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 27, 1997
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 32,981,126 shares of Common Stock, $.01 par
value, outstanding at September 27, 1997.
<PAGE>
CERNER CORPORATION AND SUBSIDIARIES
I N D E X
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 27, 1997
and December 28, 1996 (unaudited)
Consolidated Statements of Earnings for the
three months and nine months ended September 27, 1997
and September 28, 1996 (unaudited)
Consolidated Statements of Cash Flows
for the nine months ended September 27, 1997
and September 28, 1996 (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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Part I. Financial Information
Item 1. Financial Statements
<PAGE>
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
September 27, December 28,
1997 1996
------------- ------------
<S> <C> <C>
(In thousands)
Assets
Current Assets:
Cash and cash equivalents $ 9,882 $ 6,905
Short-term investments 87,522 103,997
Receivables 106,879 96,238
Inventory 2,015 1,616
Prepaid expenses and other 2,604 3,660
--------- ---------
Total current assets 208,902 212,416
Property and equipment, net 64,409 60,047
Software development costs, net 37,442 30,128
Intangible assets, net 3,573 3,973
Noncurrent receivables 2,314 3,637
Other assets 10,599 4,552
--------- ---------
$327,239 $314,753
========= =========
Liabililties and Stockholders' Equipty
Current Liabilities:
Accounts payable $ 7,781 $ 9,346
Current installments of long-term debt - 104
Advanced billings 5,875 7,811
Accrued income taxes 19,514 13,654
Accrued payroll and tax withholdings 10,738 6,755
Other accrued expenses 2,190 3,542
--------- ---------
Total Current Liabilities 46,098 41,212
--------- ---------
Long-term debt, net 30,000 30,000
Deferred income taxes 12,805 12,806
Stockholders' Equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 33,684,144 shares issued
in 1997 and 33,403,727 issued in 1996 337 334
Additional paid-in capital 145,844 144,941
Retained earnings 100,832 91,125
Treasury stock, at cost
(703,018 shares in 1997 and 513,018 in 1996) (8,593) (5,693)
Foreign currency translation adjustment (84) 28
--------- ---------
Total stockholders' equity 238,336 230,735
--------- ---------
$327,239 $314,753
========= =========
<FN>
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 September September September
27, 1997 28, 1996 27, 1977 28, 1996
---------------------- ----------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Revenues:
System sales $ 42,500 $ 26,420 $121,367 $ 93,427
Support and maintenance 17,167 14,372 49,890 42,093
Other 1,110 2,609 3,969 7,171
-------- -------- -------- --------
Total revenues 60,777 43,401 175,226 142,691
-------- -------- -------- --------
Costs and expenses:
Cost of revenues 15,835 13,782 52,861 44,945
Sales and client service 20,743 15,811 59,798 48,464
Software development 12,034 9,235 32,250 26,478
General and administrative 5,508 4,194 16,216 13,905
-------- -------- -------- --------
Total costs and expenses 54,120 43,022 161,125 133,792
-------- -------- -------- --------
Operating earnings 6,657 379 14,101 8,899
Interest income, net 546 535 1,704 1,798
-------- -------- -------- --------
Earnings before income taxes 7,203 914 15,805 10,697
Income Taxes 2,758 144 6,099 4,016
-------- -------- -------- --------
Net earnings $ 4,445 $ 770 $ 9,706 $ 6,681
======== ======== ======== ========
Earnings per share $ .13 $ .02 $ .29 $ .20
======== ======== ======== ========
Weighted average shares outstanding 34,507 33,483 33,923 33,644
-------- -------- -------- --------
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 27, 1997 September 28, 1996
------------------ ------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 9,706 $ 6,681
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 13,391 11,863
Issuance of stock as compensation 16 --
Provision for deferred income taxes -- 903
Loss on disposal of capital equipment -- 43
Provision for bad debt -- 20
Changes in assets and liabilities:
Receivables (9,318) 4,923
Inventory (399) (923)
Prepaid expenses and other (5,215) (158)
Accounts payable (1,565) (3,086)
Accrued income taxes 5,860 --
Other accrued liabilities 695 (278)
--------- ---------
Total adjustments 3,465 13,312
--------- ---------
Net cash provided by operating activities 13,171 19,993
--------- ---------
Cash flows from investing activities:
Purchase of capital equipment (11,271) (12,790)
Purchase of land, building and improvements (74) (378)
Capitalized software development costs (13,098) (9,532)
--------- ---------
Net cash used in investing activities (24,443) (22,700)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 8
Repayment of long-term debt (104) (104)
Proceeds from exercise of options 890 744
Purchase of treasury stock (2,900) --
--------- ---------
Net cash provided by financing activities (2,114) 648
--------- ---------
Foreign currency translation adjustment (112) 95
--------- ---------
Net decrease in cash, cash equivalents, and
short-term investments (13,498) (1,964)
Cash, cash equivalents, and short-term investments
at beginning of period 110,902 112,118
--------- ---------
Cash, cash equivalents, and short-term investments
at end of period $ 97,404 $110,154
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
<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 27, 1997 and
December 28, 1996 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 27, 1997 and September 28, 1996 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
- ---------------------
Three Months Ended September 27, 1997 Compared to Three Months
Ended September 28, 1996
The Company's revenues increased 40% from $43,401,000 for the
three-month period ended September 28, 1996 to $60,777,000 for
the three-month period ended September 27, 1997. Net earnings
increased 477% from $770,000 in the 1996 period to $4,445,000 for
the 1997 period.
In the 1997 period, revenues increased due to an increase in
system sales and an increase in revenue recognized from existing
contracts. System sales revenues increased 61% from $26,420,000
for the three-month period ended September 28, 1996 to
$42,500,000 for the corresponding period in 1997. Total sales to
the installed base including new systems, incremental hardware
and software, support and maintenance services, and discrete
services, were 71% of total revenues for the 1997 period compared
to 77% in 1996. This lower percentage was primarily due to the
increase in system sales to new clients.
At September 27, 1997, the Company had $171,156,000 in
contract backlog and $128,194,000 in support and maintenance
backlog, compared to $95,214,000 in contract backlog and
$102,266,000 in support backlog at September 28,1996.
Support and maintenance revenues increased 19% from
$14,372,000 during the third quarter of 1996 to $17,167,000
during the same period in 1997. This increase was due primarily
to the increase in the Company's installed and converted client
base.
Other revenues decreased from $2,609,000 in the third quarter
of 1996 to $1,110,000 in the same period of 1997. This decrease
is due primarily to a decrease in real estate lease revenues from
the rental to outside tenants, as the Company utilizes more
office space, and the reporting of certain services revenue as
system sales revenue in 1997.
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 26% of
total revenues in the third quarter of 1997 and 32% of total
revenues in the comparable period in 1996. 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.
Sales and client service expenses include salaries of client
service personnel, communications expenses and unreimbursed
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 36% in the third quarter
of 1997 and 1996, respectively. The increase in total sales and
client service expenses from $15,811,000 in 1996 to $20,743,000
in 1997 was attributable to the cost of a larger regional sales
and services organization and marketing of new products.
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 1997 and 1996 were $14,462,000 and $10,936,000,
respectively. These amounts exclude amortization of previously
capitalized expenditures. Capitalized software costs were
$4,352,000 and $3,246,000 for the third quarter of 1997 and 1996,
respectively. The increase in aggregate expenditures for
software development in 1997 was due to development of HNA
Millennium products 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 9% and 10% in the third
quarter of 1997 and 1996, respectively. Total general and
administrative expenses for the third quarter of 1997 and 1996
were $5,508,000 and $4,194,000, respectively.
<PAGE>
Net interest income increased 2% in the third quarter of 1997
compared to the same period in 1996.
The Company's effective tax rates were 38% and 16% for the
third quarter of 1997 and 1996, respectively. The lower 1996 tax
rate is due to the utilization of 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 27, 1997 Compared to Nine Months
Ended September 28, 1996
The Company's revenues increased 23% from $142,691,000 for
the nine-month period ended September 28, 1996 to $175,226,000
for the nine-month period ended September 27, 1997. Net earnings
increased 45% from $6,681,000 in the 1996 period to $9,706,000
for the 1997 period.
In the 1997 period, revenues increased due to an increase in
system sales and support of installed systems and an increase in
revenue recognized for existing contracts. System revenues
increased 30% from $93,427,000 for the nine-month period ended
September 28, 1996 to $121,367,000 for the corresponding period
in 1997. Total sales to the installed base including new systems,
incremental hardware and software, support and maintenance
services, and discrete services, were 74% of total revenues for
the first nine months of 1997 period compared to 80% in 1996.
This lower percentage was primarily due to the increase in system
sales to new clients.
At September 27, 1997, the Company had $171,156,000 in
contract backlog and $128,194,000 in support and maintenance
backlog, compared to $95,214,000 in contract backlog and
$102,266,000 in support backlog at September 28, 1996.
Support and maintenance revenues increased 19% from
$42,093,000 during the first nine months of 1996 to $49,890,000
during the same period in 1997. This increase was due primarily
to the increase in the Company's installed and converted client
base.
Other revenues decreased from $7,171,000 during the first
nine months of 1996 to $3,969,000 in the same period of 1997.
This decrease is due to a decrease in real estate lease revenues
from the rental to outside tenants, as the Company utilizes more
office space, and the reporting of certain services revenue as
systems sales revenue in 1997.
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 30% of
total revenues in the first nine months of 1997 and 31% of total
revenues in the comparable period in 1996. 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.
Sales and client service expenses include salaries of client
service personnel, communications expenses and unreimbursed
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 34% in the first nine
months of 1997 and 1996, respectively. The increase in total
sales and client service expenses from $48,464,000 in 1996 to
$59,798,000 in 1997 was attributable to the cost of a larger
field sales and service organization and marketing of new
products.
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 1997 and 1996 were $39,496,000 and
$31,526,000, respectively. These amounts exclude amortization of
previously capitalized expenditures. Capitalized software costs
were $13,098,000 and $9,532,000 for the first nine months of 1997
and 1996, respectively. The increase in aggregate expenditures
for software development in 1997 was due to development of HNA
Millennium products and development of community care products.
<PAGE>
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 9% and 10% in the first nine
months of 1997 and 1996, respectively. Total general and
administrative expenses for the first nine months of 1997 and
1996 were $16,216,000 and $13,905,000, respectively.
Net interest income decreased 5% in the first nine months of
1997 compared to the same period in 1996. This decrease is
primarily due to a decrease in cash and cash equivalents and a
decrease in interest rates.
The Company's effective tax rates were 39% and 38% for the
first nine months of 1997 and 1996, respectively.
Capital Resources and Liquidity
- -------------------------------
The Company's liquidity position remains strong with total
cash and cash equivalents of $9,882,000 and short term
investments of $87,522,000 at September 27, 1997 and working
capital of $162,804,000. The Company generated net cash from
operations of $13,171,000 and $19,993,000 during the nine month
periods ended September 27, 1997 and September 28, 1996,
respectively. During the first nine months of 1997, the Company
purchased 190,000 shares of the Company's common stock with a
total cost of approximately $2,900,000. The Company has
$18,000,000 of long-term, revolving credit from banks, all of
which was available as of September 27, 1997.
Revenues provided under the Company's support and maintenance
agreements represent recurring cash flows. The Company's revenue
backlog at September 27, 1997 included $128,194,000 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.
Recent Accounting Pronouncement
- -------------------------------
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share" (Statement 128)
which revises the calculation and presentation provisions of
Accounting Principles Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the
Company's fiscal year ending January 3, 1998 and retroactive
application will be required. The Company believes the adoption
of Statement 128 will not have a significant effect on its
reported earnings per share.
<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 27, 1997.
<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 11, 1997 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 27, September 28, September 27, September 28,
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net earnings: $ 4,445,000 $ 770,000 $ 9,706,000 $ 6,681,000
Weighted average number of common and
common stock equivalent shares:
Weighted average number of
outstanding common shares 32,951,335 32,845,572 32,825,260 32,679,356
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) 1,555,810 637,159 1,097,709 964,344
----------- ----------- ----------- -------------
34,507,145 33,482,731 33,922,969 33,643,700
Earnings per common and common stock
equivalent shares: $ .13 $ .02 $ .29 $ .20
----------- ----------- ----------- -----------
Weighted average number of common and
common stock equivalent shraes,
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) 1,550,806 52,615 271,716 --
----------- ----------- ----------- -----------
36,057,951 33,535,346 34,194,685 33,643,700
----------- ----------- ----------- -----------
Earnings per common and common stock
equivalent shares assuming full
dilution: $ .12 $ .02 $ .28 $ .20
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> SEP-27-1997
<CASH> 9,882,000
<SECURITIES> 87,522,000
<RECEIVABLES> 108,000,000
<ALLOWANCES> 1,121,000
<INVENTORY> 2,015,000
<CURRENT-ASSETS> 208,902,000
<PP&E> 100,873,000
<DEPRECIATION> 36,464,000
<TOTAL-ASSETS> 327,239,000
<CURRENT-LIABILITIES> 46,098,000
<BONDS> 0
0
0
<COMMON> 337,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 238,336,000
<SALES> 175,226,000
<TOTAL-REVENUES> 175,226,000
<CGS> 52,861,000
<TOTAL-COSTS> 108,264,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,704,000)
<INCOME-PRETAX> 15,805,000
<INCOME-TAX> 6,099,000
<INCOME-CONTINUING> 9,706,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,706,000
<EPS-PRIMARY> .29
<EPS-DILUTED> .28
</TABLE>
