Consolidated
Financial Statements.
o Revenue recognition and accounts receivable. We recognize revenue when
evidence of an arrangement exists, contractual obligations have been
satisfied, title and risk of loss (in the case of hardware) have been
transferred to the customer and collection of the resulting receivable
is reasonably assured. We defer revenue when initial payment terms
exceed 90 days. We recognize revenue on software licensing arrangements
involving multiple elements by allocation of the fair value of the
transaction to each element, or more typically using the residual method
when the arrangement includes undelivered elements. Fair value
determination requires management's judgement on a number of factors
including typical sales price. Revenue from software licensing
arrangements is principally recognized upon attainment of specified
contractual milestones and dates. Additionally, we periodically enter
into certain long-term contracts where revenue is recognized on a
percentage of completion basis or the completed contract method, as
appropriate measures of completion for each contract are achieved. We
also generate service revenues from the sale of product maintenance
contracts, consulting contracts and transcription service arrangements.
Revenue from maintenance contracts is recognized ratably over the support
period, including the installation period through the term of the
agreements, which is typically one year. Revenues from consulting and
transcription services are recognized in the period in which services are
performed. Revenue from hardware sales is recognized upon transfer of title
to customers.
Management estimates allowances for doubtful accounts receivable based on
historical experience and management's evaluation of the financial
condition of the customer. The Company typically does not require
collateral. Historically, management's estimates have been adequate to
cover accounts receivable exposures.
Page 13 of 29
o Income taxes. Our valuation allowance relating to the net deferred tax
assets is based on our assessment of historical pre-tax income as well as
tax planning strategies designed to generate future taxable income. These
strategies include estimates and involve judgement relating to certain
favorable lease rights and unrealized gains in the Company's investment in
common stock of an equity investee. To the extent that facts and
circumstances change, these tax planning strategies may no longer be
sufficient to support the deferred tax assets and the Company may be
required to increase the valuation allowance. As we generate future taxable
income against which these tax assets may be applied, some portion or all
of the valuation allowance would be reversed and an increase in net income
would consequently be reported in future years.
o Accounting for litigation, commitments and contingencies. We are currently
involved in certain legal proceedings, which, if unfavorably determined,
could have a material adverse effect on our operating results and financial
condition. In connection with management's assessment of these legal
proceedings, management must determine if an unfavorable outcome is
probable and evaluate the costs for resolution of these matters, if
reasonably estimable. These determinations and related estimates have been
developed in consultation with outside counsel handling our defense in
these matters and is based upon an analysis of potential results, assuming
a combination of litigation and defense strategies. See Part II, Item 1.
"Legal Proceedings" and Note 11 to our audited consolidated financial
statements included in 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 generally accepted accounting
principles, with no need for management's judgement in their application. There
are also areas in which management's judgement in selecting any available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K which contain accounting policies and other disclosures
required by generally accepted accounting principles.
GENERAL
Revenues increased to $104.6 million for the first quarter of 2002 from $91.8
million for the same period in 2001. Systems sales increased 4.0% in 2002, while
maintenance and service fees grew 17.9% as compared to the same period in the
prior year. The Company reported net income of $4.1 million, or $0.14 per share,
for the first quarter of 2002 as compared to net income of $19.8 million, or
$0.68 per share, for the same period in 2001. Excluding the effect of the gain
on sale of an investment in ChannelHealth of $4.3 million, net income after
income taxes for the three months ended March 31, 2002 was $1.3 million or $0.04
per share. Excluding the effects of the gain on sale of an investment in
ChannelHealth of $35.5 million, a realized gain on investment in an unrelated
entity of $5.8 million and the equity in the loss of an unconsolidated affiliate
of $6.1 million, the net loss after income taxes for the three months ended
March 31, 2001 was $172,000 or $0.01 per share.
During 2000 and continuing into 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 are temporary, they may continue to cause reductions or delays in
spending for new systems and services in the future. If these delays occur, they
may cause unanticipated revenue volatility and affect the future financial
performance of the Company.
On January 8, 2001, the Company sold ChannelHealth, including certain product
lines, to Allscripts Healthcare Solutions, Inc. (Allscripts), a leading provider
of point-of-care e-prescribing and productivity solutions for physicians.
ChannelHealth, incorporated in September 1999, was a majority owned subsidiary
of IDX. IDX retained the Patient and eCommerce Channels, which were previously
Page 14 of 29
part of Channelhealth, enabling IDX to integrate an Internet solution that
leverages its core competencies in physician practice management systems. In
addition to the sale, the Company entered into a 10-year strategic alliance
whereby Allscripts will become the exclusive provider of point-of-care clinical
applications sold by IDX to physician practices. Allscripts acquired
Channelhealth in exchange for 8.6 million shares, or 21.3% of Allscripts stock
on a pro-forma fully diluted basis, of which IDX received approximately 7.5
million shares (approximately 90%). This investment in Allscripts stock is
accounted for under the equity method. Under this method, IDX is required to
recognize a pro-rata share of Allscripts net income or loss after elimination of
certain related entity transactions. IDX has recorded approximately $17.6
million in its pro-rata share of Allscripts losses in 2001, including $6.1
million during the first quarter of 2001, and has reduced the carrying value of
this investment to zero. In the event Allscripts generates net income in the
future, IDX would not record its share of Allscripts net income until such time
as IDX's share of such future net income aggregated to an amount that was
greater than the proportionate share of cumulative losses IDX has not recorded
subsequent to its investment being written down to zero. IDX is not committed to
and does not currently plan to provide any future investments or advances to
Allscripts. Allscripts has reported losses since 1995 and may report losses in
the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
REVENUES
The Company's total revenues increased to $104.6 million during the three months
ended March 31, 2002 from $91.8 million for the corresponding period in 2001, an
increase of approximately $12.8 million or 14.0%. Revenues from systems sales
increased to $27.2 million during the three months ended March 31, 2002 (26.0%
of total revenues) from $26.2 million for the corresponding period in 2001
(28.5% of total revenues), an increase of $1.1 million or 4.0%. This increase
was primarily due to an increase in new sales and installations of certain IDX
systems.
Revenues from maintenance and service fees increased to $77.4 million during the
three months ended March 31, 2002 (74.0% of total revenues) from $65.6 million
for the corresponding period in 2001 (71.5% of total revenues), an increase of
$11.8 million or 17.9%. The increase was due to a $4.9 million increase in
EDiX's medical transcription service fee revenue, a $3.8 million increase in
maintenance revenue primarily resulting from price increases and an increase in
the Company's installed base, as well as a $3.1 million increase in installation
and consulting services provided by IDX's core business.
COST OF SALES AND SERVICES
The cost of system sales decreased to $9.2 million during the three months ended
March 31, 2002 from $11.3 million for the comparable period in 2001, a decrease
of $2.1 million or 18.6%. The decrease in cost of sales is primarily a result of
a decrease in hardware included as a component of sales of the Company's systems
sales. The gross margin on systems sales increased to 66.1% during the first
quarter of 2002 from 56.7% for the same period in 2001. The increase in the
gross profit margin as a percentage of sales was primarily due to an increase in
software license revenue which has a higher gross profit margin and a decrease
in hardware sales which have a lower gross profit margin as compared to the same
period in the prior year. The cost of services increased to $59.7 million during
the first quarter of 2002 from $52.0 million for the comparable period in 2001,
an increase of $7.6 million or 14.7%. The increase in cost of services resulted
from growth in client services expenses, primarily medical transcription staff,
as well as maintenance, installation and consulting staff. The gross profit
margin on maintenance and service fees increased to 22.9% during the first three
months of 2002 from 20.8% for the same period in 2001 and was due to increased
maintenance revenue in IDX's core business which was partially offset by growth
in service and maintenance expenses combined with operational efficiencies
related to process improvements at EDiX.
The gross profit margin of system sales of IDX's core business, information
systems and services, increased to 66.1% in 2002 from 56.7% in 2001. The
Page 15 of 29
increase in the gross profit margin as a percentage of sales was primarily due
to an increase in software license revenue which has a higher gross profit
margin and a decrease in hardware sales which have a lower gross profit margin
as compared to the same period in the prior year. The gross profit margin of
services of IDX's core business, information systems and services, increased to
25.0% in the first quarter of 2002 from 22.7% for the same period in 2001
primarily due to increased maintenance revenue which was partially offset by
growth in service and maintenance expenses. The gross profit margin for the
Company's medical dictation and transcription business segment (EDiX) increased
as a percentage of sales to 19.1% for the first three months of 2002 from 17.0%
for the same period in 2001 due to efficiencies in operations related to process
improvements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $22.0 million for the
first three months of 2002 from $19.0 million for the same period in 2001, an
increase of $3.0 million or 16.0%. As a percentage of total revenues, selling,
general and administrative expenses increased to 21.0% for the first three
months of 2002 from 20.6% for the same period in 2001. IDX's core business,
information systems and services, selling, general and administrative expenses
increased $1.6 million primarily due to increased personnel costs during the
first quarter of 2002 as compared to the same period in the prior year. EDiX's
selling, general and administrative expenses increased $1.4 million during the
first quarter of 2002 as compared to the same period in 2001 due to increased
costs in order to support sales growth.
SOFTWARE DEVELOPMENT COSTS
Software development expenses increased to $12.1 million in 2002 from $10.5
million in 2001, an increase of $1.6 million or 15.6%. As a percentage of total
revenues, software development expenses increased to 11.6% in the first
quarter of 2002 from 11.4% for the same period in 2001. As a percentage of
system sales, software development costs increased to 44.6% in the first quarter
of 2002 from 40.1% for the same period in 2001. The $1.6 million increase is
primarily due to increased personnel costs as compared to the prior year in
IDX's core information systems and services business segment. Research and
development costs in the medical dictation and transcription business segment
(EDiX) increased to $471,000 for the first quarter of 2002 from $415,000 for the
same period in 2001. Approximately $438,000 of software development costs, net
of amortization, were capitalized during the first quarter of 2002 as compared
to $291,000 for the same period in 2001.
OTHER INCOME, NET
Interest income decreased to approximately $327,000 during the first three
months of 2002 as compared to $929,000 for the same period in 2001. This
decrease was primarily due to a lower average invested balance combined with
lower interest rates during the first three months of 2002 as compared to the
same period in 2001. Interest expense during the first three months of 2002
increased to $51,000 from $0 during the comparable period in 2001.
MINORITY INTEREST
The Company's consolidated financial statements included the accounts of the
Company and BDP Realty Associates (BDP) through April 2001. BDP's real estate
was leased exclusively by the Company, and the Company was subject to
substantially all the risks of ownership through the date that this property was
acquired by the Company at the fair market value of approximately $15.0 million
as determined by an independent appraiser. All transactions between the Company
and BDP have been eliminated. The minority interest, which was eliminated in
April 2001, represented the net income and equity of BDP.
GAIN ON SALE OF INVESTMENT IN SUBSIDIARY
On January 8, 2001, Allscripts acquired IDX's interest in ChannelHealth in
exchange for approximately 7.5 million shares of Allscripts common stock
(Allscripts shares). The Allscripts shares received are subject to restrictions
on any transfer of the securities for a period of one year from the date of the
transaction and after one year, on the transfer of more than 25% of the
Allscripts shares in any one year, and 16.67% in any one month. IDX recorded the
Allscripts shares at fair value of $29.5 million, which included a discount from
market value due to the four year restrictions on transfer, resulting in a $35.5
million gain on the transaction. IDX also entered into a ten year strategic
Page 16 of 29
alliance agreement with Allscripts. Pursuant to the strategic alliance
agreement, IDX had guaranteed that Allscripts will have gross revenues resulting
from the alliance (less any commissions paid to IDX) of at least $4.5 million
for fiscal year 2001. IDX accrued the $4.5 million liability as of the date of
the transaction. IDX and Allscripts have finalized the analysis related to the
Allscripts 2001 eligible gross revenues guarantee and accordingly, IDX has
recognized an additional gain on the sale of Channelhealth of $4.3 million
during the first three months of 2002. IDX accounts for its investment in
Allscripts under the equity method of accounting. As a result of the
transaction, the Company is entitled to representation on Allscripts Board of
Directors.
REALIZED GAIN ON INVESTMENT.
Other income during the first quarter of 2001 includes a $5.8 million realized
gain from a distribution of marketable equity securities related to an
investment in an unrelated investment partnership.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE.
IDX, through a wholly owned subsidiary, currently owns approximately 20% of the
outstanding common stock of Allscripts and records its investment under the
equity method of accounting. IDX records its interest in the losses of
Allscripts as a reduction to its investment account. IDX recorded an equity loss
during the first three months of 2001 of $6.1 million on a pre-tax basis. IDX's
interest in the losses of Allscripts in 2001 reduced the balance of IDX's
investment carrying balance in Allscripts to zero, and accordingly no share of
Allscripts loss has been recorded during the first quarter of 2002.
INCOME TAXES
The Company recorded income tax expense of approximately $2.0 million during the
first quarter of 2002, an effective tax rate of 33.0%. This is lower than the
Company's historical tax rate of 40.0% due to certain research and
experimentation credits. The Company recorded income tax expense of
approximately $15.3 million during the first quarter of 2001, an effective tax
rate of 43.6%. The higher rate in 2001 is principally due to transaction costs
related to the sale of ChannelHealth that are non-deductible for income tax
purposes. The Company anticipates a consolidated effective tax rate of
approximately 33.0% for the year ending December 31, 2002. This favorable rate
is primarily the result of research credits projected to be generated and
utilized in 2002. The Company anticipates that EDiX's effective tax rate in 2002
will also be less than the statutory rate due to the use of operating loss carry
forwards, subject to annual limitations. The net deferred tax assets as of March
31, 2002 of approximately $8.5 million are expected to be realized by generating
future taxable income and are otherwise recoverable through available tax
planning strategies.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 applies to all business combinations completed after June
30, 2001, which among other things, requires the use of the purchase method of
accounting. SFAS No. 141 also establishes new criteria for determining whether
intangible assets should be recognized separately from goodwill. SFAS No. 142
provides that goodwill and intangible assets with indefinite lives will not be
amortized, but rather will be reviewed for impairment at least annually. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. The
Company has adopted SFAS No. 141 and SFAS No. 142 and has determined that they
had no significant impact on its financial condition or results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
superseded SFAS No. 121, "Accounting for Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company is required to adopt SFAS No. 144 in the
first quarter of fiscal 2002. The Company has adopted SFAS No. 144 effective
January 1, 2002 and has determined that it had no significant impact on its
financial condition or results of operations.
Page 17 of 29
LIQUIDITY AND CAPITAL RESOURCES
The Company principally has funded its operations, working capital needs and
capital expenditures from operations, excluding the net cash used in operations
of ChannelHealth in 1999 and 2000.
Net cash used in operations is principally comprised of net income and
depreciation and is primarily affected by the net effect of the change in
accounts receivable, accounts payable, accrued expenses and non-cash items
relating to the sale of Channelhealth and certain components of restructuring
charges. Due to the nature of the Company's business, accounts receivable,
deferred revenue and accounts payable fluctuate considerably due to, among other
things, the length of installation efforts which are dependent upon the size of
the transaction, the changing business plans of the customer, the effectiveness
of customers' management and general economic conditions. During the first three
months of 2002, accounts receivable from customers have been collected on
average within 89 days which represents a decrease of 15 days in terms of
average days to collect receivables from customers as compared to the
same period in 2001.
Cash flows related to investing activities have historically been related to the
purchase of computer and office equipment, leasehold improvements and the
purchase and sale of investment grade marketable securities. The Company
purchased its corporate headquarters facility from a related party in April 2001
for approximately $15.0 million based on an independent appraisal of its fair
market value. This transaction was reviewed and approved by certain independent
members of the Board of Directors of the Company that had no financial interest
in the transaction. Through March 31, 2002, the Company has spent approximately
$16.0 million on construction related to an expansion of its Corporate
Headquarters facility that is substantially complete as of March 31, 2002. In
April 2000, the Company entered into a new operating lease for office space in
Seattle, Washington, commencing in 2003, for a period of 12 years. The Company
anticipates approximately $8.5 million in cash outlays for improvements related
to this Seattle lease in 2002.
In addition, investing activities may also include purchases of interests in,
loans to and acquisitions of businesses for access to complementary products and
technologies. The Company expects these activities to continue. In April 2002,
the Company invested $7.5 million in a strategic partner, Stentor, Inc. This
investment will be carried at cost. There can be no assurance that the Company
will be able to successfully complete any such purchases or acquisitions in the
future.
Cash flows from financing activities historically relate to the issuance of
common stock through the exercise of employee stock options and in connection
with the employee stock purchase plan and proceeds from line of credit.
Cash, cash equivalents and securities available-for-sale at March 31, 2002 were
$48.8 million, a decrease of $7.5 million from December 31, 2001. The Company
has a revolving demand line of credit with a bank allowing the Company to borrow
up to approximately $19.0 million bearing interest at the bank's base rate,
approximately 4.0% in 2002. This line of credit is subject to certain terms and
conditions including the requirement that the Company must maintain deposits
with the bank that are in excess of the amounts borrowed. At March 31, 2002 and
2001, the Company had $18.7 million and $0 outstanding, respectively, under this
arrangement. As of April 23, 2002 there was no outstanding balance on this line
of credit.
In addition to existing financing arrangements, the Company owns, through a
wholly owned subsidiary, approximately 7.5 million shares of Allscripts stock, a
public company listed on the Nasdaq National Market under the symbol MDRX. This
investment in Allscripts stock is accounted for under the equity method. IDX
recorded an equity loss during the first nine months of 2001 of $17.6 million on
a pre-tax basis that reduced the balance of IDX's investment carrying balance in
Allscripts to zero. This investment has a quoted market value of approximately
$47.2 million as of March 31, 2002, and is subject to certain sale restrictions
that may significantly impact the market value.
The Company expects that its requirements for office facilities and other office
equipment will grow as staffing requirements dictate. The Company's operating
lease commitments consist primarily of office leasing for the Company's
operating facilities. The Company plans to increase the number of its
Page 18 of 29
professional staff during 2002 as needed to meet anticipated sales volume and to
support research and development efforts for certain products. To the extent
necessary to support increases in staffing, the Company may obtain additional
office space.
As of March 31, 2002, the Company has not entered into other material lease or
purchase commitments not disclosed above. The Company believes that currently
available funds will be sufficient to finance its operating requirements at
least through the next twelve months. To date, inflation has not had a material
impact on the Company's revenues or income.
During the three month period ended March 31, 2002, IDX has not engaged in:
o Material off-balance sheet activities, including the use of structured
finance or special purpose entities, with the exception of BDP Realty
which has been given full recognition in the financial statements for
all periods presented as described below,
o Trading activities in non-exchange traded contracts, or
o Transactions with persons or entities that benefit from their
non-independent relationship with IDX, other than described below.
Through April 19, 2001, the Company's consolidated financial statements included
the accounts of the Company and BDP Realty Associates (BDP), a real estate trust
owned by certain stockholders and key employees of the Company, Robert H. Hoehl
and Richard E. Tarrant, whose real estate was leased exclusively by the Company.
Effective with the date of the acquisition of the Company's corporate
headquarters from BDP, the Company has deconsolidated BDP and eliminated the net
assets, principally real estate and minority interest, included in the Company's
consolidated balance sheet as of that date. The Company's corporate headquarters
were purchased from BDP for cash, at fair market value as determined by
independent appraisers, for approximately $15.0 million during the second
quarter of 2001. This amount has been recorded as property and equipment. This
transaction was reviewed and approved by certain independent members of the
Board of Directors of the Company that had no financial interest in the
transaction. Total rent expense includes $294,000, $1.2 million and $1.3 million
in 2001, 2000 and 1999, respectively, related to this lease.
The Company leases an office building from 4901 LBJ Ltd. Partnership, a real
estate partnership (REP) owned by certain stockholders and key employees of the
Company. Lease agreements are based on fair market value rents and are reviewed
and approved by independent members of the Board of Directors. Total rent
expense includes $139,600 and $139,300 during the periods ending March 31, 2002
and March 31, 2001, respectively, related to this lease.
FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE
This Quarterly Report on Form 10-Q contains "forward-looking statements" as
defined in Section 21E of the Securities and Exchange Commission Act of 1934.
For this purpose, any statements contained in this Quarterly Report on Form 10-Q
that are not statements of historical fact may be deemed to be forward-looking
statements. Words such as "believes," "anticipates," "plans," "expects," "will"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause results to differ
materially from those indicated by these forward-looking statements, including
among others, the factors set forth below. If any risk or uncertainty identified
in the following factors actually occurs, our business, financial condition and
operating results would likely suffer. In that event, the market price of IDX's
common stock could decline.
The Company undertakes no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes in future operating results, financial condition or business
over time.
Page 19 of 29
Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results.
The following important factors affect IDX's business and operations generally
or affect more than one segment of our business and operations:
QUARTERLY OPERATING RESULTS MAY VARY. The Company's quarterly operating results
have varied in the past and may vary in the future. IDX expects its quarterly
results of operations to continue to fluctuate. Because a significant percentage
of IDX's expenses are relatively fixed, the following factors could cause these
fluctuations:
o delays in customers purchasing decisions due to a variety of factors
such as consideration and management changes;
o long sales cycles;
o long installation and implementation cycles for the larger, more complex
and costlier systems;
o recognizing revenue at various points during the installation process,
typically based on milestones; and
o timing of new product and service introductions and product upgrade
releases.
In light of the above, IDX believes that its results of operations for any
particular quarter or fiscal year are not necessarily meaningful or reliable
indicators of future performance.
VOLATILITY OF STOCK PRICE. IDX has
experienced, and expects to continue to experience, fluctuations in its stock
price due to a variety of factors including:
o actual or anticipated quarterly variations in operating results;
o changes in expectations of future financial performance;
o changes in estimates of securities analysts;
o market conditions particularly in the computer software and Internet
industries;
o announcements of technological innovations, including Internet delivery
of information and use of application service provider technology;
o new product introductions by IDX or its competitors;
o delay in customers purchasing decisions due to a variety of factors;
o market prices of competitors; and o healthcare reform measures and
healthcare regulation.
These fluctuations have had a significant impact on the market price of our
common stock, and may have a significant impact on the future market price of
our common stock.
These fluctuations may affect operating results as follows:
o ability to transact stock acquisitions ; and
o ability to retain and incent key employees.
FINANCIAL TRENDS. Although the Company's results from operations improved during
the first three months of 2002, year over year operating results and cash from
operations generally declined during the period from 1998 through 2000. In 2001
and 2000, IDX generated a net loss of approximately $8.6 million and $36.0
million, respectively. If these trends continue, IDX may have difficulty
financing future growth and funding operating initiatives, including future
acquisitions.
DISRUPTION IN THE ECONOMY. The terrorist events of September 11, 2001 have
sensitized the Company and many other businesses to the potential disruption
that such activities can have on the economy, the business cycle and,
ultimately, on the financial performance of these organizations. It is
impossible to know whether such terrorist activities will continue, and whether,
and to what extent, they may cause a disruption which may have a material
adverse effect on the business and financial condition of the Company.
Page 20 of 29
NEW PRODUCT DEVELOPMENT AND RAPIDLY CHANGING TECHNOLOGY. To be successful, IDX
must enhance its existing products, respond effectively to technology changes
and help its clients adopt new technologies. In addition, IDX must introduce new
products and technologies to meet the evolving needs of its clients in the
healthcare information systems market. IDX may have difficulty in accomplishing
this because of:
o the continuing evolution of industry standards, for example, transaction
standards pursuant to the Health Insurance Portability and Accountability
Act of 1996; and
o the creation of new technological developments, for example, Internet and
application service provider technology.
IDX is currently devoting significant resources toward the development of
enhancements to its existing products, particularly in the area of Internet-
based functionality and the migration of existing products to new hardware and
software platforms, including relational database technology, object-oriented
architecture and application service provider technology. However, IDX may not
successfully complete these product developments or the adaptation in a timely
fashion, and IDX's current or future products may not satisfy the needs of the
healthcare information systems market. Any of these developments may adversely
affect IDX's competitive position or render its products or technologies
noncompetitive or obsolete.
CHANGES AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY. IDX currently derives
substantially all of its revenues from sales of financial, administrative and
clinical healthcare information systems, medical transcription services and
other related services within the healthcare industry. As a result, the success
of IDX is dependent in part on the political and economic conditions in the
healthcare industry.
Virtually all of IDX's customers and the other entities with which IDX has a
business relationship operate in the healthcare industry and, as a result, are
subject to governmental regulation, including Medicare and Medicaid regulation.
Accordingly, IDX's customers and the other entities with which IDX has a
business relationship are affected by changes in such regulations and
limitations in governmental spending for Medicare and Medicaid programs. Recent
actions by Congress have limited governmental spending for the Medicare and
Medicaid programs, limited payments to hospitals and other providers under such
programs, and increased emphasis on competition and other programs that
potentially could have an adverse effect on IDX's customers and the other
entities with which IDX has a business relationship. In addition, federal and
state legislatures have considered proposals to reform the U.S. healthcare
system at both the federal and state level. If enacted, these proposals could
increase government involvement in healthcare, lower reimbursement rates and
otherwise change the business environment of IDX's customers and the other
entities with which IDX has a business relationship. IDX's customers and the
other entities with which IDX has a business relationship could react to these
proposals and the uncertainty surrounding these proposals by curtailing or
deferring investments, including those for IDX's products and services.
In addition, many healthcare providers are consolidating to create integrated
healthcare delivery systems with greater market power. These providers may try
to use their market power to negotiate price reductions for IDX's products and
services. If IDX is forced to reduce its prices, its operating margins would
likely decrease. As the healthcare industry consolidates, competition for
customers will become more intense and the importance of acquiring each customer
will become greater.
COMPETITION FOR HEALTHCARE INFORMATION SYSTEMS. The market for healthcare
information systems is intensely competitive, rapidly evolving and subject to
rapid technological change. IDX believes that the principal competitive factors
in this market include the breadth and quality of system and product offerings,
the features and capabilities of the systems, the price of the system and
product offerings, the ongoing support for the systems, the potential for
enhancements and future compatible products.
Some of IDX's competitors have greater financial, technical, product
development, marketing and other resources than IDX, and some of its competitors
offer products that it does not offer. The Company's principal existing
Page 21 of 29
competitors include, Eclipsys Corporation, McKesson Medquist, Inc., Shared
Medical Systems Corporation, which was acquired by Siemans AG in 2000, Epic
Systems Corporation 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. Many of
IDX's competitors have also announced or introduced Internet strategies that
will compete with IDX's Internet applications and services. IDX may be unable to
compete successfully against these organizations. In addition, IDX expects that
major software information systems companies, large information technology
consulting service providers and system integrators, Internet-based start-up
companies and others specializing in the healthcare industry may offer
competitive products or services. In October 2001, Pfizer, IBM and Microsoft
announced the creation of a joint venture known as Amicore to develop
applications to automate the administrative, clinical and financial functions of
a medical practice and connect the practice to groups, laboratories, pharmacies
and other providers for physicians and physician groups.
PRODUCT LIABILITY CLAIMS. Any failure by IDX's products that provide
applications relating to patient medical histories, diagnostic procedures, and
treatment plans could expose IDX to product liability claims. These potential
claims may exceed IDX's current insurance coverage. Unsuccessful claims could be
costly to defend and divert management time and resources. In addition, IDX
cannot make assurances that it will continue to have appropriate insurance
available to it in the future at commercially reasonable rates.
KEY PERSONNEL. The success of IDX is dependent to a significant degree on its
key management, sales, marketing, and technical personnel. To be successful IDX
must attract, motivate and retain highly skilled managerial, sales, marketing,
consulting and technical personnel, including programmers, consultants and
systems architects skilled in the technical environments in which IDX's products
operate. Competition for such personnel in the software and information services
industries is intense. IDX does not maintain "key man" life insurance policies
on any of its executives with the exception of Richard E. Tarrant. Not all of
IDX personnel have executed noncompetition agreements.
GOVERNMENT REGULATION. Virtually all of IDX's customers and the other entities
with which IDX has a business relationship operate in the healthcare industry
and, as a result, are subject to governmental regulation. Because IDX's products
and services are designed to function within the structure of the healthcare
financing and reimbursement systems currently in place in the United States, and
because IDX is pursuing a strategy of developing and marketing products and
services that support its customers' regulatory and compliance efforts, IDX may
become subject to the reach of, and liability under, these regulations.
The Federal Anti-Kickback Law, among other things, prohibits the direct or
indirect payment or receipt of any remuneration for Medicare, Medicaid and
certain other Federal or state healthcare program patient referrals, or
arranging for or recommending referrals or other business paid for in whole or
in part by the federal health care programs. Violations of the Federal Anti-
Kickback Law may result in civil and criminal sanction and liability, including
the temporary or permanent exclusion of the violator from government 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
Page 22 of 29
has a business relationship, IDX provides assistance with the provision of
inaccurate financial reports to the government under these regulations, or IDX
is found to have knowingly recorded or reported data relating to inappropriate
payments made to a healthcare provider, IDX could be subject to liability under
these laws.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) contains
provisions regarding standardization, privacy, security and administrative
simplification in healthcare. As a result of regulations now proposed under
HIPAA, IDX intends to make investments to support customer operations in areas,
such as:
o electronic data transactions;
o computer system security; and
o patient privacy.
Although it is not possible to anticipate the final form of all regulations
under HIPAA, IDX has made and expects to continue to make investments in product
enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require IDX to make investments in new products
or charge higher prices. It may be expensive to implement security or other
measures designed to comply with any new legislation or regulation.
The United States Food and Drug Administration has promulgated a draft policy
for the regulation of computer software products as medical devices under the
1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. To
the extent that computer software is a medical device under the policy, IDX, as
a manufacturer of such products, could be required, depending on the product,
to:
o register and list its products with the FDA;
o notify the FDA and demonstrate substantial equivalence to other products
on the market before marketing such products; or
o obtain FDA approval by demonstrating safety and effectiveness before
marketing a product.
Depending on the intended use of a device, the FDA could require IDX to obtain
extensive data from clinical studies to demonstrate safety or effectiveness, or
substantial equivalence. If the FDA requires this data, IDX would be required to
obtain approval of an investigational device exemption before undertaking
clinical trials. Clinical trials can take extended periods of time to complete.
IDX cannot provide assurances that the FDA will approve or clear a device after
the completion of such trials. In addition, these products would be subject to
the Federal Food, Drug and Cosmetic Act's general controls, including those
relating to good manufacturing practices and adverse experience reporting.
Although it is not possible to anticipate the final form of the FDA's policy
with regard to computer software, IDX expects that the FDA is likely to become
increasingly active in regulating computer software intended for use in
healthcare settings regardless of whether the draft is finalized or changed. The
FDA can impose extensive requirements governing pre- and post-market conditions
like service investigation, approval, labeling and manufacturing. In addition,
the FDA can impose extensive requirements governing development controls and
quality assurance processes.
SYSTEM ERRORS AND WARRANTIES. IDX's healthcare information systems are very
complex. As with complex systems offered by others, IDX's healthcare information
systems may contain errors, especially when first introduced. IDX's healthcare
information systems are intended to provide information to healthcare providers
for use in the diagnosis and treatment of patients. Therefore, users of IDX's
products may have a greater sensitivity to system errors than the market for
software products generally. Failure of an IDX customer's system to perform in
accordance with its documentation could constitute a breach of warranty and
require IDX to incur additional expenses in order to make the system comply with
the documentation. If such failure is not timely remedied, it could constitute a
material breach under a contract allowing the client to cancel the contract and
subject IDX to liability.
POTENTIAL INFRINGEMENT OF PROPRIETARY RIGHTS OF OTHERS. If any of IDX's products
violate third party proprietary rights, IDX may be required to 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
Page 23 of 29
awards as a result of infringing the proprietary rights of others, which could
cause IDX to incur additional losses and have an adverse impact on its financial
position. IDX does not conduct comprehensive patent searches to determine
whether the technologies used in its products infringe patents held by others.
In addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. IDX's success and competitiveness
are dependent to a significant degree on the protection of its proprietary
technology. IDX relies primarily on a combination of copyrights, trade secret
laws, patents, and restrictions on disclosure to protect its proprietary
technology. Despite these precautions, others may be able to copy or reverse
engineer aspects of IDX's products, to obtain and use information that IDX
regards as proprietary or to independently develop similar technology.
Litigation may continue to be necessary to enforce or defend IDX's proprietary
technology or to determine the validity and scope of the proprietary rights of
others. This litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of management and technical resources.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY. IDX intends to continue to grow in
part through either acquisitions of complementary products, technologies and
businesses or alliances with complementary businesses. IDX may not be successful
in these acquisitions or alliances, or in integrating any such acquired or
aligned products, technologies or businesses into its current business and
operations. Factors which may affect IDX's ability to expand successfully
include:
o the generation of sufficient financing to fund potential acquisitions
and alliances;
o the successful identification and acquisition of products, technologies
or businesses;
o effective integration and operation of the acquired or aligned
products, technologies or businesses despite technical difficulties,
geographic limitations and personnel issues; and
o overcoming significant competition for acquisition and alliance
opportunities from companies that have significantly greater financial
and management resources.
STRATEGIC ALLIANCE WITH ALLSCRIPTS HEALTHCARE SOLUTIONS. In 2001, IDX entered
into a ten-year strategic alliance with Allscripts Healthcare Solutions, Inc. to
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 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.
BUSINESS RELATIONSHIP WITH COMPAQ. Compaq Computer Corporation has announced a
proposed merger with Hewlett-Packard Company. Compaq is a leading provider of
hardware and operating system software used by a majority of the applications
offered by the Company. To the extent the merger impacts the product lines that
IDX uses in its product offering, or the development activities of the merged
Compaq/Hewlett-Packard entity, it may adversely affect IDX's ability to continue
to offer its products on the historical hardware platforms. As a result, such
merger could have a material adverse effect upon the business of IDX.
RESTRICTIONS ON LIQUIDATION OF INVESTMENT IN ALLSCRIPTS HEALTHCARE SOLUTIONS. In
January 2001, IDX received approximately 7.5 million shares of common stock of
Allscripts Healthcare Solutions, Inc. in connection with the acquisition by
Allscripts of IDX's majority owned subsidiary, ChannelHealth Incorporated. IDX
entered into a stock rights and restrictions agreement with Allscripts, pursuant
to which, among other things, IDX agreed to restrictions on the sale of its
shares of Allscripts common stock. In general, IDX is prohibited from selling
any shares for one year after the date of Allscripts' acquisition of
ChannelHealth, and after one year, IDX is prohibited from selling more than 25%
Page 24 of 29
of it shares of Allscripts common stock in any one year, and 16.67% in any one
month. The restrictions on IDX's ability to sell shares of Allscripts common
stock may make it difficult for IDX to liquidate its investment in Allscripts
and may adversely affect the value of such investment.
ANTI-TAKEOVER DEFENSES. IDX's Second Amended and Restated Articles of
Incorporation and Second Amended and Restated Bylaws contain certain
anti-takeover provisions, which could deter an unsolicited offer to acquire IDX.
For example, IDX's board of directors is divided into three classes, only one of
which will be elected at each annual meeting. These provisions may delay or
prevent a change in control of IDX.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 March 31, 2002, foreign currency
fluctuations have not had a material impact on our financial position or results
of operations.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities that may experience a decline in market
value due to changes in interest rates. A hypothetical 10% increase or decrease
in interest rates, however, would not have a material adverse effect on our
financial condition.
Interest rates on short term borrowings with floating rates carry a degree of
interest rate risk. Our future interest expense may increase if interest rates
fluctuate. Interest expense was immaterial in 2001 and 2000, and in 1999
amounted to $866,000 related to EDiX's pre-acquisition financing.
Interest income on the Company's investments is included in "Other Income." The
Company accounts for cash equivalents and securities available-for-sale in
accordance with Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." Cash equivalents are
short-term highly liquid investments with original maturity dates of three
months or less. Cash equivalents are carried at cost, which approximates fair
market value. The Company's investments are classified as securities
available-for-sale and are recorded at fair value with any unrealized gain or
loss recorded as an element of stockholders' equity.
Page 25 of 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 18, 2001, the Company commenced a lawsuit against Epic Systems
Corporation, a competitor of the Company, the University of Wisconsin Medical
Foundation (the Foundation), and two individuals, claiming, among other things,
that trade secrets of the Company involving its IDXtend medical group practice
system were wrongfully disclosed to, and misappropriated by, Epic, in a series
of meetings that took place in 1998 and 1999. The defendants deny the Company's
claims. The Company's lawsuit seeks damages and injunctive relief and was
brought in the United States District Court for the Western District of
Wisconsin and is entitled, IDX Systems Corporation v. Epic Systems Corporation,
et al. The Foundation brought a counterclaim against the Company claiming that
its lawsuit interferes with a contract between the Foundation and Epic, and that
the confidentiality provisions in IDX's contracts with the Foundation are
invalid. The counterclaim seeks damages and declaratory judgment. The Company
denies the counterclaim.
Subsequently, Epic filed an Answer denying the essential elements of the
Company's claims, and asserted counterclaims against the Company. Epic alleges
that the Company's claims asserting its trade secret rights were brought in bad
faith, with an intent to injure Epic competitively, and thereby violated
Sections 1 and 2 of the Sherman Act because the Company allegedly possesses
monopoly power in the U.S. market for medical practice information systems. Epic
also claims that this same alleged conduct constitutes intentional interference
with its contract with the Foundation. The counterclaim seeks treble damages.
The Company denies the counterclaims. On July 31, 2001, the Company's lawsuit
against Epic, the Foundation and the individuals was dismissed and the
counterclaims of Epic and the Foundation were dismissed. The Company appealed
the dismissal of its lawsuit to the United States Court of Appeals, and on April
1, 2002, that appellate court affirmed the District Court's dismissal of the
trade secret claim, but reversed and remanded the other related claims of the
Company, including breach of contract and tortious interference claims against
the defendants. The Company intends to vigorously pursue such remanded claims at
the District Court. It has resumed its discovery efforts in anticipation of
trial, which has been scheduled to begin in September.
In April 2000, the Company commenced a lawsuit for damages caused by wrongful
cancellation and material breach of contract by St. John Health System (SJHS),
in the United States District Court for Eastern District of Michigan, entitled
IDX Systems Corporation v. St. John Health System. Subsequently, SJHS commenced
a lawsuit against the Company in the Circuit Court of Wayne County, Michigan,
claiming unspecified damages against the Company for anticipatory repudiation,
breach of contract, tort and fraud. On motion of the Company, SJHS's lawsuit was
removed to and consolidated in the federal court. In its answer to the Company's
lawsuit, SJHS asserted the same claims previously asserted in its state court
action. In September 2001, SJHS specified damage claims of approximately $77
million in allegedly lost savings, and in January 2002 raised another theory of
alleged unspecified damages for "cover". The Company believes the claims of SJHS
are without merit and continues to vigorously defend itself and prosecute its
own claims for damages, which the Company believes may exceed approximately $9
million. The lawsuit is in the trial preparation stage and the parties are
awaiting scheduling of the trial by the court.
From time to time, the Company is a party to or may be threatened with other
litigation in the ordinary course of its business. The Company regularly
analyzes current information including, as applicable, the Company's defenses
and insurance coverage and as necessary, provides accruals for probable and
estimable liabilities for the eventual disposition of these matters. The
ultimate outcome of these matters is not expected to materially affect the
Company's business, financial condition or results of operations.
Page 26 of 29
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
Shareholder's Proposal for 2003 Annual Meeting.
As set forth in the Company's Proxy Statement for its 2002 Annual
Meeting of Stockholders, proposals of stockholders intended to be
included in the Company's proxy statement for the 2003 Annual Meeting
of Stockholders must be received by the Company at its principal office
in South Burlington, Vermont not later than December 23, 2002.
Stockholders who wish to make a proposal at the 2003 Annual
Meeting--other than one that will be included in the Company's proxy
materials--must notify the Company no later than March 8, 2003. If a
stockholder who wishes to present a proposal fails to notify the
Company by this date, the proxies that management solicits for the
meeting will have discretionary authority to vote on the stockholder's
proposal if it is properly brought before the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this Form 10-Q are listed on the Exhibit
Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference:
(b) There were no Forms 8-K filed during the first quarter of 2002.
Page 27 of 29
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
/S/ JOHN A. KANE
Date: May 10, 2002 By: ____________________________________
John A. Kane,
Sr. Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
Page 28 of 29
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
Exhibit No. Description Page
- ----------- ----------- ----
10.1 * Employment, Noncompetition and Nondisclosure 30
Agreement by And between IDX Systems Coporation
and Thomas Butts dated January 14, 2002.
10.2 2002 Stock Incentive Plan for Non-Employee 46
Directors.
* Confidential treatment requested as to certain portions, which
are omitted and filed separately with the Securities and
Exchange Commission.
Page 29 of 29
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
[IDX LOGO]
EMPLOYMENT, NONCOMPETITION AND NONDISCLOSURE AGREEMENT
THIS AGREEMENT is made by and between IDX SYSTEMS CORPORATION,
a Vermont corporation ("the Company") and the undersigned (the "Employee") as of
the date of acceptance hereof by the Company in its offices in Burlington,
Vermont, and it shall be effective on, and the Employee will begin employment
on, January 14, 2002 (the "Effective Date"). References to the Employee using
the masculine gender in this Agreement shall be deemed to include the feminine
gender and vice versa.
BACKGROUND
The Employee desires to become employed by the
Company. The Company desires to employ the Employee, and the
Employee is willing to accept such employment, upon the terms
and conditions hereinafter set forth.
The Employee acknowledges that in the course of
rendering services to the Company, he may have and will become
acquainted with information about the business and financial
affairs of the Company, and may have contributed or may in the
future contribute to such information. The Employee recognizes
that in order to protect the legitimate interests of the
Company it is necessary for the Company to protect all such
information by keeping it secret or confidential.
IN CONSIDERATION of the premises, the mutual covenants and
conditions set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. EMPLOYMENT
1.1 Employment at Will The Company hereby offers the
------------------
Employee, and Employee hereby accepts, employment or continued employment upon
the terms and conditions hereinafter set forth. Employment by the Company is
terminable at any time, for any reason, at the will of either the Employee or
the Company. No statement of policy or procedure, whether written or oral, or
set forth in any manual or guide, shall be a promise by the Company to continue
employment for any definite term, nor shall any such statement, policy or
procedure require the Company to follow any special procedure, such as
progressive discipline, before terminating employment.
1.2 Location The Employee will work at the Company's
--------
offices in Boston, Massachusetts.
1.3 Exclusive Employment The Employee shall devote
---------------------
his/her full-time efforts exclusively for the benefit of the Company as required
hereunder, and shall perform no services for, and shall not become employed or
engaged by any other person, firm or entity while employed by the Company. The
foregoing shall not prevent Employee from participating in activities in
association with professional associations as approved by the Company.
1.4 Duties The Employee, shall have such duties as
------
are typically performed by a division President of a company of similar size and
type as the Company, which shall be as assigned by the Company in its
discretion, and at all times he/she shall be subject to the direction and
control of the officers and the Board of Directors of the Company. The duties of
the Employee as of the date of this Agreement shall be as set forth on the
official job description attached hereto as Exhibit I for the position indicated
below the Employee's signature line at the end of this Agreement.
2. COMPENSATION
As the only and the full compensation for all of
the services to be provided by the Employee to the Company, the Company agrees
to pay, and the Employee agrees to and does accept, the following:
2.1 Salary The Company shall pay to the
------
Employee an annual base Salary of $275,000 per year (the "Salary"), which may be
increased by the Company on an annual basis in a manner consistent with its
annual compensation review but may not be decreased. The Salary shall be paid
semi-monthly on the fifteenth (15th) and last days of each month, in arrears, or
on such other legal basis as the Company shall generally follow from time to
time, net of all taxes and other legally permissible withholdings. In this
regard, the Employee hereby authorizes the Company to withhold from Salary
payments any amounts owed to the Company by Employee hereunder or any other
amounts as may be agreed to subsequently, including but not limited to over
payments, 401k contributions, and loan payments.
2.2 Benefits The Employee shall be entitled to the
--------
benefits, such as health, insurance, paid and unpaid leave as the Company may
from time to time offer to other similarly situated employees as a standard
benefit. Benefits are subject to change at any time with such notice to
employees as may be required by applicable employee benefit plans and laws
governing them. No special or different terms shall apply to Employee unless set
forth in writing and signed by an authorized executive officer of the Company.
In addition, Employee shall be entitled to five weeks (200 hours) paid vacation
per calendar year.
2.3 Bonuses The Employee shall receive a $75,000
-------
one-time sign-on bonus (the "Sign-On Bonus"), which shall be paid in a lump sum
to the Employee on January 31, 2002. In addition the Employee shall receive an
annual incentive bonus (the "Incentive Bonus") based upon the attainment of
performance goals set forth in a performance plan to be mutually agreed to by
the Company and the Employee within 90 days of the beginning of each calendar
year. Notwithstanding the forgoing, the performance goals for 2002, 2003 and
2004 are set forth on Schedule A attached hereto. Except as otherwise provided
herein, the Sign-On Bonus and the Incentive Bonus shall not be payable unless
the Employee is actually employed by the Company and is in good standing on the
date of actual distribution. The Incentive Bonus shall be paid to the Employee
not later than February 28 of the year following the applicable bonus year in
which the Incentive Bonus is earned.
2.4 Authorization to Deduct from Wages If at
-----------------------------------
separation of employment (a) the Company has advanced paid leave to the Employee
before the Employee has accrued such leave, (b) the Employee has failed to repay
any money the Company has loaned to the Employee during the course of
employment, or (c) the Employee is required pursuant to a written agreement to
reimburse the Company for relocation and moving costs, the Employee authorizes
the Company to deduct from the Employee's wages sufficient funds to repay such
advances, loans, or relocation/moving costs, subject to applicable federal and
state wage laws.
2.5 Equity Awards The Employee shall be granted
--------------
the number of options to purchase common stock as set forth on Schedule B
attached hereto, under and subject to all of the terms and conditions of the
Company's 1995 Stock Option Plan or its successor, Schedule B, and the Company's
form of Stock Option Agreement. Such issuances and grants will not be made
unless the Employee is actually employed by the Company and is in good standing
on the date of grant or issuance, as applicable.
Page 2 of 16
2.6 Supplemental Retirement Benefit The Employee
---------------------------------
will be among the executives of the Company entitled to the benefit of a
Supplemental Retirement Benefit Plan, if and when adopted by the Company.
Additionally, the Company shall provide certain assurances with respect to the
accumulated equity value in the options of common stock granted to the Employee
as described in Schedule D attached hereto.
3. DEFINITION OF PROPRIETARY INFORMATION
For purposes of this Agreement the term "Proprietary
Information" means all of the following materials and information in whatever
form or medium (even if not patentable, or not protectable or protected by
copyright laws) which the Employee receives access to, creates, authors or
develops, in whole or in part, in the course of and within the scope of his/her
employment with the Company or through the use of any of the Company's
facilities or resources:
3.1 Computer Software Computer programs, in any
-----------------
form, and all elements thereof, including all source and object codes, flow
charts, algorithms, coding sheets, compilers, assemblers, programmer notes,
design documents, and routines.
3.2 Research Discoveries, concepts and ideas,
--------
whether or not patentable or protectable by copyright, including, without
limitation, the nature and results of research and development activities,
technical information on product or program performance and reliability,
processes, formulas, techniques, and "know-how."
3.3 Marketing and Customer Information Price
------------------------------------
lists, pricing policies, quoting procedures, financial information, customer and
prospect names and requirements, customer data, customer site information,
propsect and call lists, telephone directories and calendars.
3.4 Business Information Production development
---------------------
processes, marketing techniques, mailing lists, purchasing information,
financial statements, management reports and business plans.
3.5 Other Any other materials or information
-----
related to the business or activities of the Company which are not generally
known to others engaged in similar business or activities.
Failure to mark any of the Proprietary Information
as confidential shall not affect its status as part of the Proprietary
Information under the terms of this Agreement.
4. DISCLOSURE OF INFORMATION, WORKS AND MATERIALS
The Employee recognizes that he/she will be exposed
to the Company's confidential information including without limitation the
Company's trade secrets, and confidential business information. The Employee is
hereby notified that such information includes all computer programs developed
by the Company and the documentation for them. Further, this includes business
information, such as price lists, customer lists and databases, business plans,
sales projections and product development plans. The Employee further
acknowledges that any information and materials received by the Company from
third parties in confidence must be treated confidentially. This includes
patient information. Employee covenants and agrees that he/she shall not, except
with the prior written consent of the Company, or as required by law or a court
of competent jurisdiction, or unless the Employee is acting as an employee of
the Company solely for the benefit of the Company in connection with the
Company's business and in accordance with the Company's business practices and
employee policies, at any time during or following the term of his/her
employment with the Company, directly or indirectly divulge, reveal, report,
publish, transfer or disclose, for any purpose whatsoever, any of such
Page 3 of 16
confidential information which has been obtained by or disclosed to him/her as a
result of his/her employment with the Company, including, without limitation,
any Proprietary Information, as defined in Section 3 hereof.
5. OWNERSHIP OF INFORMATION, WORKS AND RIGHTS THEREIN
5.1 Title The Employee hereby assigns and
-----
transfers to the Company and agrees that the Company shall be the owner of all
inventions, discoveries, work, computer software program or other
computer-related equipment or technology, conceived, developed, or made by the
Employee, either alone or with others, in whole or in part, during the
Employee's employment by the Company, which are useful in, or directly or
indirectly related to the Company's business or which relate to, or are
conceived, developed, or made in the course of, the Employee's employment or
which are developed or made from, or by reason of knowledge gained from, such
employment . If any one or more of the aforementioned are deemed to fall within
the definition of "work made for hire," within the meaning of the Copyright Act
of 1976, as amended, such work shall be considered "work made for hire," the
copyright of which shall be exclusively owned by and vested in the Company. If
any of the aforementioned are considered to be work not included in the
categories of work covered by the "work made for hire" definition contained in
the Copyright Act, such work shall be, and it hereby is, assigned or transferred
completely and exclusively to the Company. The Employee agrees to execute any
instruments and to do all other things reasonably requested by the Company (both
during and after the Employee's employment with the Company) in order to fully
vest and perfect in the Company all ownership rights in those items hereby
transferred by the Employee to the Company. The Employee further agrees to
disclose immediately to the Company all Proprietary Information conceived or
developed in whole or in part by him/her during the term of his/her employment
with the Company and to assign to the Company any right, title or interest
he/she may have in such Proprietary Information.
5.2 Employee's Works The Employee hereby
-----------------
represents and warrants that the Employee has fully disclosed to the Company and
attached hereto a description of any computer program or other computer-related
technology not covered in Section 5.1 above which, prior to his/her employment
with the Company, the Employee conceived of or developed, wholly or in part, but
which has not been published or filed with the United States Patent or Copyright
Offices.
5.3 Works and Interests of Others Employee hereby
-----------------------------
represents and warrants that employment by the Company will not violate any
agreement or promise of employee to any other person, and that Employee will not
use any property or confidential information of others in his/her work for the
Company.
6. RECORDS AND TANGIBLE MATERIALS
All notes, data, tapes, reference materials,
sketches, drawings, memoranda and records in any way relating to any of the
information referred to in Section 3, 4 and 5 hereof (including, without
limitation, any Proprietary Information) or otherwise prepared by Employee in
the course of his/her employment, and all copies thereof, shall belong
exclusively to the Company, and the Employee agrees to deliver to the Company on
request all copies of such materials in his/her possession or then under his/her
control. In the absence of such a request, Employee shall deliver such items to
the Company upon the termination for any reason of the Employee's employment
with the Company.
7. PROTECTION OF INFORMATION AND GOODWILL
7.1 Nature of Business Employee and the Company
------------------
recognize that Employee will acquire knowledge as a result of working for the
Company, and that such knowledge will include not only general knowledge of the
medical information systems business, but specific knowledge of the Company's
business, secrets, products and customers, including Confidential Information.
Page 4 of 16
Employee and the Company recognize that upon termination of employment by the
Company, Employee could use such specific knowledge and information to the
detriment of the Company by disclosing it to competitors, customers and
prospects, and using it to obtain or win business. Employee and the Company
recognize that proof of such disclosure would be difficult, yet the harm caused
thereby could be significant to the Company. Therefore, Employee and the Company
are willing to agree that Confidential Information will be disclosed to
Employee, and, to protect Employer, its relationship with its customers, its
competitive position, and its goodwill, Employee will not engage in a
competitive venture for a reasonable time after employment by the Company, as
set forth below.
7.2 Competitive Ventures The Company is engaged
---------------------
throughout the United States in the development and marketing of information
systems, including computer software and related services, for hospitals,
physician groups, laboratories, and clinics, and also for providers of
information services to such groups (such activities, products and services
being referred to herein as the "Medical Information Systems Business").
Employee recognizes that the Company's medical information systems work together
and are designed to share common files, architectures, a "look and feel," and
other elements. In the event of the termination of Employee's employment
hereunder for any reason, the Employee agrees that for a period of twelve (12)
months from the date of such termination (the "Prohibition Period"), he/she will
not:
7.2.1 Engage directly for himself/herself,
or jointly with or on behalf of any person, entity or venture involved in the
Medical Information Systems Business, or any other business in which the Company
was engaged at the time of such termination of employment, and
7.2.2 Work for or become employed by or
associated with any person, entity or venture engaged in the Medical Information
Systems Business, including, by way of example and without limitation, the
entities listed in Schedule C attached hereto and made a part hereof (which
entities together with their successors and assigns, are referred to herein as
the "Designated Entities"), where either (i) the Employee's duties will be
substantially similar to those he/she has performed for the Company hereunder,
or (ii) the Employee's duties would be likely to involve, or require, or would
involve or require, disclosure or use of Proprietary Information. For example,
and without limiting the generality of the foregoing, if Employee is employed by
the Company as a computer programmer working on medical information systems,
he/she shall not, during the Prohibition Period, work as a computer programmer
on medical information systems. As another example, if Employee is employed by
the Company as a salesperson selling medical instruments or Systems, he/she
shall not work during the Prohibition Period as a salesman or a marketer of
medical information systems.
7.3 Geographical Limitations The Employee's
-------------------------
obligations under this Section 7 shall extend to all geographical areas in which
the Company, or any of its related companies, is offering its products'
services, either directly or indirectly through licenses or otherwise, during
the Prohibition Period.
7.4 Non-Solicitation The Employee further agrees
----------------
that for a period of twelve (12) months from the date of termination of his/her
employment, he/she will not, on behalf of himself/herself or any person or
entity of the Company, (i) compete for, or engage in competitive solicitation
of, any customer of the Company, or any person or entity that he/she has, during
the twelve (12) months immediately preceding such termination, solicited or
serviced on behalf of the Company or that has been so solicited or serviced,
during such period, by any person under the Employee's supervision, or (ii) hire
or engage or attempt to hire or engage any individual who was an employee of the
Company at any time during the twelve (12) months immediately prior to such
termination.
THE EMPLOYEE REPRESENTS AND WARRANTS THAT THE
KNOWLEDGE, SKILLS AND ABILITIES HE/SHE POSSESSES ARE SUFFICIENT TO PERMIT
HIM/HER, IN THE EVENT OF TERMINATION OF HIS/HER EMPLOYMENT HEREUNDER FOR ANY
Page 5 of 16
REASON, TO EARN A LIVELIHOOD SATISFACTORY TO HIM/HER WITHOUT VIOLATING ANY
PROVISION OF SECTION 7 HEREOF.
8. INJUNCTIVE RELIEF
The Employee understands and agrees that the Company
will probably suffer irreparable harm if Proprietary Information is disclosed,
and that monetary damages will be inadequate to compensate the Company for such
breach. Accordingly, the Employee agrees that, in the event of a breach or
threatened breach by the Employee of Section 4 of this Agreement, the Company,
in addition to and not in limitation of any other rights, remedies or damages
available to the Company at law or in equity, will be entitled to, and Employee
hereby consents to, an injunction in order to prevent or to restrain any such
breach by the Employee, or by the Employee's partners, agents, representatives,
servants, employers, employees and/or any and all persons directly or indirectly
acting for or with him/her.
9. REASONABLENESS OF RESTRICTIONS
The Employee has carefully read and considered the
provisions of Sections 1 through 9 hereof and, having done so, agrees that the
restrictions set forth therein are fair and reasonable and are reasonably
required for the protection of the interests of the Company, its officers,
directors, stockholders and employees.
10. SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and be
binding upon the Employee, his/her legal representative or representatives and
testate or intestate distributees, and this Agreement shall inure to the benefit
of and be binding upon the Company, its successors and assigns. The term
"Company" as used herein shall include such successors and assigns and also
shall include any corporation which is at any time the parent or a subsidiary of
the Company, or any corporation or entity which is an affiliate of the Company
by virtue of common (although not identical) ownership, and for which the
Employee is providing services in any form during his/her employment with the
Company or any such other corporation or entity. The term successors and assigns
as used herein shall include a corporation or other entity acquiring all or
substantially all of the assets and business of the Company (including this
Agreement) whether by operation of law or otherwise.
11. NOTICES
Any notice required or permitted by this Agreement
shall be given by registered or certified mail, return receipt requested,
addressed to the Company at its then principal office, or to the Employee at
his/her then current address set forth in the payroll records of the Company, or
to either party hereto at such other address or addresses as he/she or it may
from time to time specify for the purpose in a notice similarly given.
12. ENFORCEABILITY AND SCOPE
If any provision of this Agreement is subsequently
determined by a court of competent jurisdiction to be void or unenforceable for
any reason, that provision shall be deemed stricken and the remainder of the
Agreement shall not be affected thereby and shall be binding upon the parties
hereto insofar as it remains a workable instrument to accomplish the intent and
purposes of the parties. The parties shall negotiate the severed provision to
bring the same within the applicable legal requirements to the extent possible.
Employee agrees to take any and all actions, including without limitation,
execution and delivery of any and all instruments and documents necessary or
advisable to complete, perfect, evidence or otherwise confirm any of the matters
set forth herein.
Page 6 of 16
13. TERM AND OTHER CONDITIONS
13.1 Terms This Agreement shall remain in full
-----
force and effect until the Employee's employment by the Company terminates, or
until superseded by another written employment agreement based upon good and
proper consideration and executed by the Employee and the Company, whichever
first occurs. Notwithstanding the foregoing, in the event of the termination of
this Agreement by reason of the termination of the Employee's employment, those
provisions hereof which by their terms extend in accordance with such terms
shall survive. No amendment or modification of the terms and conditions hereof
shall be effective unless set forth in a written document signed by the Employee
and the Company. As used in the Agreement, words of the masculine shall, as the
context required, include the feminine.
13.2 Termination of Employment by the Company
----------------------------------------
13.2.1 Notwithstanding anything in this
Agreement to the contrary, in the event the Company terminates the Employee's
employment other than for Cause (as defined below), or the Employee terminates
employment pursuant to Section 13.3 hereinbelow for Good Reason (as defined
below), the Employee shall be entitled to receive:
(a) all amounts fully earned pursuant
to the terms of this Agreement, but unpaid hereunder through the date of
termination, if any, in respect of Salary, Sign-On Bonus, any vested amounts
under any pension or similar benefit plan, and accrued but unused vacation and
unreimbursed expenses (the "Accrued Obligations");
(b) all outstanding and unvested
options granted to the Employee prior to the date of termination that by their
terms would become exercisable within the twelve month period following the date
of termination shall become vested and immediately exercisable (and, with
respect to all such options and previously vested but unexercised options, the
exercise period shall be extended to the first anniversary of the date of
termination);
(c) in the event the Employee's
termination of employment occurs within the twenty-four (24) month period
following the Effective Date, the Company shall pay the Employee's base Salary
for twenty-four (24) months in a lump sum within 30 days following the date of
termination at the rate in effect immediately prior to the date of termination;
(d) in the event the Employee's
termination occurs after the twenty-four (24) month anniversary of the Effective
Date, the Company shall (A) pay the Employee's base Salary for twelve(12) months
in a lump sum within 30 days following the date of termination at the rate in
effect on the date immediately prior to the date of termination, and (B)
notwithstanding Section 2.3 herein, the Company shall pay the Employee a
pro-rata Incentive Bonus for the year in which termination occurs, based upon
(i) the ratio of the number of days worked from January 1 through the date of
termination, to 365, and (ii) the actual performance incentive bonus earned by
the Employee for the year prior to the year in which the termination occurred;
and
(e) the Company shall make available
health care coverage under COBRA as required by law, and contribute for twelve
(12) months, a monthly amount toward that coverage equal to the Company's
contribution for an employee selecting such coverage, and, to the extent
allowable under its employee insurance programs, make available, at the
Employee's expense, coverage under such programs, and the Company shall provide
outplacement program services to the Employee (up to an amount equal to
$10,000).
13.2.2 The Employee acknowledges that the
foregoing payments shall satisfy any and all claims of any kind and nature,
including without limitation claims for compensation to which he may be
Page 7 of 16
entitled, in the event the Company terminates the Employee's employment other
than for Cause, and agrees to execute and deliver a full and complete release of
claims simultaneously with the receipt of any such payments.
13.2.3 For purposes of this Agreement,
"Cause" shall mean and shall be strictly limited to (i) the Employee's willful
and continued failure to substantially perform his reasonably assigned duties
(other than any such failure resulting from incapacity due to physical or mental
illness or any failure after the Employee gives notice of termination for Good
Reason), which failure is not cured within thirty (90) days after a written
demand for substantial performance is received by the Employee from the
President and COO of the Company which specifically identifies the manner in
which the President and COO believe the Employee has not substantially performed
the Employee's duties; or (ii) the Employee's willful engagement in illegal
conduct or gross misconduct which is materially and demonstrably injurious to
the Company.
For purposes of this Section 13.2.3, no act or
failure to act by the Employee shall be considered "willful" unless it is done,
or omitted to be done, in bad faith and without reasonable belief that the
Employee's action or omission was in the best interests of the Company.
13.3 Termination by Employee for Good Reason This
----------------------------------------
Agreement may be terminated by the Employee for "Good Reason". For purposes of
this Agreement, "Good Reason" shall mean and shall be strictly limited to (i) a
breach by the Company of any of its material obligations under this Agreement,
provided Employee gives the Company written notice specifying the means in which
he believes the Company has breached this Agreement and the Company has ninety
(90) days from receipt of such notice to cure such breach, or in the case of
other than a non-payment of money breach, if such breach cannot be cured within
ninety (90) days, to commence a good faith effort to cure which shall effectuate
a cure within an additional ninety (90) day period, (ii) a material diminution
in the Employee's title, position, authority, duties or responsibilities, or
(iii) a change by the Company in the location at which the Employee performs his
principal duties to a new location that is more than thirty-five (35) miles from
that existing location or (iv) a reduction in the Employee's Salary.
13.4 Resignation by the Employee Notwithstanding
---------------------------
anything in this Agreement to the contrary, in the event the Employee resigns
his employment prior to the fourth anniversary of the date of this Agreement
other than for Good Reason, all outstanding but unexercised or unexercisable
options granted prior to the date of such resignation shall expire in accordance
with the terms of their respective option agreements. In the event that the
Employee's employment is terminated due to the Employee's resignation from the
Company other than for Good Reason, the Company shall pay to the Employee the
Accrued Obligations.
13.5 Death or Disability In the event that the
-------------------
Employee's employment is terminated due to the Employee's death or disability,
the Company shall pay to the Employee (or his estate, as the case may be) the
Accrued Obligations, and any payment earned by the Employee pursuant to the
incentive bonus plan described on Schedule A.
13.6 Cause In the event that the Employee's
-----
employment is terminated for Cause, the Company shall pay to the Employee the
Accrued Obligations.
14. ARBITRATION
Any dispute between the Company and the Employee
arising out of or in any manner connected with employment
or employment practices, including but not limited to claims of discrimination
of any kind and wrongful discharge, under state, federal or local law, shall be
submitted to binding arbitration in accordance with the rules of the American
Arbitration Association, to be conducted in Burlington, Vermont, except however,
any dispute arising under Sections 4, 5, 6 and 7 of the Agreement, which, at the
Company's option, may be litigated as set forth in Section 15 below.
Page 8 of 16
15. GOVERNING LAW AND FORUM; LEGAL FEES
Employee acknowledges that IDX has employees
located in various states, and that it is important to have consistent policies
and laws apply to them insofar as matters relating to employment are concerned.
Employee acknowledges that consistency in employment policy is beneficial
because results will be predictable and all employees will be treated equally.
Therefore, Employee and the Company agree that this Agreement shall be governed
by and construed in accordance with the internal laws of the State of Vermont,
and any legal proceeding regarding the interpretation or enforcement of this
Agreement shall be instituted in a court of competent jurisdiction located
within the State of Vermont. The Company will reimburse the Employee for
reasonable legal fees incurred by him in connection with the initial employment
contract review.
16. ENTIRE AGREEMENT
This instrument contains the entire agreement of the
parties relating to the subject matter hereof, and it supersedes any prior or
contemporaneous oral or written understandings of any kind or nature. Employee
represents that he/she is not relying on any agreement, representation or
warranty pertaining to the subject matter hereof that is not expressly set forth
herein. The waiver or breach of any term or condition of this Agreement shall
not be deemed to constitute a waiver of any subsequent breach of the same or any
other term or condition.
EXECUTED on the date(s) indicated below.
WITNESS/ATTEST: IDX SYSTEMS CORPORATION:
/S/ BONITA L. STEWART By: /S/ JAMES H. CROOK, JR.
- ----------------------- ---------------------------------------
James H. Crook, Jr.
President
Date: 01/14/02
-------------------------------------
WITNESS/ATTEST: EMPLOYEE:
/S/ NANETTE W. O'LEARY By: /S/ THOMAS W. BUTTS
- ------------------------ ---------------------------------------
Thomas Butts
President/General Manager
Enterprise Solutions Division
Date: 1-14-2002
-------------------------------------
Page 9 of 16
SCHEDULE A
INCENTIVE BONUS TARGET
The incentive bonus target (representing approximately 40% of the Employee's
Salary) will be $110,000 and the maximum potential bonus (representing
approximately 70% of the Employee's Salary) will be $190,000. The components of
Employee's incentive bonus plan are:
1) $17,000 (approximately 15% of the incentive bonus target) based upon
quarterly attainment of ESD revenue - $4,250 per quarter.
2) $9,000 (approximately 8% of the incentive bonus target) based upon
quarterly attainment of accounts receivable in terms of days sales
outstanding (dso) for ESD customers - to be determined.
3) $48,000 (approximately 44% of the incentive bonus target) based upon
annual attainment of ESD operating profit objective.
4) $36,000 (approximately 33% of the incentive bonus target) based upon
IDX achieving its profit objectives. This bonus will be earned if IDX
exceeds $[*] in operating profit. For every $[*] of operating
profit over $[*], Employee will receive $1,000.
5) An additional amount based upon exceeding the ESD operating profit
objective, calculated in accordance with the "Excess Calculation
Formula" as outlined below. The ESD profit objective for:
2002 is a $[*] profit
2003 is a $[*] profit
2004 is a $[*] profit
Excess Calculation Formula - for excess ESD operating profit of:
$[*] - $[*], Employee will receive 2%
$[*] - $[*], Employee will receive 4%
$[*]+, Employee will receive 6%
The Company shall guarantee $55,000 of the above described incentive bonus for
2002 .
Page 10 of 16
SCHEDULE B
STOCK OPTION AWARDS
1. As of the Effective Date, the Employee will
receive a stock option grant to purchase 100,000 shares of the common stock of
the Company , with an exercise price equal to the average market price on the
Effective Date. This grant will vest and become exercisable at a rate equal to
25% per year over four years.
2. On February 1, 2003 and continuing annually
thereafter, Employee will be eligible to receive additional stock option grants
to purchase the common stock of the Company based upon the previous year's
financial performance for the Company's Enterprise Solution Division ("ESD"). If
the operating profit of ESD is:
1) 90% of target, the Employee will receive a stock option to purchase
20,000 IDX shares of Company common stock
2) 100% of target, the Employee will receive stock option to purchase
30,000 shares of Company common stock
3) 110% of target, the Employee will receive a stock option to purchase
35,000 shares of Company common stock
4) 120% of target, the Employee will receive a stock option to purchase
40,000 shares of Company common stock
These option grants described in paragraph 2 above
will be granted with an exercise price equal to the average market price on the
date of grant, and such options will vest and become exercisable at a rate equal
to 25% per year over four years.
Page 11 of 16
SCHEDULE C
NON-EXCLUSIVE LIST OF COMPETITORS
The following, though not all-inclusive, is a listing of
companies that are examples of competitors of IDX Systems Corporation on the
Effective Date, and, from time to time at its discretion, the Company may update
this list and the Employee shall be bound by such updated listing:
ADVANTA
AIH
Ameritech Information Systems
CSC Health Care
Cerner Corporation
Compucare (including affiliate HSII)
Compuware
Cycare Systems, Inc.
Discorp
Epic Systems Corporation
HBO & Company (including affiliates, such as Clinicom,
Advanced Laboratory, First Data)
Health Data Sciences Corporation
Medic Computer Systems
MedicaLogic Medical Manager
Meditech
Oasys
PCN
Reynolds & Reynolds
RIMS
SDK
SMS (Shared Medical Systems Corporation)
3 Net Systems, Inc.
3M Health Information Systems
Page 12 of 16
SCHEDULE D
POTENTIAL SUPPLEMENTAL RETIREMENT PAYMENT
If as of the fifth anniversary of the Effective Date the
accumulated net value in all vested options granted by the Company to
the Employee is less than $3 million, including all exercised and
unexercised shares, the Company will provide Employee with supplemental
retirement payment equal to $70,000 per year for 25 years. Monthly
payments hereunder shall be payable to the Employee, beginning on the
first day of the month coincident with or next following the date on
which the Employee attains age 60.
Notwithstanding the foregoing, it is understood and agreed that
the Employee must be employed by the Company on January 14, 2012 to
receive the supplemental retirement payment of $70,000 per year. . If
Employee's employment with the Company is terminated after January 14,
2007 and before January 14, 2012, the Employee shall be entitled to a
pro-rata supplemental retirement payment according to the following
schedule:
Date of Termination Annual Benefit beginning at age 60
------------------- ----------------------------------
After January 14, 2007 $14,000
---------------------- -------
After January 14, 2008 $28,000
---------------------- -------
After January 14, 2009 $42,000
---------------------- -------
After January 14, 2010 $56,000
---------------------- -------
On or After January 14, 2012 $70,000
Page 13 of 16
EXHIBIT I
JOB DESCRIPTION
PRESIDENT/GENERAL MANAGER - ENTERPRISE SOLUTIONS DIVISION
Founded in 1969, IDX Systems Corporation (www.idx.com) provides complete
healthcare information solutions for academic medical centers and integrated
delivery networks, hospitals, physician group practices and management service
organizations. To connect systems and sites across the enterprise, IDX offers a
comprehensive set of products and services to align physicians and hospitals,
streamline patient flow, enhance quality and reduce costs. Annual revenues are
over $350 million
The company's major product lines are organized along healthcare industry sector
lines. The two largest divisions are:
o Integrated Solutions - focussing on large to mid-sized hospitals and
integrated delivery systems, with an emphasis on clinical information
systems.
o Enterprise Solutions - focussing on medical groups and physician
organizations.
IDX is used by or is under contract to be used by more than 118,000 physicians,
installed at over 2,065 client sites, including:
- more than 265 large physician group practices (those generally with
more than 75 physicians);
- more than 510 physician practices which have 75 or fewer physicians;
and
- more than 280 IDNs, representing over 370 hospitals.
EDiX Corporation, an IDX subsidiary, offers Internet-based medical transcription
and clinical documentation services to over 130 physician group and hospital
customers. IDX subsidiary ChannelHealth brings Internet services to physicians
and patients, as well as the connectivity and e-commerce services required to
improve the physician-patient experience and support efficient healthcare
delivery.
The IDX culture is characterized by four core values that have guided the
business over the past thirty plus years. They serve to focus the organization
and are as follows:
o customer success
o employee opportunity
o growth
o profit
Page 14 of 16
IDX believes in creating an environment where there is respect for the
individuality, autonomy and creativity of its people. Its people make it
possible for the company to create and provide software solutions that allow IDX
customers to achieve success by focusing on healthcare and helping people. IDX
is committed to creating better futures for both their clients and their
employees and expects the best from its people.
The company went public in November of 1995 and the stock is traded on NASDAQ
under the symbol of IDXC. The corporate offices of IDX are located in
Burlington, Vermont. It's operating divisions, which serve national and
international markets, are based in Seattle, Boston and Burlington
POSITION SUMMARY
The President, Enterprise Solutions Division (ESD) will be located in Boston,
Massachusetts where most of the division's staff resources reside. He/she will
be responsible for all operational aspects of this critical business unit,
including systems design, program development, quality assurance, testing,
sales, implementation and customer support. ESD is a major supplier of
sophisticated, financial/administrative systems to large and midsize medical
groups. The division generates over $140 million in annual revenues and employs
over 800 people. ESD is the market leader in this sector.
There are some 300 clients served by ESD. The growth opportunities for the
division are significant as this new executive provides strategic and operating
leadership to gain greater market share of a dynamic and growing product arena.
This senior executive, reporting to the President of IDX, will be a member of
the corporate-wide operations committee. In the operations committee role,
he/she will work cooperatively with the heads of the other divisions in the
company to provide the best overall information systems solutions to the IDX
client base.
RELATIONSHIPS
Reports to: President of IDX
Direct Reports: VP-Client Services
VP-Development
VP-Marketing
VP-Sales
Director-Accounting
Key Relationships: Other Division Lead Executives
Corporate Executive Staff
CEO
IDX Board
IDX Clients
MAJOR RESPONSIBILITIES
o Set the strategy and articulate and clarify the direction for the division and
the company
o Lead the execution of the strategic plan
o Bring the Boston organization together, restore and build morale and esprit
de corps
o Focus the strategic vision and the goals and objectives from the top to the
bottom of the organization
o Get to know the company's customers, their needs and expectations
o Drive increased revenues and profitability through an aggressive growth
strategy
Page 15 of 16
o Develop communications and relationships with the other key IDX divisions
to ensure maximization of market potential for all IDX products and
services
o Develop new products and services to both expand current market share and
anticipate new market opportunities
IDEAL EXPERIENCE
o Up through sales/marketing to general management position in information
systems/software business
o Broad base of experience selling to physician groups and healthcare
institutions and organizations is highly desirable but not mandatory
o Experience in selling service oriented products is desirable but not mandatory
o A track record in producing strong, bottom line results
o Customer orientation
and focus is required, starting at the top of the customer's organization
o Building lasting relationships with industry leaders is essential for long
term success
o The President of ESD should possess strong management skills and experiences,
motivating and inspiring people
IDEAL PERSONAL PROFILE
o Strong leadership skills
o Inspiring and motivating
o A relationship builder
o Collegial; a people person
o Sense of humor
o Direct, to the point
o Articulate, smart, self assured
o Visible, open, in touch with the staff
o Entrepreneurial
o Unimpeachable integrity and ethics
Page 16 of 16
Exhibit 10.2
IDX SYSTEMS CORPORATION
2002 STOCK INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE
The purpose of this 2002 Stock Incentive Plan for Non-Employee
Directors (the "Plan") of IDX Systems Corporation, a Vermont corporation (the
"Company"), is to compensate the Company's non-employee directors for their
services on the Board and to advance the interests of the Company's stockholders
by enhancing the Company's ability to attract and retain directors who make (or
are expected to make) important contributions to the Company by providing such
persons with equity ownership opportunities and thereby better aligning the
interests of such persons with those of the Company's stockholders.
2. ELIGIBILITY
All of the Company's non-employee directors, (each, an "Outside
Director") are eligible to be granted stock or restricted stock awards (an
"Award") under the Plan. Each person who has been granted an Award under the
Plan shall be deemed a "Participant".
3. ADMINISTRATION AND DELEGATION
(a) Administration by Board of Directors. The Plan will be administered
------------------------------------
by the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Appointment of Committees. To the extent permitted by applicable
-------------------------
law, the Board may delegate any or all of its powers under the Plan to one or
more committees or subcommittees of the Board (a "Committee"). All references in
the Plan to the "Board" shall mean the Board or a Committee of the Board to the
extent that the Board's powers or authority under the Plan have been delegated
to such Committee.
4. STOCK AVAILABLE FOR AWARDS
(a) Subject to adjustment under Section 6, Awards may be made under the
Plan for up to 25,000 shares of common stock, $0.01 par value per share, of the
Company (the "Common Stock"). If any Award is terminated, surrendered or
forfeited in whole or in part (including as the result of shares of Common Stock
subject to such Award being repurchased by the Company at the original issuance
price pursuant to a contractual repurchase right), the unused Common Stock
covered by such Award shall again be available for the grant of Awards under the
Plan. Shares issued under the Plan may consist in whole or in part of authorized
but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 6, the
---------------------
maximum number of shares of Common Stock with respect to which Awards may be
granted to any Participant under the Plan or under any other stock or benefit
plan of the Company shall be 25,000 per calendar year.
5. STOCK AWARDS
(a) Grants. As consideration for service to the Company, each Outside
------
Director shall receive an award of Common Stock, for each full or partial prior
year service, equal to the maximum number of shares issuable for such prior year
multiplied by a fraction, the numerator of which is the number of meetings of
the Board (including regularly scheduled meetings and special meetings) attended
in person or by telephone during such past year, and the denominator of which is
the number of all such meetings held during such past year (each, a "Stock
Award"). The maximum number of shares issuable in any given year shall be
determined by the Board. Awards shall be made annually, on the date of the
Annual Meeting of Shareholders of the Company. The Board may, in its discretion,
waive any attendance requirements, except when an Outside Director is newly
elected during a term year and has served less than a complete year. In addition
to the foregoing, the Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, a "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
--------------------
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any.
(c) Stock Certificates. Stock certificates issued in respect of a Stock
------------------
Award shall be registered in the name of, and delivered to, the Participant. Any
stock certificates issued in respect of a Restricted Stock Award shall be
registered in the name of the Participant and, unless otherwise determined by
the Board, deposited by the Participant, together with a stock power endorsed in
blank, with the Company (or its designee). At the expiration of the applicable
restriction periods, the Company (or such designee) shall deliver the
certificates no longer subject to such restrictions to the Participant or if the
Participant has died, to the beneficiary designated, in a manner determined by
the Board, by a Participant to receive amounts due or exercise rights of the
Participant in the event of the Participant's death (the "Designated
Beneficiary"). In the absence of an effective designation by a Participant,
Designated Beneficiary shall mean the Participant's estate.
-2-
6. ADJUSTMENTS FOR CHANGES IN COMMON STOCK AND CERTAIN OTHER EVENTS
(a) Changes in Capitalization. In the event of any stock split, reverse
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stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan
and (ii) the repurchase price per share subject to each outstanding Restricted
Stock Award shall be appropriately adjusted by the Company (or substituted
Awards may be made, if applicable) to the extent the Board shall determine, in
good faith, that such an adjustment (or substitution) is necessary and
appropriate. If this Section 6(a) applies and Section 6(c) also applies to any
event, Section 6(c) shall be applicable to such event, and this Section 6(a)
shall not be applicable.
(b) Liquidation or Dissolution. The Board may specify the effect of a
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liquidation or dissolution on any Restricted Stock Award granted under the Plan
at the time of the grant.
(c) Reorganization Events
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(1) Definition. A "Reorganization Event" shall mean: (a) any
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merger or consolidation of the Company with or into another entity as a result
of which all of the Common Stock of the Company is converted into or exchanged
for the right to receive cash, securities or other property or (b) any exchange
of all of the Common Stock of the Company for cash, securities or other property
pursuant to a share exchange transaction.
(2) Consequences of a Reorganization Event on Restricted Stock
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Awards. Upon the occurrence of a Reorganization Event, the repurchase and other
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rights of the Company under each outstanding Restricted Stock Award shall inure
to the benefit of the Company's successor and shall apply to the cash,
securities or other property which the Common Stock was converted into or
exchanged for pursuant to such Reorganization Event in the same manner and to
the same extent as they applied to the Common Stock subject to such Restricted
Stock Award.
7. GENERAL PROVISIONS APPLICABLE TO AWARDS
(a) Transferability of Awards. Except as the Board may otherwise
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determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
(b) Documentation. Each Award shall be evidenced in such form (written,
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electronic or otherwise) as the Board shall determine. Each Award may contain
terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each
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Award may be made alone or in addition or in relation to any other Award. The
terms of each Award need not be identical, and the Board need not treat
Participants uniformly.
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(d) Termination of Status. The Board shall determine the effect on an
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Award of the disability, death, retirement, authorized leave of absence or other
change in status of a Participant.
(e) Withholding. Each Participant shall pay to the Company, or make
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provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, when the Common Stock is registered under the Exchange Act,
Participants may satisfy such tax obligations in whole or in part by delivery of
shares of Common Stock, including shares retained from the Award creating the
tax obligation, valued at their Fair Market Value; provided, however, that the
total tax withholding where stock is being used to satisfy such tax obligations
cannot exceed the Company's minimum statutory withholding obligations (based on
minimum statutory withholding rates for federal and state tax purposes,
including payroll taxes, that are applicable to such supplemental taxable
income). The Company may, to the extent permitted by law, deduct any such tax
obligations from any payment of any kind otherwise due to a Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
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outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type and changing the date of realization,
provided that the Participant's consent to such action shall be required unless
the Board determines that the action, taking into account any related action,
would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
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deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(h) Acceleration. The Board may at any time provide that any Award shall
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become immediately exercisable in full or in part, free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be.
8. MISCELLANEOUS
(a) No Right To Status. No person shall have any claim or right to be
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granted an Award, and the grant of an Award shall not be construed as giving a
Participant the right to any relationship with the Company.
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(b) Effective Date and Term of Plan. The Plan shall become effective on
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the date on which it is adopted by the Board. No Awards shall be granted under
the Plan after the completion of ten years from the date on which the Plan was
adopted by the Board, but Awards previously granted may extend beyond that date.
(c) Amendment of Plan. The Board may amend, suspend or terminate the
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Plan or any portion thereof at any time.
(d) Governing Law. The provisions of the Plan and all Awards made
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hereunder shall be governed by and interpreted in accordance with the laws of
the State of Vermont, without regard to any applicable conflicts of law.
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