SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
-------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number 0-15386
---------------------
CERNER CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1196944
------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2800 Rockcreek Parkway
Kansas City, Missouri 64117
(816) 221-1024
--------------------------------------------------------------
(Address of Principal Executive Offices, including zip code;
registrant's telephone number, including area code)
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) with the Commission, and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
------ -------
There were 32,868,197 shares of Common Stock, $.01 par
value, outstanding at September 28, 1996.
<PAGE>
CERNER CORPORATION AND SUBSIDIARIES
-----------------------------------
I N D E X
---------
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 28, 1996
and December 30, 1995 (unaudited)
Consolidated Statements of Earnings for the
three months and nine months ended September 28, 1996
and September 30, 1995 (unaudited)
Consolidated Statements of Cash Flows
for the nine months ended September 28, 1996
and September 30, 1995 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information:
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
September 28, December 30,
1996 1995
------------- ------------
(In thousands)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 10,030 $ 8,640
Short-term investments 100,124 103,478
Receivables 93,113 98,154
Inventory 3,170 2,246
Prepaid expenses and other 2,916 4,393
--------- ---------
Total current assets 209,353 216,911
Property and equipment, net 60,247 53,693
Software development costs, net 27,907 22,885
Intangible assets, net 4,090 4,414
Noncurrent receivables 4,194 4,097
Other assets 3,126 1,945
--------- --------
$ 308,917 $ 303,945
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 11,847 $ 14,932
Current installments of long-term debt 138 130
Advanced billings 5,156 6,162
Accrued income taxes 14,575 13,946
Accrued payroll and tax withholdings 6,381 5,112
Other accrued expenses 2,022 2,565
--------- ---------
Total Current Liabilities 40,119 42,847
--------- ---------
Long-term debt, net 30,000 30,104
Deferred income taxes 9,899 9,620
Stockholders' Equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 33,381,215 shares
issued in 1996 and 33,001,973 issued
in 1995 334 330
Additional paid-in capital 144,617 143,876
Retained earnings 89,560 82,874
Treasury stock, at cost
(513,018 shares in 1996 and 1995) (5,693) (5,693)
Foreign currency translation adjustment 81 (13)
--------- ---------
Total stockholders' equity 228,899 221,374
--------- ---------
$ 308,917 $ 303,945
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
---------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
System sales $ 26,420 $ 27,243 $ 93,427 $ 92,565
Support and maintenance 14,372 12,747 42,093 36,059
Other 2,609 1,734 7,171 5,259
-------- -------- -------- --------
Total revenues 43,401 41,724 142,691 133,883
-------- -------- -------- --------
Cost and expenses:
Cost of revenues 13,782 11,724 44,945 38,011
Sales and client service 15,811 12,657 48,464 36,648
Software development 9,235 7,429 26,478 22,482
General and administrative 4,194 4,390 13,905 12,171
-------- -------- -------- --------
Total costs and expenses 43,022 36,200 133,792 109,312
======== ======== ======== ========
Operating earnings 379 5,524 8,899 24,571
Interest income (expense), net 535 251 1,798 (710)
-------- -------- -------- --------
Earnings before income taxes 914 5,775 10,697 23,861
Income Taxes 144 2,284 4,016 9,646
-------- -------- -------- --------
Net earnings $ 770 $ 3,491 $ 6,681 $ 14,215
======== ======== ======== ========
Earnings per share $ 0.02 $ 0.11 $ 0.20 $ 0.46
======== ======== ======== ========
Weighted average shares
outstanding 33,483 32,226 33,644 30,677
-------- -------- -------- --------
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 28, September 30,
------------- -------------
1996 1995
------------- ------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,681 $ 14,215
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 11,863 9,474
Issuance of stock as compensation -- 5
Provision for deferred income taxes 908 3,346
Loss on disposal of capital equipment 43 10
Provision for uncollectable accounts 20 --
Changes in assets and liabilities:
Receivables 4,923 (13,046)
Inventory (923) 170
Prepaid expenses and other (158) (1,636)
Accounts payable (3,086) (1,462)
Accrued income taxes -- 2,000
Other accrued liabilities (278) 600
--------- ---------
Total adjustments 13,312 (539)
--------- ---------
Net cash provided by operating activities 19,993 13,676
--------- ---------
Cash flows from investing activities:
Purchase of capital equipment (12,790) (7,847)
Purchase of land, building and improvements (378) (5,840)
Capitalized software development costs (9,532) (6,899)
--------- ---------
Net cash used in investing activities (22,700) (20,586)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 8 6,060
Repayment of long-term debt (104) (6,190)
Proceed from public offering, net of expenses -- 108,727
Proceeds from exercise of options 744 1,094
--------- ---------
Net cash provided by financing activities 648 109,691
--------- ---------
Foreign currency translation adjustment 95 14
--------- ---------
Net increase (decrease) in cash, cash equivalents,
and short-term investments (1,964) 102,795
Cash, cash equivalents, and short-term investments
at beginning of period 112,118 15,305
--------- ---------
Cash, cash equivalents, and short-term investments
at end of period $ 110,154 $ 118,100
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Interim Statement Presentation
The consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included
in the Company's latest annual report on Form 10-K.
In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments
(consisting of only normal recurring accruals) necessary to
present fairly the financial position at September 28, 1996 and
December 30, 1995 and the results of operations and cash flows
for the periods presented. The results of the three-month and
nine-month periods are not necessarily indicative of the
operating results for the entire year.
(2) Earnings Per Share
Net earnings per share for the three months and nine months
ended September 28, 1996 and September 30, 1995 is based on the
weighted average number of common shares and common share
equivalents outstanding during those periods. Common share
equivalents consist of shares issuable upon exercise of stock
options using the treasury stock method.
(3) Stock Dividend
On July 17, 1995, the Company's Board of Directors declared a
two-for-one stock split in the form of a one hundred percent
(100%) stock dividend payable on August 4, 1995, to stockholders
of record July 24, 1995. All share and per share data have been
restated for all periods presented herein to reflect the stock
split.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
- ---------------------
Three Months Ended September 28, 1996 Compared to Three Months
Ended September 30, 1995
The Company's revenues increased 4% from $41,724,000 for the
three-month period ended September 30, 1995 to $43,401,000 for
the three-month period ended September 28, 1996. Net earnings
decreased 78% from $3,491,000 in the 1995 period to $770,000 for
the 1996 period. The earnings decrease resulted primarily from
an increase in spending from the 1995 period to the 1996 period.
In the 1996 period, revenues increased due to a increase in
support of installed systems and other revenues.
System sales revenues decreased 3% from $27,243,000 for the
three-month period ended September 30, 1995 to $26,420,000 for
the corresponding period in 1996. HNA contracts comprised 42% of
system revenue in the third quarter of 1996 compared to 36% for
the same period in 1995. An HNA contract is an initial contract
that includes the Company's CareNet Order Management product and
at least two other clinical systems, or a contract that brings an
existing client to this level. The revenue from additional
hardware and software products to the installed client base
decreased 15% in the third quarter of 1996 over the same period
in 1995.
At September 28, 1996, the Company had $95,214,000 in
contract backlog and $102,266,000 in support and maintenance
backlog, compared to $67,096,000 in contract backlog and
$88,065,000 in support backlog at September 30, 1995.
Support and maintenance revenues increased 13% from
$12,747,000 during the third quarter of 1995 to $14,372,000
during the same period in 1996. This increase was due primarily
to the increase in the Company's installed and converted client
base.
Other revenues increased 50% from $1,734,000 in the third
quarter of 1995 to $2,609,000 in the same period of 1996. This
increase was due primarily to an increase in services performed
above the contracted requirements for existing clients.
The cost of revenues includes the cost of computer hardware
and sublicensed software purchased from computer and software
manufacturers for delivery to clients. It also includes the cost
of hardware maintenance and sublicensed software support
subcontracted to manufacturers. The cost of revenue was 32% of
total revenues in the third quarter of 1996 and 28% of total
revenues in the comparable period in 1995. Such costs, as a
percent of revenues, typically have varied as the mix of revenue
(software, hardware, maintenance, and support) components
carrying different margin rates changes from period to period.
The decrease in margin is due to equipment being a larger
component of system sales in the third quarter of 1996 compared
to the third quarter of 1995.
Sales and client service expenses include salaries of client
service personnel, communications expenses and travel expenses.
Also included are sales and marketing salaries, trade show costs
and advertising costs. These expenses as a percent of total
revenues were 36% and 30% in the third quarter of 1996 and 1995,
respectively. The increase in total sales and client service
expenses from $12,657,000 in 1995 to $15,811,000 in 1996 was
<PAGE>
attributable to personnel and operating expenses associated with
the larger regional sales and service organization and certain
marketing initiatives.
Software development expenses include salaries, documentation
and other direct expenses incurred in product development, as
well as amortization of software development costs previously
capitalized. Total expenditures for software development,
including both capitalized and noncapitalized portions, for the
third quarter of 1996 and 1995 were $10,936,000 and $8,455,000,
respectively. These amounts exclude amortization of previously
capitalized expenditures. Capitalized software costs were
$3,246,000 and $2,279,000 for the third quarter of 1996 and 1995,
respectively. The increase in aggregate expenditures for
software development in 1996 was due to Health Network
Architecture Version 500 (HNA 500) and development of community
care products.
General and administrative expenses include salaries for
corporate, financial, and administrative staffs, utilities,
communications expenses, and professional fees. These expenses
as a percent of total revenues were 10% and 11% in the third
quarter of 1996 and 1995, respectively. Total general and
administrative expenses for the third quarter of 1996 and 1995
were $4,194,000 and $4,390,000, respectively.
Net interest income increased 113% in the third quarter of
1996 than in the same period in 1995. This increase in interest
income was due primarily to interest income from the investment
of the proceeds from the sale of 3,716,000 new shares of common
stock from the August 1995 public offering.
The Company's effective tax rates were 16% and 40% for the
third quarter of 1996 and 1995, respectively. This change is a
result of a decrease in the Company's tax valuation allowance
related to foreign net operating losses.
The Company's quarterly revenues and net earnings have
historically been variable and cyclical. The variability is
attributable primarily to the number and size of project
milestone events in any fiscal quarter. The Company expects
fluctuations in quarterly results to continue.
Nine Months Ended September 28, 1996 Compared to Nine Months
Ended September 30, 1995.
The Company's revenues increased 7% from $133,883,000 for the
nine-month period ended September 30, 1995 to $142,691,000 for
the nine-month period ended September 28, 1996. Net earnings
decreased 53% from $14,215,000 in the 1995 period to $6,681,000
for the 1996 period. The earnings decrease resulted primarily
from an increase in spending from the 1995 period to the 1996
period.
In the 1996 period, revenues increased due to an increase in
system sales and support of installed systems. System sales
revenues increased from $92,565,000 for the nine-month period
ended September 30, 1995 to $93,427,000 for the corresponding
period in 1996. This increase in system revenues resulted
principally from an increase in the sale of additional hardware
and software products to the installed client base. Sale of
additional hardware and software products to the installed client
base increased 13% in the first nine months of 1996 over the same
period in 1995.
At September 28, 1996, the Company had $95,214,000 in
contract backlog and $102,266,000 in support and maintenance
backlog, compared to $67,096,000 in contract backlog and
$88,065,000 in support backlog at September 30, 1995.
<PAGE>
Support and maintenance revenues increased 17% from
$36,059,000 during the first nine months of 1995 to $42,093,000
during the same period in 1996. This increase was due primarily
to the increase in the Company's installed and converted client
base.
Other revenues increased 36% from $5,259,000 in the first
nine months of 1995 to $7,171,000 in the same period of 1996.
This increase was due primarily to an increase in services
performed above the contracted requirements for existing clients.
The cost of revenues includes the cost of computer hardware
and sublicensed software purchased from computer and software
manufacturers for delivery to clients. It also includes the cost
of hardware maintenance and sublicensed software support
subcontracted to manufacturers. The cost of revenue was 31% of
total revenues in the first nine months of 1996 and 28% of total
revenues in the comparable period in 1995. Such costs, as a
percent of revenues, typically have varied as the mix of revenue
(software, hardware, maintenance, and support) components
carrying different margin rates changes from period to period.
The decrease in margin is due to equipment being a larger
component of system sales in the first nine months of 1996
compared to the first nine months of 1995.
Sales and client service expenses include salaries of client
service personnel, communications expenses and travel expenses.
Also included are sales and marketing salaries, trade show costs
and advertising costs. These expenses as a percent of total
revenues were 34% and 27% in the first nine months of 1996 and
1995, respectively. The increase in total sales and client
service expenses from $36,648,000 in 1995 to $48,464,000 in 1996
was attributable to personnel and operating expenses associated
with the larger regional sales and service organization and
certain marketing initiatives.
Software development expenses include salaries, documentation
and other direct expenses incurred in product development, as
well as amortization of software development costs previously
capitalized. Total expenditures for software development,
including both capitalized and noncapitalized portions, for the
first nine months of 1996 and 1995 were $31,526,000 and
$25,172,000, respectively. These amounts exclude amortization of
previously capitalized expenditures. Capitalized software costs
were $9,532,000 and $6,899,000 for the first nine months of 1996
and 1995, respectively. The increase in aggregate expenditures
for software development in 1996 was due to Health Network
Architecture Version 500 (HNA 500) and development of community
care products.
General and administrative expenses include salaries for
corporate, financial, and administrative staffs, utilities,
communications expenses, and professional fees. These expenses
as a percent of total revenues were 10% and 9% in the first nine
months of 1996 and 1995, respectively. Total general and
administrative expenses for the first nine months of 1996 and
1995 were $13,905,000 and $12,171,000, respectively.
Net interest income was 353% higher in the first nine months
of 1996 than in the same period in 1995. This increase was due
primarily to interest income from investment of the proceeds from
the sale of 3,716,000 new shares of common stock from the August
1995 public offering.
The Company's effective tax rates were 37.5% and 40% for the
first nine months of 1996 and 1995, respectively. This change is
a result of a decrease in the Company's tax valuation allowance
related to foreign net operating losses.
<PAGE>
Capital Resources and Liquidity
- -------------------------------
The Company's liquidity position remains strong with total
cash and cash equivalents of $10,030,000 and short term
investments of $100,124,000 at September 28, 1996 and working
capital of $169,234,000. The Company generated net cash from
operations of $19,993,000 and $13,676,000 during the nine month
periods ended September 28, 1996 and September 30, 1995,
respectively. During August 1995, the Company sold 3,716,000
shares of common stock. The proceeds of this sale, net of
underwriting discounts and commissions and expenses, were
$108,287,000. Prior to the public offering the Company financed
it operations, capital expenditures (other that the purchase of
the Kansas City headquarters complex and its anticipated capital
improvements), and working capital from the internally generated
funds and bank borrowings. The Company has $18,000,000 of long-
term, revolving credit from banks, all of which was available as
of September 28, 1996.
Revenues provided under the Company's support and maintenance
agreements represent recurring cash flows. The Company's revenue
backlog at September 28, 1996 included $102,266,000 representing
twelve months of equipment maintenance and software support
associated with signed contracts.
The Company believes its present cash, cash equivalents and
short-term investment position, together with cash generated from
operations and available under its current bank borrowing
facility, will be sufficient to meet anticipated cash
requirements during the next twelve months.
<PAGE>
Part II. Other Information
Item 5. Other Information.
------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the quarter ended September 28, 1996.
<PAGE>
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.
CERNER CORPORATION
------------------
Registrant
November 8, 1996 By: /s/ Marc G. Naughton
- ---------------- ---------------------
Date Marc G. Naughton
Chief Financial Officer
<TABLE>
Exhibit 11
CERNER CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
Three Months Ended Nine Months Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net earnings: $ 770,000 $ 3,491,000 $ 6,681,000 $ 14,215,000
Weighted average number of common and
common stock equivalent shares:
Weighted average number of
outstanding common shares 32,845,572 30,555,747 32,679,356 29,007,578
Dilutive effect (excess of number of shares
issuable over number of shares
assumed to be repurchased with
the proceeds of exercised options based on
the average market price during the period) 637,159 1,670,004 964,344 1,669,734
----------- ----------- ------------ ------------
33,482,731 32,225,751 33,643,700 30,677,312
Earnings per common and common stock
equivalent shares: $ .02 $ .11 $ .20 $ .46
----------- ----------- ------------ ------------
Weighted average number of common and
common stock equivalent shares,
assuming full dilution:
Additional dilutive effect
(reduction in number of shares
assumed to be repurchased with
the proceeds of exercised stock
options and converted warrants
based on the end of the period
market price of the stock, if
higher than the average price) 52,615 41,760 -- 109,617
---------- ----------- ----------- ------------
33,535,346 32,267,511 33,643,700 30,786,929
Earnings per common and common stock
equivalent shares assuming full
dilution: $ .02 $ .11 $ .20 $ .46
----------- ----------- ----------- ------------
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 10,030,000
<SECURITIES> 100,124,000
<RECEIVABLES> 94,234,000
<ALLOWANCES> 1,121,000
<INVENTORY> 3,170,000
<CURRENT-ASSETS> 209,353,000
<PP&E> 88,077,000
<DEPRECIATION> 27,830,000
<TOTAL-ASSETS> 308,917,000
<CURRENT-LIABILITIES> 45,119,000
<BONDS> 0
<COMMON> 334,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 308,917,000
<SALES> 142,691,000
<TOTAL-REVENUES> 142,691,000
<CGS> 44,945,000
<TOTAL-COSTS> 88,847,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,798,000)
<INCOME-PRETAX> 10,697,000
<INCOME-TAX> 4,016,000
<INCOME-CONTINUING> 6,681,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,681,000
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
